Rollercoaster night for equity markets - up strongly, then down sharply. US Treasury yields still unmoved. NZD continues to hold under resistance at 0.66

Equity markets have had a rollercoaster night.  The S&P500 briefly moved back into positive territory for 2020 and the NASDAQ made a fresh all-time high, before both reversing lower over the past hour.  Interest rate markets have remained unmoved despite the volatility in equities.  The NZD continues to hold under resistance at 0.66.

Risk assets initially started the new week as they finished the last one – rising strongly.  The S&P500 and NASDAQ were both up about 1.5% until around an hour ago, following a 1% rise on Friday.  The S&P500 briefly moved into positive territory for the year leaving it almost 50% above its lows in March, in the depths of the crisis.  However, US equities have fallen back sharply over the past hour, leaving the S&P500 up 0.6% and the NASDAQ down slightly on the day.

Large-cap, tech stocks – which constitute an ever-enlarging proportion of the S&P500 – had continued to lead gains, with Apple and Amazon rising as much as 4% at one point overnight and both reaching new highs.  The outsized influence of the big tech firms within the overall index is illustrated by the fact that an equally-weighted version of the S&P500 is still some 12% below its year-end 2019 levels.  Tesla, which isn’t part of the S&P500 yet but which market participants speculate could gain inclusion relatively soon, was up as much as 16% overnight, following Friday’s 11% gain.  At one point, Tesla was the 10th largest US company by market capitalisation, but these gains evaporated in the past hour and it is now back to near unchanged on the day.

There hasn’t been a clear, single catalyst behind the increase in equities overnight (nor the correction lower), although there have been a few positive developments at the margin.  On COVID-19, Florida reported over 12,000 new cases on Monday, but the proportion of people testing positive with the virus continued to drift lower (to 11.5%, a two-week low).  The spread of COVID-19 also looks to have peaked in another of the US hotspots, Arizona, which reported its lowest level of new cases in a fortnight (1,357).  In New York City there were no COVID-19-related deaths reported on Saturday, the first time for months.  Meanwhile, Pfizer and BioNTech’s experimental vaccine for the virus was granted fast track designation from the US regulator and it expects to start phase three trials later this month.  

US-China tensions continue to bubble away, but remain a secondary focus for the market at present.  US Secretary of State Pompeo called China’s territorial claims in the South China sea “unlawful”.  Meanwhile, China announced sanctions on several US officials in a tit-for-tat move after the US imposed sanctions on Chinese officials last week.

Earnings season kicked off overnight with PepsiCo reporting better-than-expected earnings and revenue for Q2.  Earnings for the S&P500 are expected to fall 44.6% in Q2 from a year ago (-55% for the Eurostoxx), although analysts have been revising their expectations higher over recent weeks.  With investors already well-conditioned for a big fall in earnings in Q2, a lot of the focus is expected to be on the earnings outlook and guidance from company executives as the global economy reopens.  JP Morgan, Citi and Wells Fargo report tomorrow.

Rates markets continue to exude little of the positivity on display in equity markets.  The US 10-year Treasury yield is unchanged overnight, at 0.64%, and remains firmly contained within its 0.55% - 0.75% trading range.  Treasury market implied volatility is near historical lows.  Likewise, in New Zealand, the 10-year swap rate has been stuck within an ultra-tight 0.7% - 0.8% range for the past month.

The Bloomberg USD index reached a one-month low overnight, but it has recovered somewhat over the past hour as equity markets came off their highs.  The EUR is up 0.4%, to around 1.1350, ahead of the EU leaders’ summit at the end of the week, where countries will try to find agreement over the proposed EU recovery fund.  The proposal is for the bulk of the €750b fund to be distributed as grants, rather than loans, to the worst-affected (and already debt-saddled) countries in the region, like Italy, although there is reportedly opposition from several Northern European countries.  The JPY and GBP are both around 0.4% lower overnight, with the latter possibly affected by market concern over the lack of progress in Brexit negotiations.

For the second session running, the NZD has failed to rally despite the rise in equity markets.  The NZD made a push towards resistance at 0.66 overnight, but it has fallen back over the past few hours and is now down 0.4% on the day.  It is trading this morning at around 0.6545.

The AUD has outperformed the NZD and is up 0.1% over the past 24 hours, to around 0.6950.  There were 177 new COVID-19 cases in Victoria reported yesterday, down from the 200+ daily total recorded over the previous few days.  The market appeared to take the decline in the daily rate of new cases positively, with the AUD rising around 20pips around the time of its reporting and the NZD/AUD cross falling back from its highs of the day.  The NZD/AUD is 0.5% lower from this time yesterday, at around 0.9415.  We still think the cross will move lower by the end of the year, with Australia’s economy still looking likely to outperform NZ’s, but we are watching the situation closely.

New Zealand Debt Management (NZDM) launched its May-2041 government bond syndication yesterday, with pricing expected today.  NZDM said it expects to raise at least $2b via the syndication.  Once issued, the May-2041 will be the longest bond on the government bond yield curve, extending it by four years from the Apr-2037 maturity.  Government bond yields were little changed yesterday despite increases in longer-term swap rates (10-year swap +3bps) and yields in Australia (10-year yield +4bps).