S&P500 recovers from yesterday's sharp intraday fall. USD weakens to a one-month low. NZD underperforms. New 20-year NZ government bond syndicated

Markets have been choppy overnight but with reasonably modest net moves across equities, currencies and rates.  The NZD has underperformed, despite a broadly weaker USD, and trades this morning around 0.6520.  New Zealand Debt Management issued $4.5b of a new 20-year government bond yesterday.

There was a big reversal in US equities around this time yesterday morning after California’s Governor reimposed several restrictions in the state, including shutting down bars and (indoor seating at) restaurants.  The S&P500, which had been up as much as 1.6%, closed 1% lower yesterday, while the NASDAQ experienced a 4% intraday decline from its session highs.  The pullback in tech stocks is perhaps not surprising after their recent stellar run and reports of concentrated investor positioning.  Bank of America’s closely-watched Fund Manager Survey showed that US tech and growth stocks was the most ‘crowded trade’ in the market and the most popular since it had been conducting the survey.

Equities opened lower overnight, but they have clawed their way back into positive territory over the past few hours, with the ‘buy the dip’ mentality seemingly still intact.  The S&P500 is up 0.9% and the NASDAQ 0.3%.  The VIX remains at an above-average level on a historical basis, around 30, but much lower than the levels seen earlier this year.

There were more than 60,000 new COVID-19 cases reported in the US again yesterday.  Arizona reported its most new cases in 11 days, with a positive test rate of over 20%, while Florida recorded a record daily high of 133 deaths.  That said, the number of new cases in Florida was below 10,000, well down on the more-than 15,000 recorded over the weekend.

Earnings season is now underway, with three of the big US banks reporting overnight.  Citi, JP Morgan and Wells Fargo reported larger-than-expected loan-loss provisions ($28b across the three banks, the most since 2008).  Strong fixed income trading revenues, amidst the record-setting pace of corporate bond issuance in Q2, helped keep Citi and JPM in profit, albeit much lower than a year ago.  However, Wells Fargo, which has a more limited trading franchise, reported its first net loss since 2008 and cut its dividend by 80%.  Its share price fell by around 5% while JPM was up 0.5% and Citi down 3%.  On the outlook, the banks sounded a cautious note, with Citi’s CEO Corbat saying “We don’t want people leaving the call simply thinking the world is a great place and it’s a V-shaped recovery.”

While the US and China continue to trade barbs over issues such as Hong Kong and the South China sea, it was reported overnight that China recorded its largest ever daily purchase of US corn, only a few days after (what was at the time) its second-largest purchase.  The news might offer some encouragement that China intends to fulfil its purchase targets of agricultural goods as part of the Phase-One trade deal with the US.  China’s customs agency said yesterday that the country remained committed to implementing the trade deal.

The USD has weakened around 0.3% overnight and is trading around a one-month low, in index terms.  The EUR has outperformed for the second day running (+0.5%).  The EUR is trading around 1.14 this morning and close to its highest level since March.  The recent appreciation in the EUR comes ahead of the EU leaders’ summit later this week, where countries will try to form an agreement on the proposed EU recovery fund.  Were the fund to be agreed, in a similar form to that proposed by the EU Commission, it will likely lead to further EUR strength and, by implication, USD weakness.

The NZD has been the worst performing currency over the past 24 hours (-0.3%), despite the broad-based USD weakness and recovery in US equity markets.  The NZD continues to drift away from resistance at 0.66 and trades this morning around 0.6520.  Our core view is for consolidation in the NZD, within a broad 0.62 – 0.66 range, over the coming few months.

There was little market reaction to news from Australia yesterday that Victoria had recorded 270 new COVID-19 cases, up from 177 the day before (although fewer tests were conducted on Sunday).  The AUD is up 0.5% from this time yesterday, to around 0.6970, while the NZD/AUD cross is back down to 0.9365.  Internal borders are starting to be tightened in Australia again, with Queensland declaring two areas of Sydney as coronavirus "hotspots" and requiring visitors from those two areas to quarantine.

Economic data has had little impact on the market.  US CPI was close to expectations, with annual core inflation sitting at a lowly 1.2%.  A slower pace of increase in rents and ‘owners’ equivalent rent’, which together comprise about 40% of the core index, weighed on core CPI.  US small business optimism rebounded in June, to a level close to where it was pre-crisis.  Expected sales surged and hiring plans jumped from 8 to 16, but capex plans remain subdued.  In Germany, the ZEW survey showed expectations near historical highs but current conditions languishing at levels close to the depths of the GFC. UK GDP was softer-than-expected in May, but Q2 growth as a whole is still expected to exceed the BoE’s most recent forecasts.

Global rates remain a sideshow to the volatility in equity markets.  European 10-year rates fell 2-4bps while the US 10-year rate is down 1bp to 0.61%.  Global rates remain stuck in extremely tight trading ranges.

Locally, New Zealand Debt Management syndicated its new May-2041 government bond yesterday, raising $4.5b amidst an order book in excess of $8.5b.  International demand for the bond was strong, with investors outside New Zealand and Australia allocated 70% of the deal.  The bond priced with a yield (1.64%) very close to that of the equivalent maturity Australian government bond at the time, which will have supported demand from international investors.  A few months back, longer-term NZ government bond yields were as much as 50bps below those in Australia.  Government bond yields snapped lower after the syndication priced, with the 10-year yield down 4bps on the day to 0.94%.  The 10-year swap rate fell 4bps as well, to 0.73%, but it remains locked in a very tight trading range.