Equity markets push higher on encouraging vaccine news. USD falls, with commodity currencies outperforming. NZD pushes back up towards the top-end of its range

Risk sentiment has been boosted overnight by encouraging news around potential COVID-19 vaccines.  Equity markets are higher, the USD is lower while global bond yields again haven’t moved very much.  The NZD has performed better overnight and is trading towards the top of its recent range.  

Equity markets have had a good night, with the S&P500 rising about 0.6% and most European indices up by around 2%.  Yesterday, Moderna reported encouraging early results from its clinical trials on its experimental vaccine for COVID-19.  These showed that it induced antibodies in all 45 of those tested, a key test of whether it is likely to be effective, albeit with side effects for some.  Moderna’s share price rose 9% overnight, bringing its cumulative gain since the end of last week to 31%.  Moderna’s final stage trail is expected to cover 30,000 people.  Separately, ITV reported that AstraZeneca and Oxford University are expected to release some “positive news ” on early test results of their own experimental vaccine before the end of the week.  They are conducting large-scale phase three trials in Brazil at present.

Optimism around a possible COVID-19 vaccine boosted those sectors most exposed to the economy reopening, with airlines, for instance, rising almost 10%.  The Russell 2000 index of US small-cap stocks rose 3.5%, while tech stocks (perceived to be more resilient to the risk of further social distancing restrictions) have underperformed (NASDAQ +0.1%).

Also helping sentiment was a Bloomberg report that Trump had decided not to escalate tensions with China, for now, by choosing not to sanction Chinese officials over Hong Kong.  Earlier in the week, Trump had approved the removal of Hong Kong’s ‘special status’ and signed-off legislation that would allow for sanctions on those Chinese officials deemed to be reducing freedoms in Hong Kong.

There hasn’t been much new information for the market on the spread of COVID-19.  The daily rate of new cases in the US remains high but doesn’t appear to be increasing at present.  Tokyo raised its alert level for COVID-19 to its highest level, with officials citing a greater spread of the virus (there were 165 new cases in Wednesday in Tokyo).  However, the Governor said she was averse to implementing a widespread lockdown, instead favouring targeted measures to control its spread.

Bank stocks have also risen (+3%) following much better-than-expected earnings from Goldman Sachs.  Like Citi and JPM yesterday, Goldman saw a big increase in trading revenues and other capital markets activity but, unlike those two commercial banks, its earnings weren’t weighed down to the same extent by loan-loss provisions.  Debt issuance boomed in Q2, as the primary market reopened and companies sought to increase liquidity.

The USD has weakened amidst the risk-on market backdrop, with the Bloomberg USD index (BBDXY) trading close to its lowest level since March (-0.3% on the day).  The USD tends to decline during periods of greater risk appetite.

Commodity currencies have outperformed.   The Norwegian krone (+1.2%) and CAD (+0.8%) are the two best performing currencies over the past 24 hours, boosted by a 2% rise in Brent crude oil prices ahead of the OPEC+ meeting later this week.  Saudi Arabia’s energy minister said overnight that the group would pare back its supply cuts from August, as planned, from 9.6m barrels per day to around 8m.

The NZD 0.6% is higher over the past 24 hours amidst the broader USD-weakness and risk-on market backdrop.  It is back trading this morning around 0.6570, near the top of its recent trading range and resistance at 0.66.  NZ Q2 CPI is released this morning although we’re not expecting this to move the market very much.  The NZD/AUD cross has pushed modestly higher, towards 0.94.

Economic data over the past 24 hours has generally been positive, but not market moving.  Industrial production in the US rose more than expected in June (but the level of activity remains almost 11% below pre-COVID levels. The NY Fed’s Empire manufacturing survey was also stronger than expected, returning to positive territory, which bodes well for the nationwide ISM index which is released early next month.  The Fed’s Beige Book reported that economic activity had increased at the start of the month but it was well below what it was before the crisis.

In central bank news, the Bank of Canada said it wouldn’t raise its cash rate “until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”  Governor Macklem said that was likely to be at least two years.  The BoC said it would continue with its QE bond buying, at a rate of at least $5b per week, until the recovery was “well underway” .  Meanwhile, the Bank of Japan kept its policy settings – including its cash rate and its 10-year yield target – unchanged at its monetary policy meeting yesterday.   Governor Kuroda reiterated that the Bank was prepared to take further action if required, although the bank has appeared reluctant to take its cash rate further negative despite the unprecedented economic shock.

Global rates are again little changed and remain confined to exceptionally tight trading ranges.  The 10-year Treasury yield is trading at 0.63% this morning, marginally higher than where it closed yesterday.  Rates markets continue to portray a less optimistic economic outlook than equity markets.  NZ rates were also little changed yesterday, both in government bonds and swaps.

There is lots of data released today, including Chinese Q2 GDP and the monthly dump of Chinese activity indicators.  The ECB meeting is tonight, although no policy rate announcements are expected.