There was little change in markets on Friday, with equities and global rates nudging higher and the USD falling modestly. The NZ yield curve flattened again, with the 10-year swap rate falling to the bottom of its recent (very tight) trading range. EU leaders have been negotiating over the weekend over the proposed EU recovery fund but have, so far, failed to reach an agreement. The EUR and risk assets may fall this morning when markets open.
The EU leaders’ summit has been taking place over the weekend, with countries still struggling to find agreement over the proposed EU Recovery Fund. The original proposal, from the EU Commission, was that €500b of the €750b fund be distributed as grants, rather than loans, to vulnerable countries, like Italy. But the so-called ‘frugal four’ have reportedly insisted that that grants should comprise no more than €350b. The summit spilled over into Sunday, its third day, and is still ongoing, amidst reports that other countries were not willing to accept grants less than €400b.
Investors see the recovery fund as crucial to the integrity of the Eurozone, because it would represent the first, major fiscal risk-sharing agreement within the region (the funds would be borrowed on behalf of all the states by the EU and then some portion distributed as grants to the most vulnerable countries). The EUR has risen to an almost 18-month high (it closed last week around 1.1430), with the recovery fund proposal boosting sentiment towards the currency. We’re likely to see EUR open lower this morning, given the lack of an agreement reached over the weekend, and, by implication the USD higher. The NZD will likely open lower too, in sympathy with the EUR. However, the EU has a history of messy negotiations but ultimately compromise solutions, so it’s likely an agreement will eventually be reached, even if that requires another summit in the coming months.
As for Friday night in markets, equity markets made modest gains, with the S&P500 and NASDAQ both rising 0.3% while the Chinese market recovered part of its 4.8% fall from Thursday (CSI300: +0.6%). The NASDAQ wasn’t overly affected by Netflix’s disappointing subscriber numbers. The S&P500 outperformed the NASDAQ by 2.3% on the week (-1.1% vs. +1.25%), the biggest margin since early-2016. IBM, Microsoft, Tesla and Coca Cola are among the companies that will report earnings this week.
COVID-19 cases continue to rise in the US – over 77,000 new cases were reported on Friday, a new daily record – and some of those affected Southern and Western states have subsequently rolled back some of their opening plans. California’s Governor said public schools wouldn’t be able to reopen in August unless the respective counties had COVID-19 under control, suggesting more than 70% of public school students will need to continue with remote learning when the new school year starts. There has also been a new outbreak in the Spanish region of Catalonia. AstraZeneca and Oxford University are set to publish their eagerly-anticipated results from their phase one trials tonight, with reports last week suggesting they were expected to be positive.
The renewed spread of the virus in the US was visible in the University of Michigan’s consumer confidence reading, which fell more than expected in July, to near its lows set in April. Markets brushed off the data, as they did the housing starts and building permits statistics. The US housing market is one of the strong parts of the economy at present.
Besides the trend in COVID-19 cases, the market is also focused on the prospect of another US fiscal stimulus package over the next two weeks, before the summer recess begins and then election campaigning. On Friday, Trump insisted that any new stimulus package must include a payroll tax cut, something likely to meet resistance from Democrats. Enhanced US unemployment benefits, which provide an extra $600 per week to claimants, are set to expire at the end of the month and Republicans have pushed back against Democrat calls to extend it, alleging that it discourages some people from finding a job. If the scheme lapses, it will provide a big shock to incomes for the large numbers currently receiving unemployment benefits. Treasury Secretary Mnuchin said on Friday that the administration wanted to extend the PPP scheme which provides support to small businesses, albeit targeted more specifically at struggling firms.
The USD was broadly weaker on Friday amidst the push higher in equity markets (the USD tends to be negatively correlated to risk appetite). The Bloomberg USD index fell 0.3%, to near a one-month low. But it's likely to rise this morning given the deadlock in EU negotiations over the Recovery Fund.
The NZD and AUD both gained around 0.3%, with the NZD finishing the week around 0.6555. The NZD traded a less-than one cent range last week and resistance at 0.66 continues to hold. We look for near-term consolidation in the NZD within a broad 0.62 – 0.66 range. COVID-19 cases remain high in Victoria, with the state reporting 363 new COVID-19 cases on Saturday, following the dip down to 217 the previous day.
The NZ PMI on Friday moved back into expansionary territory, rising to 56.3 in June from 40 last month and its record low reading of 26 in April. The bounce-back in June follows the removal of social distancing restrictions when the country went back down to COVID Alert Level 1 early in the month. All the components of the survey were above their respective long-term averages in June, with the notable exception of employment, which rose to 48.5 (this indicates that the manufacturing sector continues to shed staff, albeit at a lesser rate). We see the survey as a step in the right direction – the manufacturing sector is growing again – although there is a big hole to fill after the huge declines in the previous few months. The services equivalent of the PMI (the PSI), is released this morning.
The NZ curve flattened again on Friday, with both the 10-year swap rate and government bond yield falling 3bps. The 10-year swap rate is now at the low-end of the (exceptionally tight) 0.7% - 0.8% trading range that has prevailed over the past month. It is back within sight of its all-time lows of 0.59%, set in May. In the absence of the RBNZ reenergising market expectations for a negative OCR next year, we don’t see much scope for longer-term rates to fall much further from here. There was (again) little move in global rates in the Friday evening session.
It’s a quieter week ahead in terms of economic data and central banks, with the focus likely to remain on COVID-19 trends internationally and US corporate earnings.
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