US equities have pushed higher, on the verge of breaking the record close set in February, with the market not caring much about the lack of a fiscal stimulus bill or US-China tensions. Global rates are lower after last week’s bond market sell-off, while the NZD has lagged the gains seen in other commodity currencies, against a backdrop of a soft USD.
The S&P500 is currently up 0.4%, on the verge of closing above the record high set in February, if it can nudge a little higher into the close. The Consumer Discretionary industry is leading the charge and this industry group has been the best performing over the past month, a reflection of investors’ optimism about the economic outlook. Banks are dragging the chain after a regulatory filing at the end of last week by Berkshire Hathaway showed that in Q2 Warren Buffet significantly sold down his financial stocks, while gold miner Barrick Gold was the only addition to his listed stock portfolio, joining other “smart” investors using gold as a hedge in this unusual market environment.
Further gains in equity markets have come despite some ongoing bubbling issues. The odds of a fiscal stimulus bill being agreed this month diminished, with both parties focused on their presidential name conventions for the next two weeks. The longer the delay in an agreement, the greater the hit to US growth in Q3.
And the US government announced further restrictions on Huawei, with all companies working for Huawei using US technology subject to licences, even foreign companies such as those based in Europe, Taiwan and South Korea. The official announcement came after President Trump suggested the move at the weekend. As long as the US-China phase 1 trade deal remains in place – a necessary but not a sufficient condition to prevent a big sell-off in US equities, a metric by which Trump gauges his performance – then the market seems unperturbed by the escalation of geopolitical tensions between the two countries.
In economic data, the US home builders confidence index rose to 78, matching the record high set in 1998, benefiting from record low mortgage rates and a shift in demand for suburban living. Yesterday, Japan GDP fell by a record 7.8% q/q in Q2, marking the third consecutive quarterly decline, although the trough in Q2 was still shallower than many other countries. NZ’s PSI was solid in July, but August should look weaker following the fresh outbreak of COVID19 and the restrictions put in place across the country.
US Treasury yields have tracked lower, following the significant sell-off last week. The steady fall through Asian trading has continued overnight, seeing the 10-year rate down 3bps and touching a low of 0.67%. Key European 10-year yields have matched this performance, down 3bps.
NZ short term rates faced further downward pressure yesterday, with the odds of the RBNZ taking the OCR into negative territory next year seen to be increasing, following the super-dovish MPS last week. One-two year swap rates nudged lower as a result, while 5-10 year rates were up 1bp. NZGB yields showed rises of 1-3bps across the curve. Inflation linked bonds continue to fall in yield, with the RBNZ looking to buy stock in a market with unwilling sellers, with another failed LSAP tender.
NZ’s PM announced a 4-week delay to the general election to 17 October. Following last week’s upscaling in NZ’s COVID alerts levels, the Finance Minister announced a new Resurgence Wage Subsidy scheme, involving a 2-week payment, the duration of the current “lockdown”. This will help ease the economic blow to some businesses. Given the underspend with the current Wage Subsidy Scheme, there will be no need for the government to tap into the $14b contingency, meaning no implications for the bond tender programme. The government also announced a 6-month extension to the mortgage deferral scheme, which RBNZ’s Orr alluded to last week, offering banks regulatory relief from the deferred payments.
In the currency market, the USD remains on the soft side. With the RBNZ’s monetary policy strategy forefront of mind, NZD under-performance has continued. The NZD has been flat around 0.6540, but is lower on the crosses and has not participated in the positive move seen by the AUD and CAD, the former up 0.5% and back up through 0.72. Thus, NZD/AUD has extended its losses, trading below 0.9070 overnight to reach a fresh 2-year low. The 2018 low around 0.8950 will be seen as the next support level, ahead of more solid support at 0.88.
The NZD is down slightly on most other crosses, but JPY has outperformed, seeing a 0.5% fall in NZD/JPY down to 69.4.
The day ahead looks like a quiet one on paper, with no likely market-moving releases on the calendar.