The rout in the tech sector is either finished or paused. In a mirror image of the previous day’s moves, equities and global rates are higher, safe-haven currencies have underperformed and commodity currencies have outperformed. The NZD has maintained a 0.66 handle, moving from the bottom end to the top end.
The three-day rout in tech stocks that spilled over into other markets has either paused or ended. After dropping more than 10% from its high, the Nasdaq index is on a firmer footing, currently up over 3% for the day. Higher risk appetite has seen a broad equity market rally, with all sectors of the S&P up more than 1% and the index up 2½%.
Again, there has been little news to trigger the moves and there’s a sense that investor sentiment is the driving force than any fundamental forces.
Not long after we went to print yesterday, there were reports that AstraZeneca paused its stage 3 vaccine trial for COVID-19 after a UK patient had an unexplainable adverse reaction. Experts suggested that this was common in trials and wouldn’t necessarily have much impact on derailing the progress in the company’s vaccine development. Certainly, the market didn’t see any adverse reaction from the announcement.
In overnight news, Bloomberg reported that some ECB governing council members have become more confident in their forecasts for the region’s economic recovery. Furthermore, the latest projections for GDP and inflation will show only slight changes to the June outlook and adding to the asset purchase programme doesn’t appear warranted at this stage. The ECB meets tonight and the EUR took that report positively, as it reduces the chance of a dovish surprise. The market will be focused on how ECB President Lagarde handles questions about the recent strength of the euro. EUR blasted up through 1.18 before meeting resistance around 1.1830 and has slipped back down to 1.18.
The weaker trend overnight in USD/CAD was barely perturbed after the Bank of Canada left its policy rate unchanged at 0.25% and said it will continue its quantitative easing (QE) program, buying at least $5b per week of government bonds. Forward guidance on rates was maintained, keeping the policy rate at the effective lower bound “until economic slack is absorbed so that the 2% inflation target is sustainable achieved”. On QE, the pledge to provide further stimulus as needed was replaced, with the programme to be “calibrated” to provide the stimulus needed to support the inflation objective. Governor Macklem will provide more detail tomorrow.
With the risk-off backdrop, the NZD and AUD have been well-bid. NZD has recovered most of the previous day’s loss and is currently at 0.6675, after finding some support at 0.66 yesterday morning. At the same time, the AUD went briefly sub 0.72, but has recovered to 0.7275. On the crosses, NZD/JPY is the biggest mover of the day reflecting its risk-sensitive attributes and is up 1% to 70.9.
GBP continues to trade cautiously, stuck below 1.30, after the UK bill to override parts of the Withdrawal Agreement was published. The bill is designed as a safety net in case trade negotiations between the EU and UK fail. The bill would give Northern Ireland unfettered access to the UK and the UK could ignore EU case law on state aid. Bloomberg reports that the EU is considering legal action against the UK on this bill. NZD/GBP is at its highest level since late July at 0.5140.
Preliminary results from the ANZ’s NZ business outlook survey showed a welcome lift in confidence and activity indicators, following the relaxation of lockdown restrictions in Auckland, but indicators remained well below normal, consistent with a very cautious view coming out of the deep recession.
It was a historic day in the domestic rates market, with the first trade at a negative yield for a nominal NZ government bond and swap rate. The 3-year bond closed the day just below zero. As an indicator of how potentially long the period of low rates will remain in NZ, the 5-year rate closed barely positive, at 0.03%, down 5bps on the day. OIS pricing continues to tread deeper into negative territory, and there is plenty of scope for swap and bond rates to grind lower from here, taking more of the curve sub-zero.
Global rates have edged higher, given the more positive risk backdrop. The 10-year Treasury rate has trended higher since the NZ close and is up 3bps from that time to 0.70%.