Yesterday’s recovery in US equities turned out to be one of a dead-cat nature, with a tech-led fall overnight. The NZD and AUD are the weakest currencies for the day, with yesterday’s falls extending overnight.
The losing streak for US equities has resumed after yesterday’s pause, with the S&P500 down for the fifth day of the past six days, seeing the index currently down some 1½%. The falls have been led by big-tech, with the Nasdaq index down some 2½%. All the FANGs stocks are lower, while Tesla’s much-anticipated “battery day” turned out to be a fizzer, with CEO Musk saying it could take three years to fully realise large reductions in battery costs.
There hasn’t been much fresh news to drive the markets, so the fall is just a continuation of recent themes, including the worrying increase in COVID-19 cases across Europe and, to a lesser extent, the US which threatens the nascent economic recovery.
PMI data released were mixed. In Europe, the manufacturing sector was stronger than expected, with further recovery, powered up by Germany. By contrast, the service sector data were much weaker than expected and showed the sector contracting, alongside the widespread summer-lift in COVID-19 cases across the region. The sector faces further downward pressure as fresh restrictions are imposed. PMI data for the UK and US were more aligned to expectations, with all measures consistent with expansion across the manufacturing and services sectors.
In other news, the House passed a short-term spending bill that avoids a partial US government shutdown, but there is no talk of a fiscal stimulus bill, with the focus on a new Supreme Court judge diverting attention from politicians. Fed officials continue to suggest a sobering outlook for the US economy and calls for more fiscal support. Vice Chair Clarida reiterated the lower-for-longer rates outlook, saying that any lift-off in rates “is several years off”, as the Fed aims for above-2% inflation.
US Treasury yields remain stuck in a very tight range, with the 10-year rate flat at 0.68% – apart from a few hours, it has spent the last two weeks in a 0.65-0.70% range.
There is a bit more to say on the currency markets. The USD is stronger, up 0.6% on the BBDXY index for the day, outperforming other safe-havens, suggesting some closing of short positions being a factor. EUR is down 0.3% to 1.1670, its lowest level since late-July, underperforming GBP which is flat at 1.2730. USD/JPY is up 0.4% to 105.40.
The NZD and AUD have been the worst performers, both down more than 1% for the day. On that, we will largely pin the blame on weaker risk sentiment and a soft AUD, which has dragged the NZD down with it, rather than any reaction to yesterday’s RBNZ Monetary Policy Review.
The AUD fell after Westpac followed NAB’s call the previous day for a cut to the RBA’s cash rate by 15bps to 0.10%, but Westpac was clearer on the date, marked as soon as next month. The rate cut was seen to flow through into a reduction in the 3-year bond yield target and the rate of the Term Funding Facility. The AUD has extended its losses overnight and has gone sub-0.71. A weaker gold price hasn’t helped with the active future down 2% to USD1869. Respected RBA watcher Terry McCrann wrote that there was no good reason for the RBA to make this largely-symbolic rate cut in October on the same day as the Budget, but his disagreement with the call hasn’t halted the decline in the AUD.
The RBNZ’s MPR was in line with market expectations. On rates, the Bank left its guidance unchanged, effectively maintaining the signal that the OCR will be held at 0.25% until at least March 2021. On the bond buying programme, the upper limit remained at $100b, although next week’s offering will be scaled down to $1.16b in NZGBs (previously $1.35b), in large part reflecting the reduced weekly bond tender programme. On that note, NZDM will issue a lower-than-expected $600m-$650m of bonds each week through October, down from $950m-$1000m per week through September.
The Bank continues to work on additional policy tools. New information was that the committee prefers to launch a Funding for Lending Programme before the end of 2020, which would reduce marginal funding costs for banks. This would come ahead of a negative OCR next year, which is still looking like a viable option the Bank is working on. We don’t see the FLP as having much near-term impact for the economy, as banks are already well-funded and the volume and cost of funding is not a current impediment to lending. The uncertain and soft economic outlook is the key handbrake on lending behaviour.
The NZD fell alongside the AUD after the change in Westpac’s RBA call and has continued to trend lower, following the knee-jerk blip higher immediately after the RBNZ release. As we go to press, the NZD has hit 0.6550, its lowest level in about a month and some 3½% lower from the high just above 0.68 set a matter of days ago. Technicals show 0.6520 as a mild support level, ahead of key support of 0.64. Currency forecasters don’t get much glory, but we’ll note our NZD Corporate Update early this month suggested a 0.64-0.68 range through the end of this year and we’ll leave it at that.
The NZ rates market showed little reaction to the RBNZ announcement. Rates were already lower ahead of the announcement, with some spillover from lower Australian rates post the Westpac RBA call and the reduced supply call from the NZDM. The NZGB 10-year fell 4bps for the day to a fresh record low of just 0.47%. The 2-year swap rate fell by 2bps to 0.02%, while the 10-year swap rate fell by 4bps to 0.47%.
The OIS market offers some money-making opportunity for those willing to gamble the timing of the RBNZ’s next rate cut. February OIS is priced at 0.09%, which is a big “pay” if you think that the RBNZ is true to its guidance and won’t cut until after March. April OIS is minus 0.09%, which is a big “receive” if you think that the Bank will cut by 50bps to minus 0.25%. Neither rate budged post the MPR so no change in views came about from the release.