US equity markets had another big fall on Friday, weighed down by disappointing results from big tech firms. Risk appetite remains cautious ahead of Tuesday’s US election and with COVID-19 cases still on the rise in Europe and the US. The UK announced a nationwide lockdown over the weekend, joining France and Germany. Global rates paid little attention to the equity market sell-off, with the US 10-year yield hitting its highest level since June. Currency moves were minimal on Friday, including for the NZD.
Last week was a bad one for equity markets, with the S&P500, NASDAQ and Eurostoxx 600 all suffering their worst weeks (~-5.5%) since the March meltdown. As for Friday’s session, the S&P500 closed 1.2% lower, having been as much as 2.3% lower at one point, while the NASDAQ lost 2.5%. Disappointing results from tech heavyweights Apple, Amazon and Facebook after the bell on Friday morning set the tone for the remainder of the session. Apple’s share price fell 6% after it reported iPhone sales were more than 20% lower than a year ago and refrained from providing any guidance for Q4. Amazon (-5%) beat earnings and revenue forecasts, but investors instead focused on the firm’s rising cost base, due in large part to COVID-related expenses. Facebook (-6%) and Twitter (-21%) also experienced big falls in their share prices, with Alphabet (Google’s parent) bucked the trend, rising 4%. With the big five US tech firms now accounting for over 20% of the S&P500, movements in their share prices have an increasingly outsized influence on the overall index.
The fall in equities last week came against a backdrop of accelerating COVID-19 cases in the US and Europe and the adoption of new lockdown measures by several European governments. Over the weekend, PM Johnson announced the UK would join France and Germany by moving to a nationwide lockdown from Thursday. All UK restaurants, bars and non-essential retailers will close for at least a month although, unlike the first lockdown, schools and universities will remain open. The UK’s wage subsidy scheme will be extended, with the government covering as much as 80% of the wages of furloughed workers, and affected households will be eligible for six-month mortgage holidays. The Bank of England is expected to increase its bond buying when it meets later this week and the new lockdown may see the market increase the probability that the BoE cuts its cash rate to negative next year. Elsewhere in Europe, Belgium announced that all non-essential stores would need to be shut and mandated working from home, if possible, while Austria and Portugal announced new restrictions. The market brushed off stronger-than-expected European GDP on Friday, which showed growth rebounding almost 13% in Q3, with renewed social distancing restrictions rendering the data largely out-of-date.
Investors remain firmly focused on the US election, which takes place tomorrow night. Betting markets have the odds of a Biden win at around 66% while prediction site fivethirtyeight ascribes a 90% chance of a Biden victory. Pre-election voting numbers are running at unprecedented levels, with the state of Texas having already received more ballots than its entire vote count in the last election.
The US bond market price action on Friday suggested growing investor conviction in a Democrat sweep at the election, with Treasury yields moving sharply higher and the curve steeper. Bonds paid no attention to the equity market sell-off, with the 10-year yield rising 5bps to 0.87%, its highest level since June. A Democrat clean sweep is expected to result in another huge fiscal stimulus, which should boost growth and inflation expectations and result in greater Treasury bond issuance (notwithstanding the Fed’s ongoing support via QE). Government bonds’ waning quality as a safe-haven asset was in evidence last week, with the US 10-year yield rising 3bps despite the 5%+ fall in equity markets.
Currency moves were modest in comparison to those in the equity and bond markets on Friday. The Bloomberg DXY was flat on the day, consolidating its strong (+0.9%) gains from earlier in the week. The USD was supported last week by the equity market sell-off (the USD tends to perform well during periods of risk aversion) but, perhaps more importantly, the weakness in the EUR (as European governments implemented national lockdowns and the ECB signalled further policy easing in December). ECB Governing Council member Holzmann told Bloomberg on Friday that the central bank could look at using “new instruments” to ease policy in December.
The US election is expected to be critical to the path of the USD in the coming months, with the prevailing consensus that a Democrat clean sweep will trigger a renewed downturn in the USD. First, the Democrat’s massive fiscal stimulus will likely add to pre-existing concerns about the US “twin deficits”. Second, the fiscal stimulus should boost inflation expectations and, provided the Fed scales up its QE programme to counteract an unhelpful increase in bond yields, this should keep US real interest rates at depressed levels. Third, a decisive margin of victory for Biden – more likely in a clean sweep scenario – reduces the risk that Trump contests the result, which would be positive for risk assets and negative for the USD, all else equal. In contrast, a messy, contested result and/or a divided government are more likely to lead to renewed risk aversion and an appreciation in the USD.
Bilateral currency moves against the USD on Friday were generally contained to +/-0.2%. The NZD was down 0.2% on Friday, closing around 0.6615, extending its loss on the week to 0.7%. The AUD was flat on Friday, with the NZD/AUD cross ticking down to around 0.9410.
NZ rates moves were muted on Friday, with the 10-year swap rate rising 1bp, to 0.52%, and the 10-year government bond yield up 2bps, to 0.53%. We should expect more NZ curve steepening when the market opens this morning though, given the increase in US Treasury yields on Friday night. The RBNZ kept its bond buying largely unchanged for the week ahead, with $840m nominal government bond purchases planned – the same as last week – and only a small, $10m, reduction to inflation-indexed bond purchases.
There was plenty of economic data out on Friday night, but without any major impact on markets. Of note, core PCE inflation, the Fed’s preferred inflation measure, undershot expectations (1.5% on a year ago vs. 1.7% expected). The official Chinese PMIs released over the weekend were close to market expectations and remain at strong levels, with China’s economy benefiting from having largely contained COVID-19.
The US election will hog the market’s attention this week and likely overshadow economic data (including payrolls) and the FOMC meeting (no policy changes expected). Ahead of the US election, the RBA is expected to cut its cash rate 15bps, to 0.1% (which will flow through to its 3-year yield target and term lending facility for banks) and announce a QE bond buying programme in the 5-to-10-year sector of the curve. Our NAB colleagues look for a bond buying programme in the region of $140b, which they think is largely priced-in now. The Bank of England is expected to announce an increase to its bond buying programme at its meeting Thursday night. Locally, the quarterly labour market survey is released. We expect employment to dip 1.2% and the unemployment rate to rise to 6.1%.
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