Markets have largely consolidated overnight after the big moves following Pfizer’s positive vaccine announcement. Global rates have pushed higher while the S&P500 is flat, with big tech stocks continuing to underperform. Currency moves have also been modest, with the NZD continuing to hold above 0.68. There was a big re-pricing in the NZ rates market yesterday, with rates higher across the curve, as the market pared back its OCR rate cut expectations. The RBNZ MPS takes centre stage today.
Markets are continuing to digest the encouraging vaccine news from Pfizer and BioNtech which was announced on Monday night. The S&P500 has given back a lot of its initial move higher after the announcement – it closed “only” 1.2% higher yesterday, having been up almost 4% at one stage. The S&P500 is flat overnight.
The relatively modest reaction in the S&P500 to what appears to be game-changing news on the vaccine front is largely down to underperformance in big tech stocks. The five largest US stocks in the S&P500, which are all big tech firms, account for more than 20% of the overall index, meaning movements in their stock prices have an outsized influence. The share prices of Microsoft, Google, Facebook and Amazon all fell again overnight, with the latter also affected by news that the EU had laid formal antitrust charges against the firm. The NASDAQ is down 0.7% overnight, following yesterday’s 1.5% fall. Big tech firms have been beneficiaries of the ‘stay at home’ environment brought about by COVID-19, so they have underperformed on the vaccine news. In contrast, small cap stocks and those that have been most affected by social distancing restrictions have outperformed. The Russell 2000 index of small cap stocks is 1.8% higher overnight, adding to yesterday’s 3.7% gain, while Boeing’s share price has increased 20% in two days.
Global rates have continued to push higher, with the market factoring in a better global growth outlook and therefore less need for further monetary stimulus. The 10-year Treasury yield is 3bps higher overnight, at 0.96%, which is near its highest level since June. Yield curves are steepening, with central banks still expected to keep cash rates on hold for several years. The 2y10y US yield curve steepened 1.5bps overnight, to 78bps, its steepest level since early-2018.
The vaccine news from Pfizer has overshadowed the fact that Trump continues to dispute the US election result. Yesterday, Republican Senate leader McConnell said Trump was “100% within his rights” to dispute the election result while Attorney General Barr launched an enquiry into alleged “irregularities” in the election, despite lacking any substantive evidence. The market has brushed off Trump’s claims and is working on the basis that Biden is the clear winner of the election.
FX markets have also consolidated overnight. With the exception of the GBP (+0.6%), currency moves have been contained to +/-0.3% against the USD. The USD is generally weaker, with the BBDXY index hovering just above its recent 2½ year low.
The NZD has held above 0.68 overnight, its highest level since April 2019. It’s trading this morning at around 0.6830, close to where it was this time yesterday morning.
There were big moves in the NZ rates market yesterday, with the market recalibrating its OCR expectations after the positive vaccine news from Pfizer. OIS pricing for the February meeting shifted up 5bps, to 0.19%, April by 6bps, to 0.05%, while the terminal OCR moved up to -0.11%. For context, the terminal OCR was priced to be almost -0.25% only a week ago. The market clearly sees the positive vaccine news, in combination with the booming NZ housing market and resilient economy to date, as having reduced the chances that the RBNZ will need to resort to a negative OCR next year.
In swaps, the 2-year rate rose 5bps, to 0.09%, its highest level since late August while the 10-year rate rose 13bps, to 0.7%. Bond yields rose by as much as 15bps at the long-end of the curve. US Treasury yields are higher than where they were at the NZ market close yesterday, so we can expect further upward pressure on NZ rates when the market opens this morning.
The RBNZ MPS takes centre stage today. The RBNZ is expected to announce details of its planned Funding for Lending Programme. But the market focus is likely to centre on the Bank’s signalling around the future path of the cash rate and how likely a negative OCR is.
Finally, yesterday’s electronic card transactions data for October continued the recent trend of economic data surprising on the strong side of expectations. Total electronic card transactions rose further 7.5% in October, in seasonally adjusted terms, putting them 4.3% higher than a year prior. The retail component of the ECT was even stronger, rising 8.8% in October (after +5.4% in September) for annual growth of 9.4%.
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