Investors remain in a cautious mood, not helped by the spread of COVID19 across the US and new restrictions that are gradually being imposed. US equities are down slightly and global rates have nudged down further. Currency movements have been mostly small overnight, although the AUD has notably underperformed, that sees the NZD/AUD cross at a 7-month high at 0.95.
The spread of COVID19 remains forefront of mind for investors. After we went to press yesterday, US equities fell into the close after New York city announced that it would close schools after the COVID19 infection rate breached a critical threshold. Mayor de Blasio has added overnight that it’s “just a matter of time” before indoor dining is banned. In Tokyo, the virus alert was raised to its highest level – which involves only voluntary restrictions, given the lack of legal power to enforce a strict lockdown – after the number of new daily cases topped 500 for the first time, while the total across Japan also reached a record daily high of over 2250. EU-UK trade talks have been suspended “for a short while” after an EU official tested positive for the virus.
Counteracting the stream of negative news on global case numbers and restrictions, there was more positive vaccine news. The University of Oxford confirmed that its vaccine in development with AstraZeneca produced a strong immune response in older adults in an early study, seen as an important result to protect the elderly. The trials are running behind those of Pfizer and Moderna, but more data will be released in coming weeks.
With positive vaccine news already priced in, more weight is currently being given to the likely short-term retracement of the global economic recovery. The S&P500 has spent most of the session in negative territory and is currently down 0.2%, although the tech-heavy Nasdaq index is up 0.3%. Earlier, the Euro Stoxx 600 index closed down 0.75%.
US economic news has been mixed. Initial jobless claims unexpectedly rose last week – for the first time in five weeks – underscoring the risk to the labour market and US economy as the spread of COVID19 explodes across the country and new restrictions take place. Of some consolation, the employment component of the Philly Fed index rose to a post-COVID high and the overall index was stronger than expected, even if there was a small drop from the previous reading. Meanwhile existing home sales continued the run of extraordinarily strong housing market data, beating expectations and rising to a near 15-year high.
US 10-year Treasury yields have traded a tight range and are currently near the bottom edge at 0.845%, a touch lower since the NZ close. Key European 10-year rates fell 1-2bps.
Key currency movements overnight have been small, all within plus or minus 0.1% versus the USD since the NZ close, apart from a 0.3% fall in the AUD, taking it down to 0.7270. With the NZD tracking sideways around 0.69, this has driven the NZD/AUD cross up to 0.95, a 7-month high.
Yesterday’s Australian labour force survey showed remarkable strength in employment up 179k against a fall of 28k expected. Strength was seen across most states including Victoria. The rise in employment though was not enough to keep the unemployment rate from rising marginally to 7.0% with the participation rate surging almost a full percentage point to 65.8%. The data had little impact on the AUD and we wonder if China-Australian political tensions had some impact on the currency, after the widely reported comments from China’s Foreign Ministry, which outlined a number of grievances and threats and describing the relationship as one with “serious difficulties”.
However, we wouldn’t overplay this thematic, given the strong trade interdependence between the two countries and other factors might well be behind AUD weakness and NZD/AUD strength, such as last week’s RBNZ MPS. Also, the report was soon followed by NZ joining its “Five Eyes” allies in criticising China’s “concerted campaign to silence all critical voices” in Hong Kong. NZ could easily find itself in the naughty chair with China, alongside Australia.
While currency movements overnight have been small, the NZD is still lower on the other key crosses, given the softer risk appetite backdrop.
The domestic rates market showed mixed fortunes for NZGB and swap rates, with swap yields under upward pressure, rising 2-3bps, against a 1-2bps fall in NZGB yields, supported by a strong tender and global forces.
There are a number of global economic releases over the next 24 hours, but no key US releases. Market conditions should be quiet as the weekend approaches.
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