Risk sentiment has soured, with the market ignoring the positive news of a US fiscal stimulus deal and focusing on the renewed travel restrictions across Europe. The S&P500 is currently down 0.7% and European equities fell over 2%. Oil prices are down over 4% and commodity currencies like the NZD have underperformed.
As we reported yesterday, over the weekend US lawmakers reached agreement on a $900b fiscal relief package which includes $600 payments to most people (excludes high income earners), $300 per week aid for the unemployed who don’t ordinarily qualify for benefits, rental assistance for tenants in arrears and a whole host of other spending initiatives. The package will be voted on today by the House, Senate and signed into law by the President if all goes to plan.
A fiscal stimulus bill has already been well anticipated by the market, so that positive news had seemingly little impact, with the market focused on the news over the weekend of increased travel restrictions across Europe and the more contagious strain of COVID19 spreading across London. The UK government imposed new lockdown orders and many countries placed a ban on passenger air travel from the UK. While there is no evidence that the more contagious strain of the virus is more deadly, experts suggest controlling the virus will now be harder– a higher proportion of the population may now need to be vaccinated to achieve herd immunity and those that choose not to be vaccinated are more likely to get infected.
With some indicators of equity market bullishness reaching new highs recently, the bad news has seen a broadly-based equity market sell-off, led by travel-sensitive stocks. Oil prices are down over 4%, taking Brent crude back down to the USD50 mark. The Euro Stoxx 600 index closed down 2.3%. The S&P500 was down as much as 2% early in the session, but has since recovered and is currently down only 0.7%.
The US 10-year rate fell by about 5bps to a low of 0.88%, before a sharp reversal has seen the rate increase again, ahead of a 20-year auction, and it now trades at 0.93%, a touch higher from the level at the NZ close.
In currency markets, the USD has been broadly stronger since Friday’s close, although there was a sharp reversal around midnight – for most majors, further downward pressure after the NZ close has been reversed so that it appears that most are little changed overnight. The NZD made a charge down towards 0.70, reaching a low of 0.7003, before recovering back up towards the 0.71 mark. Similarly, the AUD fell to 0.7462, but has since recovered by over a cent to 0.7580. Thin pre-Christmas trading conditions have likely exacerbated the moves.
For the day, the commodity currencies are the weakest, with the risk-off backdrop, apart from GBP which has its own issues. GBP fell on the open yesterday reflecting the new UK lockdown and yet another deadline passing on Brexit trade talks without much progress. GBP fell to below 1.32, more than 3 big figures lower than Friday’s close, before the USD reversal sees it back up to 1.3350, still down 1.3% for the trading day. The overnight news hasn’t been great, with the Telegraph reporting EU infighting over the process for ratification of any potential Brexit trade deal, while UK PM Johnson is playing hardball, giving the impression of being non-plussed if a deal falls through, continuing to run the line that WTO terms would be “entirely satisfactory”.
Falls in EUR and JPY have been modest, in the order of 0.1-0.2%. The underperformance of the NZD sees these crosses lower, with NZD/EUR just below 0.58 and NZD/JPY at 73.4, after falling as low as 72.7 overnight.
The domestic rates market was quiet yesterday, with global forces imparting a downside bias to rates across the swaps and NZGB curves, in the order of 1bp.
In the day ahead, Australian retail sales data are released, while the highlight tonight will be US consumer confidence. This is the last BNZ Markets Today for the year. Regular publication will resume mid-January. We thank you for your readership over the year and hope you have a good break during the festive season.