US equities closed last week on a poor note with the focus on the retail investors versus hedge funds battle rather than more fundamental drivers. Hence, this wasn’t a classic risk-off move, with commodity currencies mostly trading higher Friday night (AUD the exception, being flat) and US 10-year rates nudging higher. Weaker China PMI data over the weekend will set the trading tone as the new week begins.
The S&P500 fell 1.9% on Friday, taking the weekly fall to 3.3%, the worst week since October. The VIX index spiked as high as 37.5, before closing the week at 33. European equities showed a similar performance with the Euro Stoxx 600 index down 1.9% for the day and 3.1% for the week.
Interestingly, it’s hard to argue that souring risk sentiment was the cause. US high yield and emerging market credit spreads barely moved on the day, Germany and US 10-year rates both rose 2bps for the day, and commodity currencies NOK, CAD and the NZD headed the overnight leaderboard.
It is tempting to conclude that equity markets have been overdue for a decent correction, after a blistering run but there is a lot more to it than that, with last week’s price action dominated by the hordes of retail investors colluding to punish large hedge fund investors who have been short-selling smaller cap stocks. Some online brokerage platforms reduced trading restrictions imposed on Thursday and that set up Friday for another wild day of trading, with the likes of Gamestop and AMC up over 50%. Some of the weakness in the broader market can be put down to forced selling of stocks to cover the huge losses by some hedge funds. Nerves that the wild trading environment could trigger a systemic event or further selling might have encouraged other investors to reduce equity exposure as well.
All this came on a day of generally positive economic and vaccine news. Novavax said that its COVID19 vaccine was 89.3% effective in its UK study, which included the more contagious strain of the virus, albeit less effective (49.4%) against the South African strain. Johnson and Johnson’s vaccine was said to be 66% effective and could be rolled out by March. While this was less effective that other vaccines, it was much easier to store and only required one dose.
On the economic front, European GDP growth looked to be much stronger than expected, with France, Spain and Germany figures all positively surprising, the first two by a wide margin. The ECB had projected growth for the euro area of minus 2¼% in Q4 but the consensus now has that at minus 0.9% for the upcoming figure. Canada GDP figures for November also positively surprised.
US economic data also positively surprised, with strong growth in personal income in December, spending contracting by less than expected and the Chicago PMI much stronger, continuing the theme of the manufacturing sector in recovery mode.
The positive activity data, alongside higher than expected PCE deflator and wages data saw the US 10-year rate reach 1.10%, before closing only up 2bps for the day at 1.065%.
China PMI data released over the weekend were weaker than expected. Slippage in both the manufacturing and non-manufacturing indicators was expected in January, but the fall for the latter was much larger. New lockdown restrictions as COVID19 cases popped up across various regions was no doubt a factor. The data suggest a weaker consumer spending profile at the start of the year, with some spillover for the rest of the world.
The NZD was well supported on Friday, revisiting the 0.7225 level overnight, before weakening into the close to finish the week around 0.7180 and a relatively flat performance for the week overall. The AUD pushed back up through 0.77 but closed the week around 0.7640, lagging the performance of other commodity currencies. NZD/AUD pushed higher after the RBNZ’s tapering announcement and we wonder whether this had some impact on the cross even though there was no immediate reaction on other NZD crosses.
The RBNZ announced that it would be purchasing “only” $570m of government bonds next week as part of its large scale asset purchase programme, down from $650m last week. This was a genuine taper of bond purchases, unlike the shift down earlier this year which simply matched the reduced issuance at NZDM’s weekly tender. It was interesting to see the taper coming in the same week that NZDM will be syndicating the new May 2026 bond, with issuance targeted between $2-4b, and the normal weekly tender of $500m cancelled. The RBNZ announcement drove a small increase in NZ bond and swap rates although the backdrop was also one of higher global rates. 10-year NZGB and swap rates closed the day 4bps higher at 1.12% and 1.19% respectively.
RBNZ tapering of the LSAP gives the impression that the Bank isn’t particularly concerned with the market-led rise in rates across the curve of late. Higher rates have followed higher confidence in the global economic outlook and NZ’s economic recovery remaining on track, alongside higher inflationary pressure.
Other currencies showed modest movements on the day, against the backdrop of much weaker equity markets. EUR was the best of the rest, gaining 0.3% overnight to around 1.2140 – the euro finding some support after the string of positive GDP announcements and Irish central bank head Makhlouf suggesting that the ECB doesn’t need to cut interest rates at the moment. This was a counter to comments earlier in the week by at least two other ECB council members who seemed to favour lower rates.
Tonight sees the release of the US ISM manufacturing index, with the market seeing some slippage to 60.0, still consistent with good expansion in the sector. It’s a big week for RBA watchers, with the policy announcement tomorrow, a speech by Governor Lowe Wednesday and the Statement on Monetary Policy Friday. NZ labour market data due Wednesday could potentially be a market mover if the data are strong, further nudging RBNZ policy expectations towards tightening next year.
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