Newsflow has been light with the US on holiday, but global equity markets and commodity prices continue to roar ahead, while global rates push higher. Currency markets remain uneventful and show modest changes, with the USD remaining on the backfoot.
There isn’t much news to report but that hasn’t stopped the reflation trade continuing, buoyed by further progress in beating COVID19, expectations of the forthcoming massive US fiscal stimulus, and stimulatory monetary policy that looks set to continue for an extended period.
UK PM Johnson said that the will detail his roadmap for ending the current lockdown next Monday, with a priority to try and reopen schools from 8 March. This follows news that the country has made good progress with its vaccination programme, providing shots to the most vulnerable 15 million people and caregivers and now opening up the programme to younger people. New daily cases of COVID19 have dropped to their lowest level in four months, a similar trend seen in the US.
The MSCI World index is on track to record its eleventh straight daily increase, the longest stretch since 2009. S&P500 futures are up 0.5%, the Euro Stoxx 600 index rose by 1.3%, the FTSE100 rose by 2.5% and the Nikkei index blasted up through the 30,000 mark for the first time since 1990 to close the day up 1.9%. As well as the global backdrop, the latter was supported by data showing GDP growth of 3.0% q/q in Q4, stronger than expected.
Oil prices have increased in the order of 1-2% to reach their highest level in over a year, with WTI crude breaking up through the USD60 mark and Brent crude hitting USD63.75. Higher prices are attributed to a very cold snap of weather in the US, triggering rolling power cuts in Texas, disrupting oil production in the State, and highlighting the current fragility of global supply. Other commodity prices remain strong – copper prices continue to push higher after last week’s more than 5% gain, and have now reached their highest level since 2012.
The US Treasuries market is closed but futures show further upward pressure in yield after the sell-off at the end of last week. Global rates are higher across the board, with Germany’s 10-year rate up 5bps to minus 0.38%, an 8-month high.
Higher global rates see JPY as the weakest currency, as is usual, with USD/JPY up 0.4% to 105.30. The USD has weakened against all the other key majors, continuing its downward path. Despite the stronger commodity price backdrop, the NZD has shown only a small gain to 0.7235.
The AUD and CAD have performed better, with the former pushing up to 0.7790, seeing further downside pressure on NZD/AUD to 0.9290. As we’ve noted previously, the outperformance of Australian to NZ commodity prices is supporting the fall in NZD/AUD. Indeed, our short-term fair value model estimate is just below 0.90, caused by this factor. This has more than offset relative interest rates moving in favour of the NZD.
GBP continues along its upward path, breaking up through 1.39 for the first time in nearly two years and pushing NZD/GBP just below 0.52 overnight. GBP remains the cheapest of the majors and its outlook remains bright.
The domestic rates market saw upward pressure across the curve, with further steepening, more so for the swaps than the bond market. This reflected a catch-up to Friday night’s chunky move in US rates and Australian bond futures. The 10-year NZGB rose by 7bps to 1.37% and 10-year swap rose by 10bps to 1.52%, the latter reaching a fresh high since the spike up last March.
In the day ahead, REINZ data should continue to highlight the feeding frenzy in the local housing market, fuelled by record low mortgage rates, while RBA minutes of its February meeting will add little to the extensive post-meeting information conveyed by Governor Lowe. The key release tonight is US retail sales, expected to show a bounce-back in January after the significant weakness in December.