Equities fall back after their recent strong run. Nerves on higher global bond rates backdrop and weak US labour market data not helping. NZD remains range-bound; GBP still in favour

Global equities have taken on a more cautious tone after the recent rise in bond rates, and with weaker US data overnight not helping. The NZD continues to hover around the 0.72 mark, while GBP remains the flavour of the month.

US equities opened the session on a weak note and the S&P500 has remained in negative territory throughout the day and currently down nearly 1%. After their recent record run, global equities have taken on a more cautious tone, given the rise in global rates in the background.

On that note, rates have pushed up across the board, with Germany’s 10-year rate up 3bps to minus 0.34%, its highest close since June; the UK 10-year rate was up as much as 8bps to a 10-month high of 0.65% this morning; and the US 10-year rate has traded a 1.27-1.32% range overnight and is currently up 1bps to 1.28%. There have been five cases over the past few sessions of UST10s breaking above 1.30%, but in each case the yield has fallen back down – a sign of some consolidation in the market, but too early to judge that the recent sell-off has ended.

Equity investors have taken on a more cautious tone given the threat of further increases in bond yields as policy makers make a deliberate attempt to reflate their economies. Not helping sentiment overnight was weaker US labour market data. US initial jobless claims unexpectedly rose to a four-week high of 861k, alongside a 55k upward revision to the prior week. The trend remains fairly flat, suggesting little progress in any labour market recovery for several months now, as the pandemic has raged across the States. Hope remains that the rollout of vaccines and easing of restrictions will promote some sort of recovery over coming months.

Other data were mixed, with softer than expected housing starts and stronger building permits, the latter showing single-family permits at a 14-year high. The Philly Fed index remained consistent with a nationwide ISM manufacturing reading around the respectable 60 mark.

Currency market volatility remains subdued. GBP is the only major showing signs of life, continuing its strong run over recent months and hitting a near 3-year high of 1.3986 overnight, currently up 0.7% for the day to 1.3960. Recovery from the EU-UK trade deal shenanigans late last year and the country’s over-achievement in its aggressive vaccine rollout can be attributed to the currency’s favour. NZD/GBP hit 0.5150, a 3-month low.

NZD volatility remains low with the currency hovering around the 0.7200 mark. The AUD is flat around 0.7750, with another strong employment report yesterday having minimal impact. Employment levels are almost back to pre-pandemic levels, including in Victoria. The unemployment rate fell another couple of ticks to 6.4% The outlook for the labour market continues to be positive, given forward indicators such as job ads and job vacancies.

Elsewhere, EUR and JPY show modest gains against the USD, the former up to 1.2085 and USD/JPY down to 105.70. NZD crosses don’t show much movement for the day, apart from NZD/GBP noted above.

The domestic rates market was driven by global forces – the brief short-covering rally – with lower rates across bonds and swaps for the session. The 10-year NZGB and swap rate both fell 4bps to 1.49% and 1.58% respectively. The short end of the curve remained underpinned by steady monetary policy expectations. The market will trade cautiously ahead of next Wednesday’s policy update by the RBNZ, with the Bank needing to factor in a much stronger labour market and inflation outlook than it predicted three months ago.

The economic calendar for the day ahead is fairly full with the focus on the PMI data tonight across Europe and the US, where expectations are mainly for some slippage in February compared to January.