USD remains well supported as US 10-year rate consolidates around 1.60%. EM currencies struggling, as is the NZD. US and European equities start the week on a positive note

The risk-off mood during Asian trading hours has given way, with US and European equities showing solid increases, with further evidence of a rotation into value plays and away from tech stocks. The US 10-year rate is consolidating around the 1.6% mark and supporting the USD. This is doing some damage for sentiment towards emerging market currencies and acting as a drag on the NZD, although other currencies like JPY and EUR have underperformed.

Newsflow has been light to start the week and we could easily write more on Oprah’s Harry and Meghan interview than markets. Still, some evident themes in markets are worth repeating.

In equity markets, the great rotation out of growth sectors like tech and into cyclical plays continues. The Euro Stoxx 600 index closed up 2.1%, while Germany’s DAX index rose by 3.3% to hit a fresh record high – the latter in stark contrast to the local bourse, with the NZX50 index laden with expensive defensives and stocks sensitive to a rising bond yield environment now down close to 11% since early January. Across Europe and the US, equity market gains were driven by cyclicals and banks, a sign of optimism about the economic outlook and the impact of steeper yield curves. The NZ market is largely devoid of such stocks.

The slow rollout of vaccines across the EU has been criticised, but Germany’s Finance Minister Scholz said that the pace of vaccination in Germany would pick up to as much as 10m people a week from the end of March. This would be a massive pick up in pace, given only a total of 7.3m doses have been given over the past ten weeks.

One of the narratives for the weaker euro this year has been a slow rollout of vaccines across the EU. But the positive vaccine news for Germany didn’t grab the attention of the currency market, with EUR underperforming and slipping below 1.1850 to a fresh 3½-year low.

The USD has started the week on a positive note, in the afterglow of the US Senate signing off on Biden’s massive $1.9t fiscal relief package, with only minor amendments. US Treasury Secretary Yellen dismissed fears that the fiscal stimulus would stoke inflation, saying “if it turns out to be inflationary, there are tools to deal with that”. We’d note that the tool to “deal with that” is higher interest rates, precisely the sentiment the market has been adopting this year.  The US 10-year rate is consolidating around the 1.60% mark, a few ticks higher from last week’s close, but just under Friday night’s high of 1.62%.

The trend of higher US bond yields that has lifted the USD continues to put a dampener on sentiment for emerging markets. JP Morgan’s EM currency index has been in freefall since late February, falling over 4% in just over a week, ignoring much stronger than expected China trade data over the weekend. USD/CNY broke up through 6.50 for the first time since early January, while China’s CSI index of stocks fell 3.5%, taking losses from the February peak to 13%. 

Against this negative sentiment for emerging markets, the NZD is struggling. The NZD took another turn down overnight, but key support of 0.7100 held for a second night, with the recorded low at 0.7105. The NZD has since recovered to 0.7140. The AUD is also on the backfoot, probing the 0.7640 mark overnight and now 0.7670. NZD/AUD continues to track sideways around the 0.93 mark.

Against the higher global yield backdrop, JPY continues to underperform, with USD/JPY on the verge of breaking up through 109, having started the month at 106.

Brent crude has settled back down to just over USD68, after trading as high as USD71.30 yesterday. On Sunday, Saudi-led coalition warplanes bombed Yemen's rebel-held capital, Sanaa, after Houthi rebels attacked Saudi oil facilities with drones and ballistic missiles. The rebel strikes reportedly did little to no damage to oil storage sites.

In economic news, Germany industrial production fell 2.5% in January, led by weaker autos output, much weaker than expected, but December was revised up significantly.

The domestic rates market saw lower rates across the bonds and swap curves yesterday, dragged down by better sentiment towards the Australian rates market. Longer term NZGBs were down around 5bps. The 2-year swap rate fell by 1bp to 0.55% while the 10-year swap rate fell by 4bps to 2.02%. Some upward pressure could be seen when the market opens, with the Australian 10-year bond future up 3bps in yield since the NZ close on the back of a similar move for the US 10-year rate.

On the economic calendar, NZ manufacturing data will help firm up expectations for Q4 GDP due next week, while the flash estimate for the ANZ business outlook survey will likely show some impact from the recent lockdown restrictions. The global calendar remains light.