Market sentiment has flipped, with a rotation back into tech stocks leading a surge in US equities, while the US 10-year rate has drifted lower. The USD has shown broadly based weakness, helping the NZD and AUD recover a little overnight.
After we went to press yesterday, risk assets took a tumble, with US equity markets closing weaker and the NZD tracked lower to test support near 0.7100 again by mid-afternoon. Sentiment turned around after reports that Chinese State-backed investment funds stepped in to support China’s equity market after its recent double-digit percentage fall. US equity market futures tracked higher since, the cash market opened on a strong note and gains have built during the session. The S&P500 is currently up more than 2%, while the Nasdaq’s gain hit 4%.
It’s hard to believe that Chinese state buying of its domestic market is the cause of a 4% gain in the Nasdaq, but whatever the cause, confidence has returned to the market and we’ve since the most beaten down stocks outperform – big tech is leading the charge and value stocks and financials have underperformed, a reversal of recent fortunes.
Adding some support to market sentiment, the OECD published a chunky upgrade to its world growth outlook, a reminder to investors that the global growth outlook is pretty damn good, given the highly stimulatory policy backdrop and the rollout of vaccines.
In the OECD’s latest forecast update, world GDP growth for 2021 was revised up a hefty 1.4 percentage points to 5.6%, with global output now seen to rise above pre-pandemic levels by the middle of this year. One of the biggest upgrades was for the US, with its growth estimate nearly doubling to 6.5%, as the OECD built in the USD900b fiscal stimulus of December and the $1.9t package about to be signed off this week. Even from a much stronger base, world growth for 2022 was upgraded by 0.3 percentage points to 4.0%.
There has also been further sign of consolidation in the US Treasuries market, with perhaps investors thinking that the run-up in yields has gone too far, too fast. The 10-year rate traded as low as 1.52% overnight, well down from the 1.60% levels since less than 24 hours ago. It currently trades at 1.55%, down 4bps for the day. Nerves will be tested during the rest of the week. The US Treasury will auction $38b of 10-year bonds and $24b of 30-year bonds over the next two trading sessions. The 14bp spike in the 10-year rate in late February to over 1.6% during a liquidity vacuum is attributed to the poorly bid 7-year auction at the time. We await and see what demand will be like at the long bond auctions this week.
Following the reversal script, the USD is on the backfoot, with the BBDXY index down 0.5%. After falling to as low as 0.7103 yesterday – further confirmation of 0.7100 as a key support level – the NZD has gained over half a cent to 0.7160, after meeting some resistance at 0.7180 overnight. The AUD has rallied a full cent from its low up to 0.7719 and currently sit around 0.7700. NZD/AUD continues to track sideways around 0.93.
EUR is on the soft side. While it managed to break up through 1.19 overnight, it has since fallen back below that level and is up only 0.2% from the NZ close. USD/JPY broke up through 109 yesterday afternoon, a nine-month high, but USD weakness now sees it back down to 108.55.
The domestic rates market had a lacklustre session and rates barely changed. The offshore rally overnight means that the lead for the open today will be slightly lower rates. The Australian 10-year bond future is down some 3bps in yield from the NZ close.
A series of second-tier Q4 NZ economic activity releases including for the manufacturing and wholesale sectors resulted in BNZ economists downgrading expectations for GDP for the quarter from 0.7% q/q to 0.4%. The GDP release is next week and is fairly dated, so is unlikely to impact the market. Confidence around the figure is low, with a wide range, so a negative outcome wouldn’t surprise. But the big picture is that the economy recovery has likely flattened out over Q4 and Q1, after the strong rebound in Q3. The lack of global tourists during peak season can take some of the blame.
The ANZ business outlook survey showed weaker activity indicators in the early-March reading, likely weighed down by the recent lockdowns, although some of it might just have been seasonal. Of note, selling price intentions rose to a fresh record high, with a net 48.9% of firms looking to raise prices, while year-ahead inflation expectations rose to a two-year high of 1.95%. As we’ve previously noted, the RBNZ has already effectively achieved its inflation mandate and the path ahead is for a further lift in inflation, with core measures moving decisively in the top half of the target range.
The survey showed a contrast with the positive NAB business survey for Australia, showing confidence at an 11-year high and business conditions at a multi-year high – further evidence of our view that the Australia economy is better placed this year than NZ’s, one factor supporting our view of a flat NZD/AUD this year even against a backdrop of the RBNZ seen to be tightening policy ahead of the RBA.
On the economic calendar today, after NZ card spend data for February, focus will turn to RBA Governor Lowe’s speech. We’ll be keen to hear what the Governor thinks of the rise in global yields given the post-Board Meeting Statement was mostly neutral on these developments, while recent QE purchases have provided mixed messages on the RBA’s resolve to keep interest rates across the curve suppressed. Tonight, US CPI data could be a market mover either way on a negative or positive surprise, given the market’s anxiety on the inflation outlook. There will also be keen interest in how strongly the Bank of Canada pushes against market expectations for a rate hike next year at its scheduled meeting.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.