US bond and equity markets have traded broadly sideways overnight amidst a lack of market-moving news. The USD has pushed higher again, to near its year-to-date highs, while the EUR remains under pressure due to concerns around a Covid-19 ‘third wave’ in the region. The NZD has fallen to around 0.6950, a four-month low. NZ wholesale rates increased 4-8bps yesterday, rebounding after heavy falls the previous two days.
There haven’t been any major new developments overnight to drive markets. Investors remain wary about the resurgence in Covid-19 in continental Europe and its slow vaccine roll-out, both of which will delay its economic reopening. European equities were down modestly overnight, European government bond yields fell 2-3bps and the EUR remains under pressure in currency markets.
US equity markets opened lower, with the S&P500 trading down almost 1% at one point, but they have recovered their losses in the past few hours. The timing of the initial sell-off seemed to coincide with headlines from an interview with Fed Chair Powell in which he said the Fed would “gradually roll back” its bond buying “as we make substantial further progress toward our goals .” There didn’t appear to be anything new from the comments and the S&P500 is now up slightly on the day, while the NASDAQ is down 0.3%. In stark contrast to the stuttering vaccine roll-out in Europe, US President Biden announced that he was raising his target for vaccination in his 100 days of office, from 100 million to 200 million Americans.
US bond yields have edged up overnight, with the US 10-year yield trading at 1.62%. An hour ago, there was another weak 7-year Treasury auction, which came 2.5bps above secondary market yields at the time, suggesting tepid investor demand. Treasury bond auctions have come back on the radar of investors amidst concern around the record amount of supply that needs to be absorbed this year. A very weak 7-year auction last month, which came 6bps above pre-auction levels, triggered the initial break in the US 10-year yield above 1.5%. There wasn’t much reaction to a larger-than-expected decline in US jobless claims last week. Jobless claims are now at their lowest level since Covid-19 hit the US, although they remain very high on a historical basis.
The increase in US rates this year has left the Bloomberg US aggregate bond index, a key US benchmark, with a 3% loss this year, leaving it on track for its biggest quarterly loss since the early 1980s. Some commentators have speculated that the pullback in bond yields on the past week may be related to the coming quarter-end, which will see significant portfolio rebalancing out of equities and into bonds from those investors (such as so-called ‘balanced funds’) that maintain fixed weights between the two.
EUR weakness remains a feature of currency markets, with investors concerned that the slow vaccine roll-out and return to lockdown in several countries will delay the economic recovery in the region. The EUR has broken below 1.18 overnight and has fallen to its lowest level since last November. It trades this morning around 1.1770 (-0.4% on the day).
The counterpart to EUR weakness has been USD strength, which has seen the BBDXY index push up to near its year-to-date highs. The USD is stronger against all the G-10 currencies overnight except for the GBP.
The NZD has edged down overnight, in sympathy with the moves in the EUR. The NZD is trading around 0.6950 this morning, a four-month low. The next key support level kicks in at 0.68. We remain positive on the medium-term outlook for the NZD, mainly because we think recent USD strength will prove temporary and the expected sharp recovery in global growth this year should help commodity currencies, like the NZD.
In vaccine news, AstraZeneca restated the results from its large-scale Covid-19 vaccine trials yesterday, after US regulators raised doubts around the initial results. The updated results show the vaccine was 76% effective, only marginally lower than the original 79%. AstraZeneca and Oxford University, with which it has developed the vaccine, said they planned to seek emergency use authorisation in the US shortly. The vaccine is already in wide use in the UK and has also been used in Europe, albeit supply bottlenecks have crippled its distribution on the continent. Elsewhere, India has reportedly banned the export of Covid-19 vaccines, in order to prioritise domestic vaccination. India is a major production hub for vaccine producers and the measures, which the FT reports could last two to three months, could slow down the vaccination drive in other countries, including the UK.
After two days of big declines, the domestic rates market reversed course yesterday. Wholesale swap rates increased by 4bps, at the 2-year point, to 8bps, at the 10-year. Higher global rates, including those in Australia, were partly behind the domestic rates move, in addition to what appeared to be some profit-taking from investors. Even with the correction yesterday, the 10-year wholesale rate, at 1.80%, is almost 20bps lower this week.
Attention again turns to the RBNZ’s week-ahead bond buying announcement at 2pm today. The RBNZ has maintained the pace of bond buying at $630m/week over the past three weeks. This has been more than bond issuance (which has been running at $450-500m/week), meaning the RBNZ has been reducing the free-float of bonds in the market. This has added downward pressure to government bond yields. With bond issuance set to drop by $150m/week from next week, we expect the RBNZ to reduce its bond buying as well, to avoid overwhelming the market. We expect the RBNZ to reduce its bond buying next week by at least $150m and a case could be made for a larger reduction, following a run of poorly offered buybacks (including one this week where the RBNZ failed to find enough sellers for its target purchase).