USD remains under pressure. EUR breaks above 1.20, NZD approaches 0.72. Equities pull back, global rates drift higher 

Market sentiment has turned a little more cautious overnight, with equity markets pulling back from their recent highs.  The USD remains under pressure, with the EUR punching up through 1.20 and the NZD hitting a one-month high.  The US 10-year yield has drifted up to 1.60%.

There hasn’t been any major economic data or central bank talk to drive markets over the past 24 hours.  Equity markets have given back some of their gains from last week, with the S&P500 trading about 0.5% lower at this point and the NASDAQ down just over 1%.  The Eurostoxx 600 index was barely changed and continues to hover near its all-time high.

Global Covid-19 cases hit a new record over the past seven days, with over 5.2m new cases reported.  Cases are well down from their peak in countries like the US and UK, where vaccination is well advanced, but they are still rising sharply in some developing countries, especially India.  The UK announced a travel ban on India overnight in response to the surge in cases in the country and concerns around the emergence of an Indian variant in the UK.  The extent to which vaccines protect against new Covid variants is a key uncertainty surrounding the reopening process and hence the economic outlook.

After falling sharply last week, despite a string of stronger-than-expected economic data releases, US yields have nudged higher overnight.  The US 10-year yield is back at 1.60%, 2bps higher on the day and 7bps above the lows from Friday morning.  Ahead of the ECB meeting on Thursday night, European government yields continue to grind higher.  The 10-year German yield increased 3bps overnight, to -0.23%, near its highest level since last March.  The market has become slightly more optimistic around the European vaccine rollout and economic outlook of late, as reflected in the 20bps decline in the spread between 10-year US and German bond yields this month and the rebound in the EUR currency.

The USD remains under pressure.  The BBDXY has fallen 0.4% overnight to its lowest level since the end of February.  This is the sixth successive day the USD has declined.  The USD is off around 2% this month on the back of the pullback in US Treasury yields, greater investor optimism around the European vaccine rollout and rising risk appetite (albeit not so much overnight).  USD weakness overnight has been broad-based; it has fallen against nine of the G10 currencies (the exception being the CAD).

The EUR is up 0.5% overnight, breaking through 1.20 for the first time since early March.  News that Pfizer had agreed to increase its vaccine supply to the EU by 100m doses this year, bringing the planned total to 600m, plays to the emergent EUR recovery view.  Pfizer expects to deliver 250m doses this quarter, around four-times what it supplied in Q1 and enough to fully-vaccinate around a quarter of the population.

The GBP has been the outperformer overnight, appreciating over 1% to almost 1.40.  The JPY is up 0.6%, with USD/JPY falling to a six-week low, just above 108.  USD weakness has seen the NZD trade up towards 0.72, above where it was before the government announced its new housing policies last month.  We still think the outlook favours further NZD strength/USD weakness this year.

NZ rates moved lower yesterday, with both the 10-year government bond yield and swap rate falling 3bps, to 1.60% and 1.80% respectively.  Indicative of a lack of selling interest in long-end NZ government bonds at present, the RBNZ’s QE buyback of $40m 2037 maturity bonds yesterday was met with just $68m of offers.  The buyback cleared around 3bps lower than secondary market levels at the time.  The evident lack of selling interest in long-end NZ government bonds at present comes ahead of some big bond maturities next month, which will result in some large duration extensions for the local bond indices.

In domestic data, the PSI (Performance of Services Index) encouragingly moved back into expansionary territory last month for the first time since October.  The index jumped from 49.7 to 52.4, not far from its long-term average of 53.8   The rebound in the services sector last month was much less pronounced than for manufacturing (the PMI hit a record high in March), with supply chain issues one factor that appears to be hampering the services sector.

It should be another quiet session ahead.  The RBA minutes are released but are not expected to provide much insight given little change in the April post-meeting Statement.