It has been a quiet start to the trading week with a slightly cautious tone. Most equity markets are flat to lower, US Treasury yields have trended down and commodity currencies have underperformed. This sees the NZD down 0.4% to 0.7045.
It looks like it will be a quiet trading week ahead of Friday’s key US employment report. Furthermore, there has been little economic news and no major headlines.
Some cautious trading ahead of that employment report or some month-end activity might explain the slight softness in global equity markets overnight and a small rally in US Treasuries. After another positive month for equity markets, some asset allocators will be rebalancing towards the bond market. The Euro Stoxx 600 index fell 0.6% while the S&P500 is flat. There has been further rotation into IT stocks and the Nasdaq index has printed a fresh record high and currently up 0.7% for the day. The US 10-year rate has seen a steady fall since the NZ close and is down some 5bps to 1.47%, more than reversing the increase on Friday night.
Another wave of Fed speakers has been out in force overnight but the market has moved on from taking much notice following last week’s peak in verbosity.
Overnight there have been contrasting views on the ECB’s bond buying programme outlined by the head of the Bundesbank, Weidmann and ECB executive board member Panetta. Weidmann said that inflation is not dead and warned of upside risks to price developments being predominant in the euro area. He argued for a reduced step-by-step reduction in the ECB’s emergency bond buying programme (PEPP) rather than a sudden end in the programme, due to last until at least March 2022. By contrast, Panetta said that the economy was not yet out of the pandemic phase and that “experience shows that attempting to reduce the pace of asset purchases too early would lead to a tightening of financing conditions and a higher pace of purchases later.”
Brent crude oil prices are down in the order of 2%, a mix of the risk-off tone and thoughts of reduced oil demand, alongside possible increased supply ahead. Some European countries such as Spain and Portugal have imposed new restrictions on UK visitors and Hong Kong has done the same as new cases of COVID19 increase in the UK. Renewed lockdowns across parts of Asia, Australia, Russia and South Africa amongst others also suggest reduced oil demand. On supply, OPEC+ meets this Thursday and the Bloomberg consensus expects a 550,000 barrels per day lift in oil production from August.
In currency markets there has been little movement save for some modest underperformance of commodity currencies. After last week’s strong rebound, the NZD has retraced 0.4% to currently sit at 0.7045. We’d note that last week the rebound in risk appetite alongside higher NZ-US short rate spreads saw our short-term fair value estimate return to a 0.74 handle. However, we recognise that’s a bridge too far at the moment and there is some near-term technical resistance around 0.71. The AUD has fallen back to 0.7565 and fair value sits north of 0.80. While NZD/AUD is flat at 0.9310, other NZD crosses are all modestly weaker.
The domestic rates market saw higher rates across the bond and swap curves in the order of 2-3bps, the tone set by global forces on Friday night. There will be some interest in how the bond market performs this week, with only $200m of bond buying by the RBNZ and $500m in the bond tender later this week. In theory, the increased net supply the market will have to absorb should put some mild upside pressure on NZGB yields, although this could be a slow burner as the market gradually adapts to the change.
In the day ahead, RBNZ Governor Orr speaks later this afternoon following the release of the Statement of Intent, an annual outline of the Bank’s priorities over the next few years and not typically market moving. Global economic releases tonight include Euro area confidence figures, Germany CPI inflation and US consumer confidence.