Risk sentiment sours on worries about delta variant and increased geopolitical tensions with China. Equities tumble, US 10-year rate plunges to 5-month low of 1.17%. Commodity currencies down around 1%; NZD nears 0.6920 support level

The new week has begun with a significant deterioration in risk appetite, attributed to fears of the spreading delta variant of COVID19 and some accusations of China cyberattacks not helping. There have been some chunky falls in global equities, rates and commodity prices overnight. The usual safe-haven currencies have outperformed while commodity currencies have copped it, sending the NZD to the bottom of the range and fresh year-to-date lows for the AUD.

There was a whiff of softer risk appetite late last week on a number of worries and after a weekend break, investors have decided to ramp-up a broadly-based sell-down of risk assets. US S&P500 futures started falling during Asian trading, gathered momentum as Europe opened and continued falling throughout the US session. The Euro Stoxx 600 index closed down 2.3% and the S&P500 is currently down over 2%. The VIX or fear index has spiked up to around 25.

The switch into safer assets has driven a large fall in the US 10-year rate, currently down 11bps to 1.18% after hitting a fresh 5-month low of 1.17%. UK and Germany 10-year rates are down by 7bps and 3bps respectively.

High on the worry list is the spread of the delta variant of COVID19 around the world. A surge in case numbers is even being seen in well-vaccinated regions including the US, UK and EU.  The WSJ reported statistics from a couple of hospital chains that showed that only 1-3% of fully vaccinated people were needing hospital care. However, the spread of the virus to unvaccinated people was seeing a rise in hospital admissions. In countries with low vaccination rates, including most of the developing world, case numbers and deaths are surging, with Indonesia being the new global hotspot.

This is a major setback for the global economic recovery and we’d view as a legitimate reason for the selling of risk assets, given the uncertainty about how long this could last and whether the spread sees even more contagious variants of the virus develop.

Adding to the risk-off tone overnight, during the morning session of European trading, the US government blamed hackers affiliated with the Chinese government’s main intelligence agency for the cyberattack on Microsoft email software in March. The UK and EU added their support for this accusation alongside Canada, Australia, NZ, Japan and NATO. While no sanctions have been imposed, the pubic blaming was served to expose the scale of China’s activity and take steps to counter it. The announcement will add to US-China and Australia-China geopolitical tensions, and with NZ being a signatory to the accusations there must be a non-negative risk that NZ’s trade with China eventually faces some hurdles.

After the OPEC+ deal on gradually increasing supply over the coming year, the oil market opened on a slightly softer note, with traders putting more weight on the increased supply dynamic than the idea of a stronger oil cartel. However, selling pressure increased as risk appetite tumbled and Brent crude is currently down over 7% at USD68.25. The risk-off tone has seen weakness across other commodities including copper, down over 3%.

In currency markets, the yen has been the top performer, with USD/JPY down 0.5% to 109.50, and the USD itself well supported.  EUR is also showing some safe-haven characteristics, barely falling to just below 1.18, which has moderated the rise in the USD BBDXY index to just 0.3%. GBP has underperformed, down 0.8% to 1.3660, with any positive vibe from “Freedom Day” steam-rolled by the surge in COVID19 cases and threat of a return to restrictions.

Commodity currencies have fared the worst. The NZD is down about 1% to 0.6930, after reaching a low of 0.6922, just above last-week’s year-to-date low of just under 0.6920, reaffirming that mark as a key support level. The AUD has also fallen 1%, traded a fresh year-to-date low of 0.7327, and is currently near that low. USD/CAD is up over 1% to 1.2760. With the big fall in risk sentiment, NZD/JPY is the biggest loser of the day, down 1.5% to 75.8 after finding some support near the March low of 75.6.

Yesterday, the domestic rates market saw lower yields across the curve, a combination of some settling down post the RBNZ MPR and CPI shocks of last week and global forces. The 2-year swap rate fell 3bps to 1.06% and the 10-year rate fell 5bps to 1.81%. NZGB yields were 2-3bps lower across most of the curve. The weaker global risk backdrop will have some questioning the merits of an RBNZ rate hike as soon as next month. But virus concerns could easily blow over in a month or two while NZ inflation will still be heading higher and the economy will still be over-heated.

The economic calendar has been light to start the week. The NZ performance of services index showed a modest rise to remain near a historically high level. The composite indicator derived from combining the PSI and PMI suggested growth running around a 4% annual rate, which is much more than the economy can sustain and adds to the overheating, high-inflation thematic.

In the US, the academic panel which judges official US recessions decided that the recent recession only lasted two months through March/April 2000, the shortest on record, following the longest economic expansion on record post the GFC.

For the economic calendar in the day ahead, Japanese inflation data are expected to show further lack of progress in the BoJ meeting its target; the RBA minutes shouldn’t reveal anything new since Governor Lowe has already provided a lot of the background to July’s tweak in policy and the PBoC is widely expected to keep policy steady, although there is more interest than usual in the decision on the loan prime rate following the recent cut to the reserve requirement ratio for banks. In the US, building permits and housing starts data are expected to show small increases.