Equity markets have recovered further overnight, with Monday’s fears now seemingly a distant memory. Unlike yesterday, better risk sentiment is evident across other asset classes as well, with US Treasury yields up towards 1.3%, commodity prices rebounding and commodity currencies recovering nicely.
Risk sentiment has improved, with this being attributed overnight to the great start to the US earnings season, with 85% of companies reporting so far beating expectations. With cash near zero, Treasury yields so low, and corporate bond spreads near record lows, the theme of TINA – There Is No Alternative – has no doubt supported the stock market. The S&P has gained for a second day, currently up 0.7%, with Monday’s losses now looking like just a blip on the radar and the index back within 1% of last week’s record high. Earlier, the Euro Stoxx 600 index closed 1.7% higher.
Fears of the spread of the delta variant of COVID19 remain back of mind, but those concerns have been put to one side for another day. The WSJ reports that the highly contagious variant doesn’t pose an immediate risk to the strength of the US recovery, with limited disruptions, and analysts expecting a robust expansion to continue in the second half. That thesis will be put to the test over coming weeks as new case numbers explode, as they have in the UK. Indeed, the UK is being watched closely as a test case and the country, currently with almost no restrictions, will give a good steer as to whether hospitalisation and death rates can remain low as the delta variant spreads through unvaccinated cohorts which are mostly younger folk.
While the stock market is sensitive to earnings beats and forward guidance, this earnings season the bond market might pay more attention than usual to comments around inflation pressures. Bloomberg has noted inflation concerns expressed by a large range of companies in the reporting season so far. The CEO of PPG (paints and coatings producer) said that the inflation cycle was much higher than anticipated and the company is working to secure further selling price increases. Coca Cola’s CFO thought that in 2022 there would be more cost pressures ahead, while the CEO of industrial supplies distributor Fastenal noted the likelihood of persistent cost pressures due to the shortage on international capacity and “there’s a ton of inflation going on”. JP Morgan CEO Jamie Dimon said that inflation could be worse than people think. The list of companies expressing similar sentiments goes on.
Increased risk appetite has driven a selloff across global bond markets. The US 10-year rate has traded a wide 11bps range since the NZ close, initially falling to 1.19% and reaching a high of 1.30%, currently up 7bps at 1.28%. Recall that little more than 24 hours ago the rate traded down at a five-month low of less than 1.13%, so there has been a remarkable turnaround in bond market sentiment.
Commodity prices are mainly higher, including a more than 4% lift in oil prices. Brent crude is trading at USD72.20. Bad news for coffee drinkers as coffee is up 5.5%, nearing a five-year high with a severe frost affecting Brazil’s crop.
In currency markets, safe haven currencies are out of favour, with the yen, USD and EUR in that mix while commodity currencies have rebounded, with overnight gains in the order of 0.7-0.8% for the AUD and NZD and a 1.2% gain for CAD. GBP has also rebounded around 0.7% after being hit hard early this week, the market ignoring the return of Brexit headlines. Arguments over the Brexit deal headline the FT this morning, with the EU insisting that it will not renegotiate the deal after the UK warned it was willing to suspend part of the deal unless the EU agreed to new trading rules for Northern Ireland.
After the NZ close, the NZD took another brief look below 0.69, before making a strong run to a high of 0.6977 and it currently trades near that level. The AUD made a fresh year-to-date low of 0.7290 before starting a run up to 0.7360. Australian retail sales were much weaker than expected, falling 1.8% m/m in June, dragged lower by a number of lockdowns and the current widespread lockdowns will mean even weaker numbers for July. This has supported a recovery in NZD/AUD to 0.9475. Key NZD crosses are higher including NZD/EUR back up through 0.59 and NZD/JPY up over 1% and approaching 77.
The domestic rates market saw swap rates up 1-2bps and NZGBs up 2-4bps. Traders will be pleased that the RBNZ’s bond buying programme has now finished, which will allow for more natural market conditions, liquidity, better price discovery and less volatility. The Australian 10-year bond future is up 4bps in yield since the NZ close, which will set the tone for the market open.
The ECB meets tonight and isn’t expected to make any change to policy settings and no new forecasts will be presented. However, there is expected to be a lively debate on how the new looser inflation target might affect the near-term policy outlook. The economic calendar remains light. US initial jobless claims are expected to nudge down further.