Quarter ends with softer risk sentiment, not helped by weak China PMI data. Oil prices lower after US to release 180m barrels over six months from its strategic reserve

It has been a fairly uneventful end to a historic trading quarter, with a slight risk-off feel. Equity markets have been on the soft side, while global rates are lower. Oil prices are lower after the US decision to release an unprecedented 180m barrels from its strategic reserve. Safe haven currencies have outperformed and the euro is also on the weak side. The NZD has pushed down to 0.6940.

The oil market has been in focus after word got out that the US would release 180m barrels of oil from its strategic reserves. The was confirmed by the White House overnight, with a statement that it would release an “unprecedented” million barrels of oil a day from its strategic reserves for six months beginning May, totalling about 180m barrels. This would serve to bridge the supply gap until domestic production ramps up. The US expects other countries will make some reserve releases as well, although not on the same scale.

OPEC+ has so far refused to deviate from its plan to gradually raise oil production and reaffirmed its current plan at its latest overnight meeting. Oil prices headed lower yesterday and much of the move has been sustained, with Brent crude currently down 4½% to USD108 per barrel.

President Putin said that Russia would keep supplying gas as per long-term agreements, easing fears of gas disruptions after previous talk to demand payment in rubles. The gas contracts say payment is to be made in euros, and sometimes in dollars.

A risk-off move developed yesterday after a weak set of China PMI data and the risk-off feel has endured overnight. Both the manufacturing and non-manufacturing gauges are now decisively below the key 50 level, with a particularly large fall to 48.4 for the non-manufacturing index as COVID restrictions hit the services sector, while production was affected by scaled down activity levels. Figures for April could be even worse, as lockdown restrictions have been extended, with one estimate suggesting that 30% of China’s GDP is affected by areas currently facing restrictions.

The S&P500 is currently down 0.4%, capping off a weak quarter, down nearly 4%, and that would have been much worse if not for the 10% recovery over the past couple of weeks. The Euro Stoxx 600 index fell 0.9% and was down 6½% for the quarter.

The bond market is ending the month on a slightly better footing after being savaged through March, possibly supported by month-end flows, which are seen to be positive, as investors re-allocate into the poorly performing asset class. Lower oil prices have also helped sentiment. The US 10-year rate is down 3bps for the day to 2.31%, well down on the 2.55% peak made earlier this week, but a massive increase from the level of 1.51% at the start of the year, driving a historically large negative return for the quarter. In returns through to yesterday, the Bloomberg Global Treasuries index was down 6½% for the quarter, a poor return for a supposedly “safe” asset class.

The US 2s10s curve remains close to inversion, with the 2-year rate down slightly at 2.30%. European rates were down in the order of 9-10bps, reversing some of the massive increase seen over recent trading sessions.

In US economic data, US personal spending in February undershot market expectations, rising just 0.2% m/m in nominal terms and down 0.4% in real terms. The core PCE deflator was in line at 0.4% m/m, taking the annual change to 5.4%, which is expected to be close to the peak. The Chicago PMI rose by a stronger-than expected 6½pts in March to 62.9, adding to the chance of a strong reading for the ISM manufacturing index tonight.

In currency markets, safe-haven currencies have been well supported, given the risk-off backdrop. Some sense of normality is returning to the yen market, with USD/JPY down to 121.50, while NZD/JPY is closing in on 84. Weak China PMI data didn’t help sentiment for the NZD or AUD. The NZD is down 0.5% from this time yesterday to 0.6940. The AUD fell down to almost 0.7470, but has recovered a little overnight to around 0.75. NZD/AUD has been on a bit of a rollercoaster ride this week. It recovered over a cent to nearly 0.93, but has since fallen back to 0.9260.

A chunkier fall in European rates compared to other markets has driven a weaker euro, down 0.6% overnight back down below the 1.11 mark.

The domestic rates market showed a downside bias to yields yesterday. There was strong bidding in the NZGB tender, with good cover and clearing through mids.  Yields ended the day down 4-5bps across the curve, with the 10-year rate down 5bps to 3.22%. Long term swap rates were also down 4-5bps, while the 2-year rate was flat at 3.29%.

In the day ahead, NZ consumer confidence for March is released and it is hard to believe it could fall much further, having already hit sub-GFC levels in February, normally consistent with deep economic recession. Euro area inflation data will show a sharp lift, as already signalled by some country-level data, putting more heat on the ECB to reverse its negative-policy rate, now well past its use-by date. The US employment report is widely expected to show another strong monthly increase and fall in the unemployment rate, while the ISM manufacturing index is expected to tick higher.