Spike in Spanish bond yields as creditworthiness questioned

by Mike Jones

NZD

The NZD continued its gentle journey southwards overnight. The NZD/USD slipped from 0.8200 to around 0.8140, reflecting the headwinds from a broadly stronger USD.

Against the AUD, the NZD continues to trend higher and sits close to 6-month highs.

Overnight, investors’ risk appetite was scuttled. Global equity markets plunged and our risk appetite index (scale of 0-100%) gave up around 3 percentage points, to sit around 64%.

Not only are European sovereign debt jitters starting to flare up again (focused on Spain – see Majors), but investors are getting used to the idea the Federal Reserve may not be easing again this cycle  (it is the Fed though, so never say never).

Commodity prices remain under downward pressure. The CRB index (a broad index of global commodity prices) declined 1.9% overnight, to be down nearly 6.5% from mid-February levels. And, as we flagged yesterday, the ANZ NZ commodity price index recorded a further 1.7% fall in March.

This mix of weaker commodity prices and softening risk appetite saw investors further trim positions in ‘growth-sensitive’ currencies like the AUD and NZD overnight.

The ‘safe-haven’ USD and JPY were the obvious beneficiaries. The NZD/JPY skidded from above 67.50 to below 67.00, helping drag the NZD/USD back below 0.8150.

Squinting your eyes through the volatility, the NZD/USD remains firmly in the middle of the 0.8090-0.8295 range it has maintained since early March.

The currency has been torn between the negatives of easing risk sentiment and the weaker AUD on the one hand, and signs of a pick-up in NZ economic momentum and widening interest rate differentials on the other. In the short-term, we suspect this tug of war will keep the NZD/USD relatively range-bound.

There’s no NZ data released until next Wednesday’s NZIER business survey. As such, gyrations in USD sentiment will continue to drive the NZD/USD in the short-run.

If Friday’s all important US non-farm payrolls is about as positive as investors expect, we’d expect a further firming in the USD to weigh on the NZD.

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Majors

Gloom descended on markets overnight. Global equity markets notched up sizeable losses, bond yields declined and commodity prices fell sharply. Reflecting the negative risk sentiment, the ‘safe-haven’ USD and JPY strengthened against all of the major currencies.

Last night’s economic data was actually pretty reasonable. European and UK services PMIs beat expectations, as did US ADP employment numbers (209k vs. 206k expected). The ISM non-manufacturing index also remained consistent with US economic expansion (56.0 vs. 56.8 expected).

Despite the solid data, risk sentiment remained depressed. Not only are investors getting used to the idea the Fed won’t be doling out more stimulus, but EU debt worries are starting to flare up again.

A speech from resident Fed hawk Lacker reinforced the ‘no more stimulus’ message from yesterday’s FOMC minutes. With the ECB and BoE also likely done easing, investors are facing up to the idea central banks may be close to the end of their liquidity splurge. Equity and commodity markets are not happy with this; witness last night’s 0.9-2.7% falls in the major equity indices.

The ECB meeting was pretty unexciting. Rates were left unchanged and ECB chief Draghi added little new colour. The more eye-catching development for investors was a jump in Spanish bond yields, indicating increased worry about Spain’s creditworthiness.

A poorly received Spanish auction saw 10-year yields jump 25bps, widening the spread to German yields to 390bps – the highest since November.  

Heightened Spanish concerns saw the EUR slide from above 1.3320 to below 1.3140 against the broadly stronger USD. EUR/JPY fell over 1% to 108.00 as the JPY’s ‘safe-haven’ allure kept the currency in demand. Most of the other major currencies were dragged lower in the EUR’s wake.

Looking ahead, Friday night’s US non-farm payrolls remains the focus for markets. The past three monthly releases have all seen jobs gains above 200k, and analysts expect another 205k jobs were added in March.

We suspect a result above 200k is needed for the USD to sustain its recent gains. Ahead of payrolls, the BoE should stick to the script tonight and keep rates and asset purchases unchanged. Meanwhile UK and German manufacturing data should be relatively positive. 

All its research is available here.