Thursday, August 13, 2020

Asia Times: The RBNZ’s dovish statement sent Kiwi diving, only to be saved by a declining dollar as risk-on sentiment returns

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • NZD
  • Reserve Bank of New Zealand

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Market Recap: The RBNZ’s dovish statement sent Kiwi diving, only to be saved by a declining dollar as risk-on sentiment returns

The US broad market surged on Wednesday with the S&P500 inching closer to its last record high of 3,386.15 in February. Gains over the broad market may have been bolstered by comments from US Treasury Secretary Steven Mnuchin on Fox Business, where Mnuchin signalled that US President Donald Trump plans to introduce capital gain tax cuts to help boost the economy. Mnuchin's call on Democrats to return to negotiations regarding the proposed stimulus measures likely helped drive optimism in the market as well, as investors took the comment as a sign of a possible compromise from the White House to push forward with stimulus talks.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.05% +289.93 27,976.84
S&P500 +1.40% +46.66 3,380.35
Nasdaq +2.13% +229.42 11,012.24
*Source: Bloomberg

S&P500 sector performance was largely skewed to the tech sector, as big tech shares surge to recover from a three-day decline. Tech led gains followed by health care stocks, in what appears to be a rebound following the three-day correction as opposed to risk aversion. Financials was the only sector that fell on Wednesday, but it was likely mainly due to weakness in gains with major banks. Stocks that dominated the bottom 20 performers in the S&P500 were mostly stocks that gained over the last three days, which includes Macau casino and resort operators, and cruise liners. The easing in the VIX index also signals that risk aversion was likely not a driver for sector performance and is instead a natural rotation back into underperforming stocks from the last three days.

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The dollar returned back on track for its decline as investors returned back into financial markets. The oil-linked Norwegian krone and Canadian dollar benefitted from the uptick in oil prices as well as better-than-expected weekly US crude inventory data. Safe haven currencies were mixed, but were mostly skewed towards the downside. Elsewhere in the UK, sterling lost steam against the greenback despite posting better-than-expected GDP figures for Q2 2020. Economic activity in the UK (GDP) fell 20.4% QoQ and 21.7% YoY for the quarter ended June 30th. While the headline figure was better than both economists' and the Bank of England's (BoE) forecast, exports dipping less than import figures for Q2 figures signal that domestic demand may be weaker in the country as compared to its trading partners.

The Reserve Bank of New Zealand's (RBNZ) dovish monetary policy decision on Wednesday sent the New Zealand dollar falling against the greenback during most of the day's trading session. The RBNZ kept rates on hold as expected but flat out beat expectations after increasing the ceiling for its Large Scale Asset Purchase (LSAP) programme to NZ$100 billion (economists were mixed on whether the RBNZ would expand its LSAP programme, with estimates only for an increase to NZ$90 billion). In addition, the central bank also highlighted further tools that can be deployed if needed, of which one was a negative overnight cash rate. It is important to also note that the central bank's decision came just after New Zealand's city of Auckland experienced a spike in Covid-19 cases which prompted a reintroduction of lockdown measures in the city. This means that the latest decision doesn't consider the impact of the materialisation of renewed restrictions in Auckland, which will likely add to the pressure on the domestic economy, suggesting that the aforementioned additional measures in its statement could be deployed sooner than expected.

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Safe haven assets were mostly tilted to the downside as risk aversion fades yet again following what appears to be a quick and sharp correction in financial markets. While the extent of the recent correction still remains to be seen, safe haven assets suggests that risk appetite is growing broadly yet again. Gold was the exception among safe havens, advancing after the three-day downturn. The precious metal is however, still trading well below its record high. The Japanese yen fell against the euro and the dollar. US Treasuries fell across the board, with benchmark 10-year yields rising 3.3bps higher to 0.67%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.21% +3.94 1,915.83
Silver +2.90% +0.72 25.51
USD/JPY +0.39% +0.42 106.91
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.2bps 0.16%
10-Year +3.3bps 0.67%
30-Year +4.5bps 1.37%
*Source: Bloomberg

Oil futures surge on official crude oil stockpile data in the US as the report signalled a recovery in both demand and supply. The US Energy Information Administration's (EIA) weekly crude oil inventories report showed US stockpiles falling over 4 million barrels last week, while refineries increased rates up above 80% for the first time since March. Gasoline and distillate inventories declined, signalling to traders that demand may be starting to return. While investors were largely optimistic ahead of the official report, the data helped to confirmed those expectations in the market, sending crude oil prices higher. WTI closed above its 200-day moving average for the first time since January as a result. With oil prices rising, the key concern next for crude oil prices will likely be a possible uptick in shale oil production in the US, which should put pressure on crude oil prices. But if energy demand signals continue to beat expectations, traders look more likely to continue to be bullish on crude oil's recovery instead.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.09% +0.93 45.43
WTI +2.55% +1.06 42.67
*Source: Bloomberg

In Asia, stocks were trading mostly higher on Thursday morning, tracking gains in the US. The Nikkei and KOSPI were both trading higher in the early hours of the trading session, while the ASX200 opened the day lower ahead of Australia's labour market report for July. Futures tracking major indices in the US were trading lower as of 8.55am (GMT +8), with the Nasdaq leading losses, a reversal of Wednesday morning's performance in the futures market. Today's focus for the US will likely be on jobless claims data, which may show another decline in benefit claims as workers return to their jobs faster than expected following the expiration of the enhanced unemployment benefits in the US on July 31st, especially since this was before the enhanced unemployment benefits extension executive order from Trump was signed over the last weekend.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.85% +429.91 23,273.87 8:45:50 AM
KOSPI +0.37% +9.04 2,441.39 9:05:50 AM
ASX200 -0.14% -8.65 6,123.40 9:05:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.00% -1.00 27,865.00 8:55:47 AM
US Futures -0.07% -2.25 3,367.75 8:55:50 AM
Nasdaq Futures -0.13% -14.00 11,112.00 8:55:50 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • Australia Jul Unemployment Rate/Employment Change (9.30am)
  • Germany Jul Inflation Rate (Harmonised CPI/CPI) (2pm)
  • US Aug 7th Initial Jobless Claims (8.30pm)
  • US Jul 31st Initial Jobless Claims (8.30pm)