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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Brexit fears continued to weigh heavily on market sentiment with the yield on the 10-yr bund falling to a new record low of -2.5 bps and the dollar strengthening (yen excepted).

- Brexit fears and the ongoing yield compression weighed on bank stocks with the Euro Stoxx bank index falling 1.2%.

OUTLOOK

UPCOMING TODAY: ANZ Job ads at 10.00am; Business NZ PMI at 10.30am; ANZ Roy Morgan Consumer Confidence at 1.00pm.

CURRENCY: Kiwi is once again showing its resilience to the current "risk off" environment - hardly surprising given where our interest rates sit, and given that we live in a world of almost infinite liquidity. That said, last night was a volatile night, with NZD following USD/JPY lower early in the session only to recover as AUD bounced off lows. It seems reasonable to expect more volatility going into next Thursday’s Brexit vote.

RATES: Local yields are likely to continue grinding lower in line with global yields, and in sympathy with the TWI’s consolidation at 12 month highs.

REVIEW

GLOBAL MARKETS OVERVIEW: A non-committal Fed, a hesitant BoJ, SNB and BoE and more polls showing that the "Leave" campaign is in the ascendancy in the Brexit vote drove a continued flight to safe haven assets. Apart from the yen, the dollar was a major beneficiary and the flight to safe haven assets continued. The yield on the 10-yr bund fell to a low of-2.5 bps and interest rate compression and the broader geo-political implications of the UK leaving the EU weighed on bank stocks in particular. By the close of play, the Dax was down 0.6%, FTSE down 0.3% and the peripheral bond spreads continued to widen out. For example, the spread between German Bunds and Portuguese 10 year bond yields widened by around 8 bps to 341 bps. UK sovereign CDS has risen to 42 bps from 33 bps a week ago. Gold rallied and crude oil prices fell; with WTI futures at $46.50 at 6.30am NZT. US 10yr bond yields continued grinding lower, but are off their intraday low (1.516%).

DATA PULSE

ALL ABOUT THE FED: US CPI disappointed slightly, with the +0.2% rise in May slightly below the market's expectation of +0.3%. But core inflation was as expected at +0.2% m/m and +2.2%y/y, up from 2.1%. But the Philly Fed index was better, rising from -1.8 to +4.7. The BOE left rates unchanged and reiterated that it will provide liquidity and has the stability tools to protect banks. A Survation poll showed 52% support for "Leave" in Brexit polls.

COMMENTARY - KEY THEMES AND VIEWS

CONVERGENCE IT IS, STILL. The one over-arching theme in bond markets over the past few years has been yield convergence, with yields in erstwhile "peripheral" (but arguably now "outer core") markets like New Zealand slowly but surely making successive lows as the months go by. This week, we saw the 10yr bond break below 2.5% and the 15 year swap fall below 3%. When compared to where that bond stood on 31 December (3.56%), that’s a remarkable move - but one that looks like it has further to run, especially after Yellen’s less than convincing insistence that each upcoming Fed meeting is "live". The TWI is at a 12 month high - not a surprise given where relative rates and growth outlooks sit. But it is still too high from an inflation/exports perspective - and the more it diverges from these basic "fundamentals", the more interest rates need to converge. Offshore buying of NZGS bonds remains rampant, with non-resident holdings up a staggering $1.7bn in May.

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