US indices drop, whether economies will open up as quickly as previously expected, whether we will see negative interest rates in New Zealand, what are the risks to the stock market and a review of macroeconomic data – all of this in today's commentary.
US indices drop, whether economies will open up as quickly as previously expected, whether we will see negative interest rates in New Zealand, what are the risks to the stock market and a review of macroeconomic data – all of this in today's commentary.
On Tuesday we saw the first major falls in US stock indices. This came after Anthony Fauci, director of the National Institute for Allergy and Infectious Diseases, told the US Congress that the virus is not yet under control and that there is likely to be no effective treatment or vaccine before the end of August or early September. Therefore, it is still necessary to consider the possible risks of opening up the economy too early so that a second wave of the disease does not occur. Los Angeles has already announced that it may maintain the order to stay at home for another three months, and students will not return to California universities in the fall. Fears of a longer closure of the U.S. economy seemed to be driving down stocks and indices.
It is worth noting that the forward P/E ratio for S&P 500 is at a level comparable to that of the Internet bubble. This may show that buying shares at this point in time is a job for either the biggest optimists or speculators.
The Bank of New Zealand (RBNZ) today left the main interest rate at 0.25 per cent, but expanded its quantitative easing programme and said that negative interest rates may be on the horizon. Consequently, a negative cash rate was included in the money market for 2021. RBNZ announced plans to increase bond purchases up to 60 billion NZD over the next 12 months. This seemed to lead to a decrease in the NZD/USD exchange rate to the level of 0.6000. After the decision of RBNZ, JPMorgan bank changed its forecasts for the NZD/USD currency pair. The bank reduces its projection to 0.59 for Q3 from 0.60 and to 0.58 for Q1 2021 from 0.61.
Meanwhile, in the UK, a preliminary estimate showed that the GDP shrank by 2.0% in Q1 vs. Q4 2019. This was the sharpest fall since Q4 2008. Nevertheless, due to the initially specific approach of the British government to the epidemic's problem, the worst data for the economy may still be ahead of us. The second quarter may show the biggest slowdown not in a decade, but in decades. The GBP/USD pair rate is currently struggling to defend support in the 1.2250 area.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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