Daily Commentary BY THE CURVE TEAM –

Market Malaise Returns

12th of June, 2020

The Fed Chairman’s reality check along with renewed virus fears sees downside market volatility remerge.

Divergence between the underlying economy and markets narrowed over the past 24 hours. Many markets had posted sharp rebounds from their March lows on hopes of the V-Shaped economic recovery and a short lived virus fight. After looking shaky the past few days, the gap opened up to the downside overnight and it was a free for all.

Equity markets posted large falls across Asia, Europe and the US while the US surged back into vogue after being on the back foot for the past two weeks. Many are pointing to the reality check received from Fed Chairman Jerome Powell yesterday following the most recent meeting of the Federal Reserve. Others suggest the virus, which is posting record daily new cases and has begun a second wave of cases in certain countries, is the impetus.

Regardless of the drivers, it is becoming clearer that the global economy is going to take longer than many first thought to recover from the biggest synchronous downturn since the Great Depression. Even with an abundance of liquidity and record levels of stimulus, the return of basic economic functioning is some way off or may return in different ways.

With the AUD moving in sync with equities since the March low, it was caught in the downdraft overnight which will take off some of the recent pressure that had been put on the RBA. Bond markets have also rallied as other markets have stalled. That has seen the yield on the three year bond in Australia drift back down to the RBA’s target while the 10 year yield has continued to fall. It is now nearly 30bp below its high from earlier this week, sitting just under 0.90%.

David Flanagan

Director - Interest Rate Markets