Fears about spreading coronavirus impacts markets. Commodity prices, US equities, US rates all much lower. Market rate cut expectations in NZ diminish further

US equities ended the week on a soft note and global rates were lower, with traders worried about the escalation of the deadly Wuhan coronavirus. Currency movements remained well contained, with JPY slightly outperforming alongside the USD on Friday night.

Markets are focused on news around the deadly coronavirus that began in China and is gradually spreading across Asia and with cases now being reported in the US, Europe and Australia. The number of cases is rising exponentially, with confirmed and suspected patients now well into the thousands and over 56 deaths. Travel restrictions were imposed in China ahead of the Lunar New Year celebrations and TV reports show empty shopping malls and streets. There will clearly be a significant economic impact, centred in China. A key question is the time it will take for the virus to be contained and one can only speculate at this stage.

Commodity markets have been hardest hit, with copper prices down 6% last week and Brent crude down over 6% for the week, as traders price in a period of weaker demand. Even the seemingly bullet-proof US equity market got a taste of the action, with the S&P500 down 0.9% on Friday and down over 1% for the week, its largest weekly fall since August. US equities have been well overdue for some consolidation after its strong run, and the fear of a viral pandemic has provided a good excuse for some profit-taking.

With risk sentiment souring, global bonds were well bid on Friday, seeing European rates fall across the board and the US 10-year Treasury rate down 5bps to 1.68%, its lowest close in over three months.

The concern about the virus outbreak dominated market movements and key economic data releases took a back seat. Flash PMI data for Germany were stronger than expected across both the manufacturing and services sectors, supporting the view that the worst is over for the country’s beleaguered manufacturing sector, paving the way for improved growth momentum across the economy. The improvement for the euro area was held back by soft data for France. The UK PMIs were even better, suggesting some recovery in growth that had been held back by uncertainty about Brexit and the general election. The US PMIs aren’t as closely followed, given the longer history of the ISM indicators, but the data show that other countries are catching up to the US in terms of economic performance, with US growth slowing at a time when other countries are showing improved growth momentum.

EUR and GBP strength after the PMI releases proved temporary, with USD strength on the risk-off sentiment the winner on the day, accompanied by JPY strength.  However, overall currency movements were well contained, with USD indices up less than 0.2% for the day.

The NZD and AUD were slightly weaker Friday night, closing the week around 0.6610 and 0.6830 respectively. Suppressed currency volatility meant that the NZD range for the entire week was less than 50pips, contained within 0.6580-0.6630.  A few more weeks like that and currency strategists will become an endangered species, joining switchboard operators, video store employees, and elevator operators (although, on a positive note I can attest that the great town of Whanganui still employs an elevator operator, so endangered is not the same as extinct).

NZ CPI data were slightly stronger than market expectations, mainly on the tradeables side, but the data also showed rising core inflation pressure.  The RBNZ’s “sectoral factor model” estimate of annual core inflation rose to 1.8%, its highest rate in almost nine years. The data supports the view that an on-hold policy stance remains appropriate, and the chance of further easing pricing into the OIS curve continued to diminish, with no more than a one-in-four chance of a 25bps easing now priced for later in the year. There was a slight flattening of the yield curve, with the 2-year swap rate up 1bp to 1.23%, while lower term rates were down slightly on global forces.

The local trading day ahead should be deadly quiet with Auckland and Australia holidays. Tonight sees the release of Germany’s IFO business survey and US home sales.  Highlights for the week ahead include Australian CPI data, China PMIs, euro area GDP and policy meetings by the US Fed and Bank of England. But the key driver of market movements this week looks likely to be headlines around the spreading coronavirus.