Spreading coronavirus impacts markets. Global equities and rates head south. NZD, AUD and CNY underperform

The spreading coronavirus has dominated markets with a significant risk-off move evident. Equity markets have fallen, some more than 2%, while global rates are much lower. Currency movements have been well contained apart from notable falls in the AUD, NZD, CNY and Scandi currencies.

The death toll from the spreading coronavirus has risen to over 80 in China, with nearly 3000 confirmed cases and over 30,000 people under observation. The virus has spread to a number of other Asian countries and is now evident in five US states. Many are comparing the virus to the SARS epidemic of 2003, but there are some key differences. Compared to SARS, the strain of coronavirus has a longer incubation period – up to 14 days – which could increase the spread of the virus, while the death rate is currently lower. Chinese authorities have been more open about this epidemic and have extended the Lunar New Year holiday period to contain the spread of the virus. With China accounting for 98% of confirmed global infections the World Health Organisation has not yet declared the coronavirus as a global emergency.

The spreading virus will have a significant global economic impact, particularly in China. For NZ, the key negative will be much reduced tourism, a key export earner, with China advising its citizens not to travel overseas and early anecdotal evidence suggesting widespread cancelled bookings. The virus comes at a time when there were signs of a fledging global economy recovery after an 18 month downturn lead by the manufacturing sector. The viral epidemic imposes significant downside risk to global growth, given the importance of China’s economy. The magnitude of any downturn is currently purely speculative and will depend on how long it takes for the spreading virus to be contained. It’s fair to say that we are very early in the process of the epidemic and news will likely get a lot worse before it gets better.

The response in financial markets to the increased uncertainty about the outlook has been predictable, with a fall in risk sentiment driving down global equities and rates.  Key indices across Japan and Europe fell by just over 2%. Many Asian markets were closed Monday, but the iShares MSCI China and Hong Kong indices are currently down nearly 4%. The S&P500 opened down 1.8%, but the loss has been pared down to 1.1%. Global rates are lower, driven down by the longer end of the curve.  The US 10-year Treasury rate is currently down 7bps to a fresh 3-month low of 1.61%, while the 2-year rate is down 5bps. NZ rates fell by 4-8bps across the curve yesterday, a reflection of these global forces.

Economic data have taken a back seat and will likely continue to do so over coming weeks as markets remain focused on news about the coronavirus. Germany’s IFO business survey was weaker than expected, with the headline business climate and expectations indicators both falling short of expectations, in contrast to last week’s improving PMI data. US new home sales were also weaker than expected, albeit following a strong run.

In currency markets, most majors have been well contained with movements for the day currently confined to +/-0.3% against the USD, with preeminent safe havens JPY and CHF slightly outperforming and the EUR, GBP and CAD slightly underperforming.  The Scandi currencies, AUD, NZD and yuan have been notable underperformers, with the AUD and NOK down over 1%.

USD/CNH is up 0.7% to 6.9815 while USD/CNY is up 0.5% to 6.9425. The AUD and NZD are currently trading near their lows for the day, just over 0.6750 and just under 0.6550 respectively. Clearly, news of further escalation in the virus, which seems likely, represents a source of near-term downside risk for these currencies. NZD/AUD poked its head above 0.97 but a more decisive break higher would be likely on further concerning news about the virus.

Commodity prices remain the biggest casualty of the virus with further falls overnight, with copper down another 3% and crude oil down nearly 3%, with Brent crude down to USD57.50 per barrel. Falling oil prices have weighed on NOK, as noted, but the CAD has been surprisingly resilient losing only about 0.3% against the USD.

The economic calendar in the day ahead remains light ahead of more action later in the week. NAB’s Australian business survey today is followed by US durable goods orders and consumer confidence tonight.