Calm returns to markets. US equities up over 1%; US rates higher. NZD underperforms despite higher risk appetite

A sense of calm has returned to markets after the coronavirus-driven turmoil of recent days.  US equities and Treasury yields are higher. While most currency movements have been modest, the NZD has underperformed a little, alongside GBP.

The number of cases of the coronavirus continues to rise exponentially, with confirmed cases approaching 4,500, some 107 deaths and tens of thousands showing symptoms of the disease. Overnight, markets have calmed down and we’ve seen some reversal of recent trends, with the S&P500 currently up 1.1% and the 10-year Treasury yield up 3bps to 1.64%, after falling as low as 1.57% last night. China’s markets are still closed but the ishares MSCI China ETF is up 0.7% after falling 6½% over the three previous trading sessions.

The market might be encouraged by the swiftness of the Chinese government’s response compared to the SARS outbreak, the low mortality rate and the fact that deaths have so far been confined to China. Confirmed cases outside of China are less than 70. Furthermore, traders are finding it hard to break away from the “buy-the-dip” mentality which has served so well during the market’s bull run. When China’s markets reopen, the PBoC pledges to conduct operations “to provide abundant liquidity in a timely manner” and this might have also supported market sentiment.

In other news, the UK government approved limited use of Huawei equipment in the country’s 5G mobile phone network, limiting the company to a market share of 35% in 5G infrastructure and excluding its products from the sensitive core of the network such as servers. The decision will earn the wrath of the US, which wanted the UK to ban Huawei products, and therefore threatens any post-Brexit US-UK trade deal. We await Trump’s response. The news has done no favours to GBP which is the worst performing of the majors, down 0.5% to below 1.30. GBP also suffered under the weight of negative Brexit headlines, with the EU said to play hardball on any trade deal, and some nerves ahead of the BoE’s policy decision near the end of the week.

Against the recovery in risk appetite and support for CNH, the NZD has underperformed for no obvious reason, hitting an overnight low of 0.6521 and settling around 0.6530. The AUD has fared a little better and is currently hovering around 0.6750, ahead of key inflation data today.  The other majors have shown little movement overnight.

In US economic news, the Conference Board consumer confidence index rose by more than expected to a 5-month high, driven primarily by strong labour market indicators. Headline durable goods orders were boosted by defence spending, but stripping that out core orders fell by 0.9% m/m in December, signalling a still-weak business investment trend, likely weighed down by the US-China trade war. One might expect some recovery, given the truce, although the uncertainty around the spreading coronavirus is a new factor to consider.

Yesterday, NZ rates were lower across the curve with a flattening bias, driven by global forces. The 2-year swap rate fell by 4bps to 1.15% and the 10-year rate fell by 8bps to 1.47%. We should see a reversal of moves today, with the US 10-year rate up 3bps since the NZ close and Australian 10-year futures up 5bps in yield terms.

Australian CPI data today will be the last key indicator ahead of the RBA’s policy decision next week.  The market has lost conviction in prospects for an easing next week following the strong employment report, so unless there’s a material downside surprise to inflation, the market is likely to be unmoved in its RBA policy expectation.  The global economic calendar remains light ahead of meatier events later in the week. The Fed’s FOMC decision will be released not long after our daily report tomorrow and ahead of that announcement trading conditions are typically quiet.