Equities, rates, commodities fall on coronavirus growth concerns. Weakness in Asian and commodity currencies drives NZD below 0.65. BoE keeps rates on-hold, supporting the GBP

Market sentiment has deteriorated overnight amidst growing concerns about the economic fall-out from the coronavirus.  Equities, bond yields and commodities have all fallen in unison.  The NZD has fallen below 0.65 amidst broad-based weakness in commodity and Asian currencies. 

The coronavirus remains the key issue facing markets.  The number of cases in China continues to increase sharply while there was confirmation a short while ago of the first the person-to-person infection in the US.  Russia has closed its land border with China.  As companies and governments take action to prevent the spread of the virus (such as cancelling holiday travel and closing down shops and production plants), the economic impact in the short-term will become more pronounced. 

Markets movements suggest growing investor concerns about the growth outlook, especially those countries and markets with a major exposure to China.  Asian equities continued to fall yesterday, with the Hang Seng down 2.6%, following a similar-sized fall the previous day, and the Nikkei down 1.8%.  Chinese benchmarks remain closed for Lunar New Year, although Taiwan’s market reopened yesterday and finished down 5%. 

Commodities remain very weak, consistent with the market pricing in a worsening growth outlook.  Copper is down more than 9% this year (having fallen for 12 consecutive sessions), Nickel 11% and Brent crude oil 13%.  The stronger USD this year has been adding to the downward pressure on commodities.  Bloomberg reported that Saudi Arabia wants to bring forward the OPEC+ meeting from March to February – likely to endorse supply cuts to support oil prices – but this has been resisted by Russia so far. 

In currencies, USD/CNH hit the psychologically important 7.0 level for the first time this year, as the offshore renminbi weakened 0.4%.  Other Asian currencies have suffered too, with the Taiwanese dollar falling 0.9% after trading resumed after the Lunar New Year break and the Thai Baht, which has a large exposure to China through its tourism industry, falling 0.4% (bringing its year-to-date drop to 4%).  

Given New Zealand’s exposure to global growth (via commodity prices) and China in particular (as a major export market), the NZD has unsurprisingly come under pressure over the past 24 hours.  The NZD is currently down 0.6% to 0.6485 and at the bottom of the currency leader board (alongside the AUD).  It’s the first time the NZD has fallen below 0.65 since early December.  After a sharp run-up late last year, the NZD has now fallen almost 4% this month alone. 

Currency movements for the G10 show a split between commodity currencies (all lower overnight) and European and safe-haven currencies (higher against the USD).  The GBP has been the best performer, rising 0.6% to almost 1.31, after the BoE kept its cash rate unchanged at 0.75% (see more below).  This has spilled-over somewhat into the EUR, which is up a more modest 0.2% to be back above 1.10. 

The S&P500 is down 0.7% overnight, with mixed earnings reports failing to provide support.  Facebook’s share price fell almost 7%, despite beating analyst earnings and revenue expectations, while Microsoft and Tesla rose after their respective earnings reports (the latter up 11%, continuing its recent dizzying run).  The breakdown of overnight movements in the S&P500 reveals outperformance by so-called “defensive” sectors, with utilities and consumer staples up slightly on the day but all other sectors in the red.  Amazon is among those to report after the bell today. 

Global rates have extended their recent falls with the 10 year Treasury yield dropping another 5bps to 1.54%, its lowest level since mid-October.   The 3m10y Treasury curve has again inverted slightly (it currently sits at -3bps).   The market has increased its expectations of Fed easing, and now prices almost two full rate cuts by the end of the year. 

The falls in rates globally has flowed through to the NZ curve and OCR expectations.  NZ swap rates were 5bps to 9bps lower yesterday, in a curve flattening move.  The market has increased its chances of an RBNZ OCR cut this year to 60%. 

In economic data, US Q4 GDP actually beat expectations, albeit marginally, coming at a 2.1% annualised growth rate.  On the quarter, housing investment and net exports boosted growth (the latter mostly related to a sharp fall in imports, itself due to the trade war).  Meanwhile, inventories subtracted from growth and consumption was softer than recent quarters. For 2019, GDP increased 2.3%, down on 2018’s 2.9% rate, and consistent with a slowdown in the US economy towards a more trend-like pace.  There was a downside surprise to the Fed’s preferred core PCE deflator, reinforcing the theme that inflation remains subdued despite the current US expansion now being the longest since WWII.   

In what the market was pricing to be close to a 50-50 decision, the Bank of England (BoE) kept its cash rate on hold overnight, at 0.75%.  The vote was 7-2, the same as in December.  The BoE cited the stabilisation in the global economy in recent months and reduced domestic uncertainty after the Conservative’s election victory as reasons to remain on hold.  The UK Budget is also on March 11th, where the government is expected to ramp up investment.  The BoE has an easing bias, with the MPC saying “policy might need to reinforce the expected recovery in UK GDP growth” if either the global recovery petered out or the improvement in UK survey data after the election wasn’t corroborated by stronger hard data.  Looking further ahead, the BoE said “some modest tightening of policy may be needed” if the economy picked up in future years, as it forecasts.  On the coronavirus, Carney said he didn’t want to speculate about the impact on growth but the BoE was monitoring it closely and it was a reminder to be vigilant.  It was Carney’s last meeting as BoE Governor, with former BoE senior official Andrew Bailey to take charge from the next meeting.