Coronavirus fears continue to dominate market price action. Global equities, rates, commodity prices lower. NZD and AUD continue to underperform

On Friday, the spreading coronavirus remained forefront of mind for the market, seeing weaker equity markets, lower global rates and safe-haven currencies outperforming. The NZD and AUD continued to track lower.

The market remains concerned about the potential global impact of the coronavirus centred in China. The number of cases and deaths continues to rise (over 14,600 and 305 respectively at the last count) and the first death was recorded outside of China in the Philippines. Of note, 96% of the deaths have been confined to Hubei province wherein lies the epicentre, Wuhan. Much of China is still effectively in lockdown and, given its economic importance, the hit to its economy is reverberating across the world, with Australia and New Zealand’s high exposure to Chinese demand well noted.  Widespread travel restrictions, factory closures, airlines cancelling travel to and from China and cancelled export orders are the initial direct economic impacts being felt.

The end of this week will be crucial in determining whether the quarantine has been effective. That will mark two weeks since travel outside Hubei province was severely restricted and some experts suggest we should start seeing the number of cases peak.

For financial markets, the uncertainty around the virus and how long it will spread is seeing risk appetite evaporate, evidenced in falling equity markets, commodities and rates. On Friday, the S&P500 fell steadily through the day, ending down by 1.8%, and thereby erasing all of its gains for the year. The US 10-year Treasury yield also steadily fell, ending the day near its low, down 8bps to 1.51%. The 2-year rate fell by a greater 10bps to 1.31%, consistent with expectations that the Fed will need to cut rates, with some 50bps of easing now priced this year. Fed vice-chair Clarida called the coronavirus a “wild card” and it was too early to determine whether it will significantly affect the US economy.  He argued that if the virus were to result in a one-two quarter slowdown in growth that’s “probably not something that changes the big picture”.

China’s markets reopen today and yesterday the PBoC pledged market support with a $21b injection of liquidity and other support measures.

A wealth of economic data was released Friday, but much of this was largely ignored. China’s steady manufacturing PMI and rising non-manufacturing PMI pre-dated the much of the impact of the virus and these should plunge next month, at least. In the US, the Chicago PMI plunged to a four-year low, defying market expectations for a small increase. The fall defied the rise seen in other regional indicators, being likely depressed by Boeing’s woes with the 737-Max. On a more positive note, the final reading of the University of Michigan’s consumer sentiment index edged up to an 8-month high, suggesting a resilient US consumer, buoyed by strong income growth. On the inflation side, the core PCE deflator ticked up to 1.6% y/y, still below the Fed’s 2% target. Annual inflation in the employment cost index was 2.7%, continuing at a fairly steady, unthreatening pace, over the past twelve months.

Euro-area GDP growth was softer than expected at 0.1% q/q in Q4, driven down by economic contractions in France and Italy.

Currency markets continued to trend in the expected direction, given the market’s focus on the virus and diminishing risk appetite. Safe-havens JPY and CHF remained well bid, while the NZD and AUD continued to languish. The USD saw some month-end rebalancing, which saw it weak into the close, helping to support EUR and GBP despite the risk-off tone. GBP was the strongest of the majors, with the squeeze higher perhaps a reflection of some follow-through from the BoE’s unchanged policy decision the day earlier. The UK officially left the EU on 31 January and entered a transition period that lasts through the end of the year. While we’ve barely had to mention Brexit this year, some tough trade negotiations ahead will ensure that the memory lives on and return to haunt the market at various stages through the year.

NZD/JPY took a peek below 70 before closing the day just above that mark, down nearly 1% for the day and some 3% lower for the week. NZD/USD ended Friday down 0.4% for the NY session to 0.6465, taking its monthly decline to just over 4%, almost fully eroding the sharp recovery seen through December. With the 100-day and 200-day moving averages breached, the next line of support is around 0.6400. The spreading virus and risks thereof will determine how much more weakness in the NZD will prevail, but it feels safe to say the worst is unlikely to be over. The same can be said for the AUD, which fell below 0.67 to reach a low not seen since August. NZD/AUD remained tightly range-bound for the week, closing just under 0.9670.

Economic data releases are all a bit of a sideshow at the momentum, but for the record, the key data print tonight is the US ISM manufacturing index, which surprisingly lurched down to its lowest level since the GFC in December. The market expects a small recovery from that level for January. The calendar for the week ahead includes important NZ labour market data, the RBA’s policy decision and Governor Lowe’s messaging in a speech and testimony to Parliament, and US employment data at the end of the week. But the market’s focus will remain on the coronavirus outbreak and how China’s markets fare today will be of some interest.