Some calm restored to markets. US equities and rates higher. GBP hit as UK-EU trade talks in the spotlight. NZD and AUD flat

The coronavirus remains the key focus for the market.  US equities are trying to stage a recovery and US rates are slightly higher, a change from the prevailing downward trend, although the market still feels skittish. The NZD and AUD are flat, while GBP has taken a blow on cliff-edge trade deal concerns.

China’s financial markets opened yesterday after having been closed for a week and played catch up to the movements already seen elsewhere. China’s equity market fell almost 8%, as forewarned by the ETFs on Chinese equities traded in other markets. Of some comfort, the PBoC injected over $21b of liquidity into the market and cut its reverse repo lending rates by 10bps. If anything, the market relaxed a little over this risk event through the Asian trading session, with Hong Kong’s equity market, which has been open all through the week, showing a small gain and SPX futures staging a rally.  US equities opened strongly overnight, with the S&P500 up as much as 1.3% before paring its gain down to 0.8% as we go to press. US health authorities said they were preparing as if the disease would become a pandemic. The tallies of confirmed cases of the coronavirus and death toll continue to climb, reaching 17,400 and 360 respectively, mostly contained within China.

Chinese officials are evaluating whether the target for economic growth this year should be softened. The target is normally revealed in March and economists had already expected a softening to “around 6%” from 6-6½% in 2019. In our view, the coronavirus is currently inflicting a heavy blow to its economy so it stands to reason that growth will be much weaker, even if there is ultimately a rebound of sorts next quarter on a quick passing of the viral epidemic. Bloomberg reports that Chinese officials are hoping that the US will agree to some flexibility on pledges in their phase-one trade deal with the US, given the economic hit inflicted by the coronavirus. The deal has a clause that allows for natural disasters or unforeseeable events.

In economic news, the US ISM manufacturing index was much stronger than market expectations, bouncing back above the 50 mark from a post-GFC low, likely supported by the signing of the phase-one US-China trade deal. The details were also strong, with much higher new orders and export orders. But clearly the data have been superseded by the damage inflicted by the coronavirus, so the market reaction of slightly higher rates didn’t last long. The US 10-year rate was drifting higher heading into the release and tacked on a couple of more basis points to a high of 1.57%, but it has since fallen back to 1.53%, up 3bps for the day.

In currency markets, the reopening of China’s domestic markets saw USD/CNY up 1.1% to just over 7.02. The NZD has traded a tight range, about 0.6455-0.6475 on rounded figures since Monday’s open, while the same can be said for the AUD, trading roughly between 0.6685-0.6705. So nothing to see here.

The key mover has been GBP, hit hard as UK PM Boris Johnson and EU chief negotiator Barnier laid down some opening stances for trade negotiations. GBP is down 1.6% to 1.30, having earlier fallen just below that level. Barnier said that a highly ambitious trade deal is on offer but only if Johnson signs up to strict rules to prevent unfair competition. Johnson rejected Barnier’s demand, saying that he would not accept the EU’s trade rules. Johnson set out his vision of a “Canada-style” relationship with the bloc that would break free from EU rules while pledging not to undercut European standards on environmental, social and commercial policy. The market didn’t like what it saw, but there’s a deal to be done and it’s too early to write off the chance of some agreement before the end of the year. The “will they-won’t they” do a deal is likely to be an enduring theme for the year and an onoging source of GBP volatility.  NZD/GBP is up 1.5% to 0.4970.

There has been some negative spillover for EUR, down 0.3% to 1.1060. Better risk sentiment also sees yen slightly weaker so all round the USD has been well supported.

Oil markets remain downbeat, with reports that Chinese demand is down about 20%, given the travel restrictions and reduced economic activity since the virus took hold. Brent crude is down 3% to below $55 per barrel, its lowest level in over a year for the active contract.

Yesterday the NZ rates market was driven by the offshore moves seen Friday night. Swap yields were down 5-6bps across the curve, with the 2-year rate down to 1.08% and the 10-year rate down to 1.38%. We should see a modest increase across the curve on the open given the better risk sentiment overnight.

This afternoon the RBA will make a decision on its cash rate and the market only sees a small chance of a 25bps rate cut, with pricing significantly fading after the stronger than expected Australian employment report. An on-hold decision along with an easing bias shouldn’t impact the market.  A speech by Governor Lowe and his testimony to Parliament later in the week will provide much more detail around the RBA’s thinking, which will be of more interest.