Market’s fear over coronavirus fades. Global equities rebound; global rates higher. NZD and AUD push higher

The market seems to have less concern about the impact and longevity of the spreading coronavirus, with a strong recovery in global equities and global rates. Safe-haven currencies have underperformed, the NZD has ticked higher, while the AUD was well supported after the RBA’s on-hold policy decision.

There has been no positive news about the spreading coronavirus, with the number of confirmed cases and deaths continuing to rise at a steady rate – reaching over 20,500 and 425 respectively in China. However, the fear in the market about a possible pandemic has eased, perhaps reflecting confidence that widespread travel bans within China and from China will help contain the outbreak, while government policy measures will try to counter the significant economic impact.

There has been little news for markets to digest. We still await the outcome of the Iowa vote, the first of the Democrats’ party vote to elect a candidate to run off against President Trump.  Counting the votes has become a shambles with a breakdown in the technology that can surely only add to the chances of a Trump victory later in the year. Both Bernie Sanders and Pete Buttigieg declared victory based on their own analysis of the voting but the official result is expected to be declared later this morning.

During the Asian trading session we saw a recovery in Chinese equities (up 2.6% for the CSI 300), while Hong Kong’s Hang Seng index rose by 1.2%.  The positive vibe in Asia carried through into the European and US trading sessions, with the Euro Stoxx 600 index up 1.6% and the S&P500 currently up 1.7%. The Nasdaq index is currently trading at a record high.

The risk-on session sees US Treasury yields much higher, with the 2 and 10-year rates up 6-8bps.  The 10-year rate has moved upward at a steady pace and has pierced 1.60%. Commodity markets also have a better feel, although not as convincing.  Brent crude is up 1%, trading around US55 per barrel.

In currency markets, safe havens CHF and JPY have underperformed. USD/JPY is up 0.7% to 109.40 while NZD/JPY is up over 1%, to around 71.0. While the Scandi currencies have been the best performing, the NZD and AUD have been well-bid. As widely anticipated, yesterday the RBA left its policy rate unchanged at 0.75% and maintained an easing bias. While the Bank noted the negative impact of bushfires and the recent coronavirus outbreak, it left its optimistic growth forecasts largely intact. A speech from Governor Lowe today will add more colour to the outlook. The AUD rose 40 pips to 0.6725 immediately after the policy announcement and has maintained that gain, adding a little more to trade at 0.6735.

The stronger AUD spilled over into the NZD and it has made better gains overnight, currently trading around 0.6490.  NZD/AUD traded a low of 0.9604 overnight but is back up to 0.9630. The GDT dairy auction price index fell by 4.7, close to the 5% fall expected by our resident cow-whisperer Doug Steel (with a bit more on-field training I’m sure he could become more accurate), driven by whole milk powder (down 6.2%) and skim milk powder (down 4.2%). The NZX milk futures market had forewarned of reduced pricing, alongside the hit dealt to other commodities as traders look to weaker Chinese demand due to the coronavirus.

Yesterday, flows rather than fundamentals seemed to drive the NZ rates market, dragging the 2-year swap rate down 2bps to 1.05% and the 10-year rate down the same to 1.36%. A full 25bps easing by the RBNZ for this year got priced into the OIS curve, but that is unlikely to sustain as fears around the coronavirus fade. The Australian 10-year bond future is trading 11bps higher in yield since the NZ close, and that will impart a strong upside bias to NZ rates today.

In the day ahead, NZ’s unemployment rate is expected to be steady at 4.2% while wage inflation will remain robust, with the outcomes unlikely to sway market expectations that the RBNZ is apt to keep monetary policy on hold for some time, while global influences such as the coronavirus still impart some chance of easier policy if the global economy takes a turn for the worst. RBA Governor Lowe might provide some more colour on the monetary policy outlook in a speech this afternoon, with traders parsing his words to glean any hints that a near-term easing might still be required. The key release tonight is the US ISM non-manufacturing index, which is expected to remain at a healthy level.