NZD continues to drift lower on coronavirus fears. US 10-year rate down as well. US equities unperturbed

It has been a fairly quiet start to the week, with a lack of fresh news. US equities have begun the week on a positive note but the rates market is taking a more cautious tone about the coronavirus outbreak and the US 10-year Treasury rate is down 4bps to 1.55%. Currency movements have been modest but the NZD and EUR have been on the softer side of the ledger.

The number of worldwide confirmed cases of the coronavirus outbreak is now over 40,500, with 99% of those cases in mainland China. The number of deaths has breached 900, with still only two of those outside of mainland China. That said, the virus is spreading, with the number of countries affected increasing. Singapore is the worst-affected country outside of China with 45 confirmed cases. The head of the World Health Organisation said that “In recent days we have seen some concerning instances of onward [coronavirus] transmission from people with no travel history to China, like the cases reported in France yesterday and the UK today. The detection of this small number of cases could be the spark that becomes a bigger fire. But for now, it’s only a spark.”

The economic impact, centred in China, remains severe, with a growing number of firms shutting down production amidst rising reports of supply chain disruptions. China CPI data yesterday released yesterday were much stronger than expected, although reflected seasonal influences, higher pork prices from the swine fever and the early impact of the coronavirus. The data isn’t expected to prevent the PBoC from pumping liquidity into the financial system to support the economy during this difficult time.

Equity markets still seem the least affected by the coronavirus, on the view that a one-quarter hit to growth isn’t significant for valuations, given the support provided by lower rates. The S&P500 is currently up 0.2% following last week’s strong 3.2% gain. Asian markets outside of China were generally weaker, while the Euro Stoxx 600 index was flat.

The bond market seems more concerned about the economic impact of the coronavirus, with rates biased to the downside, on the view that monetary authorities are likely to be more accommodative in their policy stances than otherwise. The US 10-year Treasury rate is down 4bps to 1.55%, trading near its low for the session. Technicians will be looking at last week’s low of 1.50% as an indicator of yield support. NZ rates fell across the curve yesterday, with the 2-year swap rate down 4bps to 1.11% and the 10-year rate down 6bps to 1.43%. Global forces remain in charge, although traders also have an eye towards Wednesday’s RBNZ policy update. Very little chance of any rate cut is priced in for the meeting, but the Bank is expected to keep the option of further rate cuts on the table, given the heightened uncertainty about the longevity of the economic hit from the coronavirus.

Currency movements have been contained to +/-0.3% against the USD for the majors.  The NZD remains on the soft side – trading near a fresh low for the year just above 0.6380 – with the impact of the coronavirus forefront of mind and NZ’s high economic exposure to China. The longer the economic shutdown in China extends, the greater the impact on NZ’s export earnings. While near-term pressure remains to the downside, once we get harder evidence of the virus being well under control, then the scene will be set for an NZD recovery.

The AUD is flat at 0.6670, after early yesterday morning reaching a fresh post GFC low of 0.6660. NZD/AUD is down to 0.9560, the bottom of its tight range this year.

The euro remains on the soft side.  German political uncertainty increased, after the expected successor to Chancellor Merkel stepped down as CDU leader. EUR got through that news largely unscathed but lurched down several hours later for no obvious reason, reaching a low of around 1.0910. GBP is on the stronger side of the ledger, up slightly to 1.2910.

In the day ahead, the Fed’s Harker (voter) speaks during NZ trading hours. UK GDP is released tonight, where the market expects a pre-Brexit flat quarter, while Fed Chair Powell gives his testimony to US lawmakers, followed by a big session on Q&A.