Risk sentiment is slightly positive, as the market becomes less concerned about the coronavirus outbreak. Global equity markets are higher, rates are slightly higher, the AUD and NZD have lifted off yesterday’s lows and safe-haven currencies have underperformed.
Markets seem less worried about the ultimate economic impact of the coronavirus. While the number of confirmed cases continues to steadily rise, the daily rate of change has been slowing over the past six days or so. Also of some comfort, some factories in China have begun to re-open, including heavyweights Airbus and Caterpillar. The Chinese government is urging the nation’s biggest companies to meet production targets despite the challenges posed by the viral outbreak, as firms being to restart operations. The ministry said that it was “very urgent” to resume industrial production and stabilise expectations.
US equities have risen to fresh record highs, with the S&P500 currently up 0.4%, following a gain of 0.9% in Europe’s Stoxx 600 index. A number of global companies have issued profit warnings, given the impact of the virus on sales in China, but with hope that the virus will be well-contained the impact is only seen as temporary. The price action in Chinese equities has been interesting, with the CSI300 up for the sixth day running and nearly fully recovering the near-8% loss when markets reopened 3-Feburary after the extended holiday.
Global rates are slightly higher, with US 2 and 10-year Treasury rates up some 2bps, the latter up to 1.59%. Fed Chair Powell stuck to the script in his testimony to lawmakers, with little impact on the market. He believes that the current stance of monetary policy will support continued economic growth, a strong labour market and inflation returning to the symmetric 2% target. While policy was not on a pre-set course, “as long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate. He added that the Fed was closely monitoring developments related to the coronavirus that could impact the global economy – it was too early to say whether the impact on the US economy would be persistent and material.
In currency markets, safe-havens have underperformed, with JPY, CHF and the USD the weakest over the past 24 hours. The AUD has been the strongest over that timeframe, blasting up through 0.6700 after much stronger than expected housing finance data. It’s clear that the RBA’s rate cuts last year and easier lending restrictions have boosted the housing market, reducing the need for further rate cuts. Less concern about the coronavirus and a strong yuan were supporting factors in the lift in the AUD. The overnight high was 0.6737 and it trades this morning around 0.6710.
The NZD has followed the same pattern, running up to a high of 0.6421 overnight and now back down to about 0.6400 – the rally tempered ahead of the RBNZ’s Monetary Policy Statement this afternoon. We don’t consider it a “live” meeting, with the market pricing in only a very small chance of any rate change. If not for the coronavirus epidemic, the Bank would likely be adopting a more hawkish tone, given the recovery in global indicators, upward revisions to NZ GDP, and clear signs of rising domestic inflationary pressure. However, the near-term risk around the coronavirus adds a more cautious overtone to the outlook, and the Bank will want to keep its policy options wide open. NZ rates were little changed yesterday ahead of the meeting.
On the NZD crosses, NZD/AUD got down to about 0.9520 last night, a fresh low for the year, and has recovered slightly. The NZD is flat to higher on the other crosses. EUR slipped below 1.09, but the move didn’t last long and it is now higher at 1.0920. GBP is also higher at 1.2950. UK GDP was flat in Q4, as expected, with consumer spending at its weakest in four years, rising just 0.1%, and business investment falling by 1.0%. Indicators suggest that post-election and the political brinksmanship over Brexit, momentum is to the positive side as 2020 begins. The government gave the green light to the£106bn High Speed 2 rail scheme – the biggest infrastructure project in Europe.