Risk-off backdrop yesterday after Apple says it doesn’t expect to meet revenue guidance due to COVID-19. Equities fall further overnight before recovering over the last hour. Broad-based strength in the USD. NZD hovering just above YTD lows

Markets have traded in a risk-off fashion over the past 24 hours, with equity markets and government bond yields falling.  Most of the moves happened during yesterday’s Asian trading session following Apple’s announcement that it did not expect to meet its revenue guidance of the current quarter.  The NZD has underperformed amidst the risk-off backdrop and trades below 0.64 this morning. 

Starting with COVID-19, the number of new cases continues to decline, with China reporting 1,886 new cases on February 17th down from 2,048 on February 16th.  Importantly, recoveries are picking up as well, with 1,708 new recoveries reported on February 17th, up from 1,425 the previous day. 

While the number of new cases appears to be trending the “right way”, the market’s focus over the past 24 hours has shifted to the economic impact of the containment measures to prevent the spread of the virus.  During Asian trading yesterday, Apple announced that it didn’t expect to meet its revenue guidance for the current quarter.  Apple said that the COVID-19 outbreak had slowed down production in China and hit consumer demand for its products in the country, with much lower foot traffic across its retail stores.  The announcement caused S&P500 futures to fall around 0.5% during the Asian session yesterday with global bond yields falling in sympathy.  The S&P500 extended that fall overnight (it was down 1% at one stage) although it has recovered over the past hour and is now 0.4% lower on the day.  Apple’s share price is currently down 2.4% on the day. 

Adding to the pessimism, Germany’s ZEW survey of financial analysts fell much more than expected in February, signalling that the virus was starting to impact economic sentiment in other countries.  Expectations among the ZEW’s survey respondents had risen materially towards the end of last year, but the virus appears to have put an abrupt halt to that recovery.  The ZEW President observed that export-oriented sectors had deteriorated “particularly sharply” as a result of COVID-19. 

Global rates have continued to grind lower amidst concern around the economic fallout from COVID-19.  The 10 year Treasury yield fell 4bps during Asian trading yesterday, to 1.54%, after Apple’s announcement.  There was a brief spike higher in yields overnight after a much stronger-than-expected Empire manufacturing survey (of firms in the New York region), which rebounded to its highest level since September 2017.  But the moves weren’t sustained, and yields were quick to reverse back towards the day’s lows.  The market prices 1½ cuts for the Fed over the remainder of the year.  NZ rates moved lower yesterday, in-line with global moves, with the 10 year swap rate falling 4bps to 1.46% and the 2 year rate down another 2bps to 1.10%, now lower than where it was before the RBNZ’s MPS last week. 

The USD has continued its recent good run, with the Bloomberg DXY rising 0.2% to its highest level since the end of November last year.  The BBDXY is now more than 2% higher this year while the EUR/USD is trading at an almost three-year low.  The recent strong performance of the USD follows divergent data trends in the US and Europe (illustrated overnight by the rebound in the Empire survey set against the weakness in the ZEW).  Citi’s US data surprise index is near its highest level since April-2018 while the European equivalent has fallen away sharply this month.  The risk-off backdrop has also benefited the USD, albeit more so against commodity and growth-sensitive currencies. 

The AUD came under pressure yesterday afternoon after the release of the RBA minutes to its February meeting.  The minutes noted there was a case for further cuts, primarily because lower rates could “speed progress towards the Bank's goals and make it more assured in the face of the current uncertainties."  The RBA weighed faster progress towards its economic goals against concerns that household debt could rise given the upswing in the housing market.  The minutes also flagged concerns that the COVID-19 coronavirus outbreak presented a large downside risk for the outlook, especially given China is much more integrated into the global economy than compared to the 2003 SARS outbreak.  The AUD is trading 0.4% lower than 24 hours ago, at around 0.6690. 

The NZD is down around 0.8% since this time yesterday, amidst the broad-based strengthening in the USD, risk-off backdrop and weakness in the AUD after the release of the RBA minutes yesterday.  The NZD is currently trading at around 0.6385, just above its lows for the year at 0.6378.  The NZD/AUD has fallen below 0.9550. 

Dairy prices fell another 2.9% at the fortnightly Global Dairy Trade auction overnight (-2.6% for whole milk powder), following on from the 4.7% fall at the previous auction.  The decline overnight was broadly in-line with pre-auction indications and there wasn’t any NZD market reaction.  The fall in dairy prices could trigger a round of downward revisions to analysts’ dairy payout forecasts, with the bottom of Fonterra’s current $7.00 to $7.60 range in their sights. We currently project $7.40, but subject to downward reassessment. 

While the agricultural sector is a clear risk for the NZ economy at present (given the virus-induced slowdown in Chinese demand and recent adverse weather), the housing market remains supportive.   Yesterday’s REINZ data showed annual inflation in the House Price Index was +7.0%, from 6.6% in December while the median days-to-sell, which tends to lead future house price movements, continued to press lower.  We think the housing market will be at least as strong as the RBNZ forecasts this year.

In other currencies, the JPY has outperformed (unchanged on the day) amidst the risk-off market moves and decline in US Treasury yields.  The GBP has held-in well amidst a reasonably positive labour market report.  UK employment rose by a larger-than-expected 180k, while the unemployment rate remained at 3.8%, equalling its lowest level since the mid-1970s.  Wage data were slightly below expectations.  The GBP is hovering around 1.30 at present, unchanged on the day against the USD (but well off the intraday highs). 

The Australian wage price index is released today and our NAB colleagues look for a subdued 0.5% increase in Q4, in-line with consensus.  UK and Canadian CPI data are also released.