Market jitters around COVID-19 grow stronger, spilling over into weakness in equities. Asian currencies fall further on COVID-19 fears. AUD hits 11-year low, NZD down to 0.6335

Market jitters around COVID-19 grow stronger, spilling over into weakness in equities. Asian currencies fall further on COVID-19 fears. AUD hits 11-year low, NZD down to 0.6335

Concerns about the spread of COVID-19 have ratcheted higher over the past 24 hours, with equities, bond yields and several Asian and emerging market currencies falling sharply.  The USD has continued to strengthen.  The AUD hit an 11-year low following a disappointing employment report and further weakness in Asian currencies while the NZD is trading down at around 0.6335. 

China reported a further fall in the number of new COVID-19 cases yesterday, but concerns are growing around the spread of the virus to other countries.  Yesterday, the number of reported cases in South Korea more than doubled, to 82, while they continued to tick up in Japan and Singapore.  The market’s concern is that if COVID-19 continues to spread in these countries, this will lead to similar containment measures as in China, exacerbating the hit to growth in these economies which are already dealing with the spill-overs from the virus-induced slowdown in China.  Indonesia’s central bank cut its repo rate yesterday by 25bps, to 4.75%, with the Governor citing concerns around the impact of the virus on trade and investment, despite Indonesia having no reported cases as yet. 

China has again changed its methodology for reporting new COVID-19 cases, reverting to its original method.  China had 394 new confirmed cases of infections on February 19th, its lowest level since Jan 23.  This seemingly hasn’t provided much comfort to investors however, with markets trading in a risk-off fashion overnight.  The PBOC cut its 1-year loan prime rate yesterday, to 4.05%, as expected. 

Concern around the economic fallout of COVID-19 on China and the broader Asian region has led to some sharp falls in several Asian currencies over the past 24 hours.  USD/CNH has moved decisively above the psychological 7.0 level and it is now trading at its highest level of the year, at 7.05.  The Thai Baht has fallen 0.8%, to its lowest level since June, the KRW by 0.8%, to its lowest level since October, and the Singapore dollar by 0.5%, to an almost three-year low.  The JP Morgan emerging market FX index fell 0.6% overnight, to an all-time low; it has declined by almost 4% in 2020. 

In the G10, the NZD and AUD have again underperformed, which is unsurprising given their connection to the global growth cycle (via commodities) and the Asian region in particular.  The AUD has fallen 0.9% to 0.6615, an 11-year low.  A larger-than-expected increase in the Australian unemployment rate at the labour market report (to 5.3%) added to the downward pressure on the AUD.  The NZD has tracked movements in the AUD and has fallen 0.8%, leaving it trading at around 0.6335.  Meanwhile, the JPY has continued to weaken, despite the broader risk-off backdrop, and traded above 112 overnight for the first time since April last year.  Concerns around Japanese recession risk and COVID-19 appear to be trumping the usual safe-haven demand that market participants have come to expect during periods of turbulence. 

The risk-off backdrop has spilled over into equity markets.  The S&P500, which had made a record high yesterday, plunged 1.5% a few hours ago for no apparent reason (apart from perhaps playing catch-up to other asset markets).  The S&P500 has managed to recover over the last hour or so but still trades 0.6% lower on the day while the NASDAQ is down 1%. 

Global bond yields have continued to move lower.  The 10-year Treasury yield has fallen 4bps to 1.52%, having touched 1.5% earlier in the session (equalling its lows for the year).  The market shrugged off a very strong Philly Fed survey, which increased to one of its highest readings on record.   New orders bounced to an almost 2-year high, which bodes well for the ISM survey. 

The market prices around 40bps of Fed cuts by the end of the year.  Asked about this market pricing in a CNBC interview, Fed Vice Chair Clarida said “market pricing on rate cuts is a little tricky.”  Clarida said he didn’t think the market expected the Fed to cut rates this year and pointed to the forecasts of economists, the majority of whom don’t expect rate cuts this year.  Clarida added that the fundamentals of the US economy were strong although it’s too soon to see any impact of COVID-19 on the economy. 

The USD has continued its upward momentum, with the Bloomberg DXY increasing another 0.5%, its biggest one-day change since last September.  The DXY index (which is dominated by EUR/USD) is trading at its highest level since April 2017 and is hovering just below the psychologically important 100 level.  The USD continues to benefit during periods of risk-off, especially given the JPY has failed to display its usual safe-haven characteristics recently. 

NZ rates fell in sympathy with Australian and global rates yesterday, with both the 2 and 10 year swap rates declining 2bps.  OCR rate cut expectations have been creeping up again since the hawkish surprise at the RBNZ MPS and the market now almost-fully prices a 25bp cut by the end of the year.  The market prices close to a 40% chance of a cut by May.  For comparison, the market prices around a 50% chance of an RBA rate cut by May and 30bps of RBA cuts by the end of the year.  For NZ, the market will probably need to see the removal of various COVID-19 containment measures (such as travel restrictions) to see a material re-pricing of these rate cut expectations. 

We will be watching out for a speech from RBNZ Governor Orr at midday today.  The title of the speech is “Aiming for Great and Best for Te Pūtea Matua” although the Canterbury Employers’ Chamber of Commerce, to whom Orr is presenting, says it will cover an overview of the MPS and discuss the current state of the economy.  

In addition to COVID-19 related news, the flash European PMIs will also be closely watched tonight. 

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Anyone heading to USA this may want to get your spending money now looks like we are heading back .49cent versus USD my gold and silver stocks in AUD looking better by the minute.
I wonder how long it takes to hit our importers costs and we see even more pressure on living costs and people who have stretched themselves in property during the last 4-5 years start to struggle to pay for everyday things.
If this drags on it could hit a lot of tourism related areas very hard leading to large job/business losses/closures and we may see a lot of FHB stuck in negative equity as we head into recession this year and prices dropping 10 plus percent easily as baby boomers will still need to sell/downsize etc and can afford to undercut current prices if forced to sell.

If a recession hits I'm predicting people will put their faith in the USD.

https://www.tigerdroppings.com/rant/politics/chinas-debt-rose-to-40-tril...

"The Chinese government has sought to rein in corporate debt by restricting borrowing through informal channels, known as shadow banking. While the restrictions have prompted a reduction in corporate debt in non-financial sectors, net borrowing in other sectors has surged, bringing total debt to over US$40 trillion – some 15 per cent of overall global debt, according to data released by the Institute of International Finance."

China total debt to over US$40 trillion. Wait for the pop.

I have been banging on for many years on this forum about China .......... and had all sorts of jibes back in return.

The awful truth is that China cheats , they lie, they steal , they copy , they twist and spin..... and they do nothing that is not carefully considered and in their narrow self -interest .

We should never had hitched our cart so firmly to the Chinese Yak ......and instead kept our trade balanced between a broad number of countries .

Let Covid19 be a warning to spread our risk and our interests .

Ouh C'mon Boatie, NZ has benefited hugely.. in the RE area.. do visit that South East AKL, spend at least about 3-5yrs to really know how the RE market has been beef up by sir JK/ANZ courtesy in'direct' capital injection from China off course, what you see on the dock right now, between past Nat member/JLR & three more prominent businessman - was just a tip of ice berg. Here's the clue, out of how many countries on this planet? - why JK choose to steer NZ into one basket? - Be honest, 70s, 80s, 90s - Check in the past News papers clip talking about 'housing/dwelling'... then compare it from 2001 onwards - Check where those spiraling up RE numbers - where's those capital injected magically? - local wages.. ha ha

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