Main Themes: Risk aversion among investors rose sharply overnight, as equity markets continued to tumble and government bonds sold off. The VIX measure of investor sentiment surged to 31.3 overnight, from 17.3 at Friday’s close. It is the highest level since August 2015 and well above the average of the past few years.
Share Markets: US share markets resumed their decline overnight. European share markets were also weaker. The Dow Jones closed 1,175 points lower (or down 4.6%) and the S&P 500 index finished 113 points lower (or down 4.1%). At one point during trade, the Dow Jones was more than 1,500 points lower (i.e. over 6%) - its largest intraday-points drop in history.
Interest Rates: Steep declines in equity markets contributed to stronger US Treasury prices (i.e. yields fell). The US 10-year bond yield fell 14 basis points and the US 2-year bond yield slid 12 basis points.
Foreign Exchange: The USD continued to strengthen overnight, continuing its retracement. Against this backdrop, the Australian dollar was relatively resilient. It fell from around 0.7930 to 0.7885. In the near term, any possible rebounds in the AUD/USD are likely to struggle near the 0.7980 level. Downside risks for the near-term AUD outlook remain. In other currencies, the UK pound struggled and fell under the key 1.4000 level. Weaker UK economic data and remarks from the UK Prime Minister over the weekend contributed to the weaker pound. EUR/USD fell from 1.2460 to 1.2390. The JPY bucked the trend and was the outperformer overnight. It rose from 109.80 to 109.20, with safe-haven flows helping the yen appreciate.
Commodities: The fall in the world price of oil accelerated, as the deepening slump in equity and debt markets continued.
Australia: Job advertisements jumped 6.2% in January, according to the latest ANZ survey. This jump was the largest since January 2012, although it followed a decline of 2.7% in December. For the year to January, job ads increased by 13.8%, up from 11.4% in the year to December.
The AiG performance of services index rose to 54.9 in January, from 52.0 in December. The breakdown of the subcomponents was encouraging. There were rises in the employment and new orders subcomponents. Moreover, the index is further above 50, signalling more rapid expansion in services sector activity.
The Melbourne Institute’s inflation gauge rose by 0.3% in January. For the year to January, the inflation gauge rose by 2.0%, down from 2.3% in the year to December. It was the lowest annual rate of inflation growth since December 2016.
China: The Caixin services purchasing managers’ index (PMI) rose to 53.7 in January, from 53.0 in December. The reading was the highest since May 2012 and is further above 50, signalling expansion.
Europe: European Central Bank (ECB) President Draghi said overnight that the ECB is increasingly confident that inflation will rise on the back of rapid economic growth. But he warned that new headwinds have arisen from the recent volatility in the exchange rate and these headwinds require “close monitoring”.
The final readings for the services and composite index showed a stronger rise across December to January. The services PMI rose from 57.6 to 58.0 and the composite PMI rose from 58.6 to 58.8. In other data, retail sales for the Eurozone region fell 1.1% in December, after expanding 2.0% in January.
Japan: The Nikkei services PMI increased to 51.9 in January, from 51.1 in December.
United Kingdom: The services PMI fell from 54.2 in December to 53.0 in January. The composite PMI also fell over the same time period, from 54.9 to 53.5.
United States: The ISM non-manufacturing index rose from 56.0 in December to 59.9 in January, close to the highest level in more than thirteen years. The prices paid subcomponent rose sharply in January to 72.7, the highest level since May 2011. Indeed, all eighteen manufacturing industries reported higher material costs.
The final reading for the Markit services PMI showed it stayed steady from December to January at 53.3. The final composite PMI reading also remained flat at 59.9 across the same time period.
Today’s key data and events
AU Trade Dec exp $300mn prev -$628mn (11:30am)
AU Retail Sales (11:30am)
Values Dec exp -0.2% prev 1.2%
Volumes Q4 exp 1.0% prev 0.1%
AU RBA Decision exp 1.50% prev 1.50% (2:30pm)
EZ Ger. Factory Orders Dec exp 0.8% prev -0.4% (6pm)
US Trade Dec exp -$52.0bn prev - $50.5bn (12:30am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are house forecasts and for other countries are consensus forecasts.
Jo Horton, Senior Economist