Bank of Melbourne

Morning Report

Main Themes: Negative sentiment sparked by the coronavirus outbreak tempered overnight. Stocks rose and safe-haven assets generally weakened, despite Hong Kong imposing travel restrictions and the death-toll from the virus rising. US economic data released overnight also supported markets.
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Main Themes: Negative sentiment sparked by the coronavirus outbreak tempered overnight. Stocks rose and safe-haven assets generally weakened, despite Hong Kong imposing travel restrictions and the death-toll from the virus rising. US economic data released overnight also supported markets.

Share Markets: After plunging in the previous session, US stocks rebounded. A surge in Apple shares led the rise as investors ratcheted up expectations ahead of its earnings announcement due later today. The Dow Jones is currently up 0.9% while the S&P500 is 1.1% higher.

Comments from the head of the World Health Organisation (WHO) backing China’s ability to contain the spread of the new coronavirus helped to calm markets.

Interest Rates: US treasury yields rebounded from 3-month lows as investors recalibrated their appetite for risk. 10-year treasury yields increased 4 basis points to 1.65%. The 2-year yield rose 2 basis points and is currently 1.46%.

Australian interest rates have been significantly impact over concerns about the coronavirus. The 10-year bond yield fell 11 basis points to 0.95% yesterday while the 3-year bond fell 8 basis points to 0.63%. At the shorter end, the 90 day bank bill swap yield edged lower by 1 basis point to 0.88%.

Futures markets are currently pricing in a 22% chance that the Reserve Bank (RBA) will cut the cash rate at its meeting on Tuesday next week.

Foreign Exchange: The US dollar index nudged higher to 98.003 while the euro was broadly flat at US$1.1018. The yen fell slightly, highlighting that the risk-off mood has tentatively abated, but investors remain cautious.

Due to its high correlation with the Chinese economy, the Australian dollar has been buffeted by the latest coronavirus developments. The AUD extended yesterday’s fall by 0.07% to US$0.6756, a 5-month low.

Commodities: The march lower in oil prices halted while gold declined as the risk-off mood took a breather. WTI oil futures rose 0.8% while gold fell US$13 per ounce to US$1,568.6.

Australia: Australian businesses reported another challenging month in December. The NAB monthly business survey showed a fall in both business confidence and conditions.

Business confidence fell to the lowest level since July 2013. The worsening bushfire crisis in December likely played a role. The confidence index fell 2 points to -2.

The business conditions index slipped 1 point to +3. The conditions index remains above the lows reached in the middle of 2019 when the RBA first began cutting rates, but well below the 2018 average.

New Zealand: New Zealand prime minister Jacinda Arden has set September 19 as the date of the upcoming election. Opinion polls have Arden’s Labour-led coalition and the National Party, led by Simon Bridges, in a tight contest.

China: The escalating coronavirus outbreak has now killed more than 100 people in China with several cities in lockdown. There have been more than 4,500 confirmed cases in mainland China so far. The WHO said that China has agreed to receive international experts “as soon as possible” and the organisation has expressed faith in China’s ability to control the epidemic.

United States: Data released overnight painted opposing pictures for consumers and businesses. Consumer confidence beat market expectations, with the Conference Board index rising to 131.6 in January. A brighter assessment of the jobs market drove the result.

Other data showed that new orders for capital goods fell by the most in eight months in December. The 18-month US-China trade war has dented business spending and been a particular drag on manufacturing. Core capital goods orders fell 0.9% in December, suggesting that business investment may have contracted in the fourth quarter.

 

Today's key data and events:

AU WBC Leading Index Dec prev -0.09% (11am)

AU Consumer Price Index Q4 (11:30am)

   Headline q/q exp 0.6% prev 0.5%

   Headline y/y exp 1.8% prev 1.7%

   Trimmed Mean q/q exp 0.4% prev 0.4%

   Trimmed Mean y/y exp 1.5% prev 1.6%

JN Consumer Confidence Jan exp 39.5 prev 39.1 (4pm)

US Trade Dec exp –$65.0bn prev -$63.2bn (12:30am)

US Pending Home Sales Dec exp 0.5% prev 1.2% (12:30am)

US FOMC Decision exp 1.50-1.75% prev 1.50-1.75% (6am)

 

Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.

 

Nelson Aston, Economist Ph: 02-8254-1316