Main Themes: Sentiment towards the impact of the coronavirus improved, prompting a risk-on mood among investors. Equities and bond yields saw the biggest increases.
Share Markets: Equity bourses were stronger world-wide, buoyed by renewed confidence in China’s handling of the coronavirus outbreak. Mainland Chinese indices provided a positive lead, with the CSI 300 bouncing back 2.6% after yesterday’s fall.
The Dow Jones and S&P500 are both currently up 1.4%. The tech-heavy NASDAQ is up 2.1%, boosted by another stunning rally in Tesla shares which rose 20% overnight. Tesla shares have more than doubled since the start of the year as more investors and analysts are betting that electric vehicles are becoming a profitable venture.
Interest Rates: Demand for bonds tumbled as investors saw less risk of widespread economic fallout from the coronavirus. The yield on US 10-year treasuries breached 1.60%, up 8 basis points. The curve steepened, with a 6 basis point increase in the 2-year bond yield to 1.41% while the yield on the 3-month treasury bill was unchanged at 1.57%.
Australian bond yields ended yesterday’s session mixed, however, yields bounced after the Reserve Bank (RBA) struck an overtly optimistic tone towards the growth outlook when it kept interest rates on hold. The 10-year bond yield closed 1 basis point lower at 0.92% while the 3-year bond yield increased 3 basis points to 0.62%.
Foreign Exchange: The US dollar index rose 0.1% overnight, with most risk-off currencies falling. The Australian dollar performed well, benefitting from the bullish comments from the RBA and a more positive take on the coronavirus. The AUD rose from US$0.6685 to US$0.6720 following the RBA’s interest rate decision, and then extended gains overnight to US$0.6735 this morning. The euro and pound reversed their moves from the previous session, with the euro weakening to US$1.1044 and the pound strengthening to US$1.3033.
Commodities: Oil prices erased gains of almost 2% to close down overnight. Fears over the long-term impact of the coronavirus’s impact appeared to outweigh the short-term optimism. A special OPEC+ committee weighed the impact on global oil demand and economic growth of the coronavirus. WTI crude is down US$0.50 per barrel to US$49.60.
Gold prices fell amid the general shift away from safe haven assets, falling 1.4%.
Australia: The Reserve Bank (RBA) left the cash rate on hold at 0.75% at its meeting yesterday. Markets were not expecting any adjustment to the cash rate, however, the accompanying statement showed a renewed sense of positivity regarding the economic environment. The statement contained clues suggesting that the RBA will be retaining its optimistic forecast for economic growth when it delivers its Statement on Monetary Policy (SoMP) on Friday.
The RBA expects growth to reach trend (2.75%) this year and pick up to 3.0% growth in 2021. Our view is that growth is likely to be significantly below that, especially in light of the recent bushfires and coronavirus outbreak.
It would be a challenge to achieve the RBA’s forecasts of economic growth and underlying inflation this year without further easing. Economic growth is weak, and the outlook for consumer spending is soggy amid low wages growth and high household debt. We continue to expect two more cuts to the cash rate later this year.
China: The People’s Bank of China (PBoC) injected US$71.5 billion into repo markets on Tuesday, according to reports. The authorities in Beijing have pledged to support financial markets and take steps to cushion the economic impact of the spreading coronavirus. Markets have generally taken this as a positive, with risk assets responding positively to the announcement.
The most recently updated coronavirus figures show confirmed cases of 20,708 worldwide, including 427 deaths. A vast majority of cases and fatalities remain in China.
United States: Factory orders rose 1.8% in December, boosted by new orders for defence aircraft. The measure that is a closer guide to economic growth, which strips out transport orders, also outperformed, rising 0.6%. The latest reading is a positive for the economic outlook, however, for 2019 as a whole, factory orders were down 0.6%. Business sentiment remains fragile in the aftermath of the long-running US-China trade war.
Today's key data and events:
AU AiG Perf of Construciton Dec prev 38.9 (8:30am)
NZ Unemployment Rate Q4 exp 4.2% prev 4.2% (8:45am)
NZ Employment Change Q4 exp 0.3% prev 0.2% (8:45am)
JN Jibun Bank PMI Services Jan F prev 52.1 (11:30am)
AU RBA Governor Lowe Gives Speech (12:30pm)
CH Caixin Services PMI Jan exp 52.0 prev 52.4 (12:45pm)
EZ Markit Services PMI Jan F exp 52.2 prev 52.2 (8pm)
UK Markit/CIPS Services PMI Jan F exp 52.9 prev 52.9 (8pm)
EZ Retail Sales Dec exp -1.1% prev 1.0% (9pm)
US ADP Employment Jan exp 158k prev 202k (12:15am)
US Trade Balance Dec exp -$48.2bn prev -43.1bn (12:30am)
US Markit Services PMI Jan F exp 53.2 prev 53.2 (1:45am)
US ISM Non-Mfg PMI Jan exp 55.1 prev 55.0 (2am)
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