Bank of Melbourne

Morning Report

Main Themes: Stocks soared to fresh highs as the risk-on mood tightened its grip on markets overnight. Oil prices and government bond yields rose. Investors were heartened by comments from China’s top epidemiologist suggesting that the rate of new cases of the coronavirus has peaked and by additional stimulus measures from Chinese authorities.
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Main Themes: Stocks soared to fresh highs as the risk-on mood tightened its grip on markets overnight. Oil prices and government bond yields rose. Investors were heartened by comments from China’s top epidemiologist suggesting that the rate of new cases of the coronavirus has peaked and by additional stimulus measures from Chinese authorities.

Share Markets: The S&P 500 (+0.6%), Dow Jones (+0.8%) and NASDAQ (+0.8%) all rose to fresh record highs overnight. Tech stocks led the rally, but it was continued optimism about the containment of the coronavirus (now officially named covid-19 by the World Health Organisation) that pushed stocks around the globe higher. The Euro Stoxx 50 rose 0.8%.

Yesterday, the ASX 200 rose 0.6%. Optimism around the impact of covid-19 and a generally positive set of earnings results boosted local shares.

Interest Rates: Global government bond yields surged as investors embraced riskier assets. The yield on US 10-year treasuries rose 4 basis points to 1.63% and the 2-year yield saw a 2 basis points increase to 1.44%. The 3-month treasury bill yield was steady at 1.58%.

A reported drop in the number of new coronavirus cases in China was the main driver, however, positive comments about US economic prospects from Federal Reserve Chair Jerome Powell also supported sentiment. Interest rate futures are pricing in 1.4 more cuts to the Fed funds rate this year.

Australian yields improved, with the curve steepening yesterday. The 10-year bond yield rose 4 basis points to 1.09% and the 3-year yield rose 3 basis points to 0.75%. Markets are pricing in just over one more cut to the interest rate this year.

New Zealand government bond yields surged as the Reserve Bank of New Zealand (RBNZ) switched to a neutral policy stance after keeping rates on hold at its February meeting. 10-year government bond yields surged 10 basis points yesterday to 1.39%.

Foreign Exchange: The US dollar index rose 0.3% overnight, edging above 99 for the first time this year. The index has risen for 7 of the past 8 sessions. Against the euro, the dollar rose to a 2-year high of US$1.0874. The differential in economic growth prospects between Europe and the United States has driven the dollar’s strength recently.

The New Zealand dollar surged following the RBNZ’s more hawkish tone after its monetary policy decision. The New Zealand dollar is now trading at US$0.6464.

The more positive attitude towards risk supported the Australian dollar overnight. It is currently at US$0.6736 and has risen for the past three sessions.

Commodities: Oil prices made further gains above US$50 per barrel as concerns over the impact of the coronavirus eased. OPEC slashed its forecast for oil demand by 440,000 barrels per day, but markets had already been expecting this. WTI futures rose to US$51.1 per barrel. Gold prices edged lower overnight for the second session in a row.

Australia: The Westpac-Melbourne Institute consumer sentiment index edged up 2.3% to 95.5 in February.

The lift in sentiment this month reflects easing concerns around bushfires and comes despite some significant negative developments, most notably the coronavirus outbreak abroad.

Despite the modest improvement, the level of sentiment remains very weak. At 95.5, the index remains well below the long run average of 101.4 and the 100 level that indicates pessimists outnumber optimists.

The detailed components of the survey showed expectations for the economy and attitudes towards major purchases improved. This was partially offset by deterioration in assessments of family finances.

New Zealand: The Reserve Bank of New Zealand (RBNZ) left the overnight cash rate (OCR) on hold at 1.00%. The decision was as expected, however the accompanying statement was more hawkish than the market had expected. The RBNZ upgraded its assessment of the labour market and said that inflation was running “close to” target. Its own forecasts for the OCR were for it to remain at 1.0% for the remainder of the year.

The RBNZ cited fiscal policy as the main driver for the switch to a neutral monetary policy bias. The government’s plan to boost infrastructure spending has seemingly had a big influence. The RBNZ also mentioned signs of stronger consumer spending.

The RBNZ expects the coronavirus to subtract 0.3 percentage points from Q1 GDP.

China: Chinese authorities reported the lowest number of new cases of the covid-19 virus in two weeks. The country’s top medical adviser forecasted that the pandemic could be over by April, however UN health authorities warned that it could go either way. The latest figures show the number of deaths has risen to 1,113.

Europe: Eurozone industrial production fell by more than expected in December, capping off a sluggish quarter for the area. Industrial production fell 2.1% over the month in December, leaving activity down 4.1% over the year. All major economies in the bloc reported a slowdown in industrial production.

United States: At his second day of testimony to congress, Fed Chair Powell reiterated his confidence in the US economic expansion. Despite an expected drag from the coronavirus, he said that there was no reason why “the current situation of low unemployment, rising wages, high job creation… can’t go on”. His comments highlight that the Fed sees the current Fed funds rate of between 1.5-1.75% as appropriate in the medium term.

 

Today's key data and events:

JN Producer Prices Jan exp 0.0% prev 0.1% (10:50am)

AU MI Inflation Expectations Feb prev 4.7% (11am)

UK RICS House Price Balance Jan exp 3% prev -2% (11:01am)

AU RBA Governor Lowe Participates in Panel (11am)

US Consumer Price Index Jan exp 0.2% prev 0.2% (12:30am)

US CPI ex Food and Energy Jan 0.2% prev 0.1% (12:30am)

US Initial Jobless Claims Feb 8 exp 210k prev 202k (12:30am)

US Fed’s Kaplan Speaks (4:45am)

ECB Board Members Lane (5am) and Panetta (6am) Speak

 

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