Bank of Melbourne

Morning Report

Main Themes: Market movements were mixed overnight as investors mulled the impact of the global spread of the coronavirus. Stock markets handed back early gains while oil prices fell further. The AUD moved steadily lower.


Main Themes: Market movements were mixed overnight as investors mulled the impact of the global spread of the coronavirus. Stock markets handed back early gains while oil prices fell further. The AUD moved steadily lower.

Share Markets: US and European equity markets stabilised after two consecutive sessions of heavy losses. US indices opened higher, but have declined as the session has progressed. The Dow Jones is currently down 0.2% while the S&P 500 is 0.3% lower. The Euro Stoxx 50 closed 0.14% higher, ending a four-session losing streak.

With little major data released, investors remained focused on the coronavirus. The World Health Organisation (WHO) said that cases inside of China appear to have peaked, but global cases are ramping up. Despite positive US home sales data, construction materials companies sustained heavy losses after US luxury home-builder Toll Brothers issued an earnings warning due to coronavirus impacts on their supply chain.

The ASX 200 plunged 2.3% yesterday, spurred by coronavirus fears.

Interest Rates: US treasury yields oscillated around a low level. The significant drop in yields over the past few days reflects the repositioning of expectations of further cuts to the Fed funds rate and negative economic impact of the coronavirus. The US 10-year treasury yield rose 1 basis point to 1.34% while the 3-month treasury bill yield saw a 1 basis point decline to 1.52%. The yield on the 2-year note, which is often used as a proxy for interest rate expectations, fell 4 basis points to 1.16%.

German yields rose following news reports that it was considering raising its debt ceiling. There are currently strict rules on borrowing at a state and national level, but there have been calls for more fiscal support to kick-start its sluggish economy.  

Australian bond yields edged down. The 10-year bond yield was 1 basis point lower at 0.92% yesterday. The 3-year bond fell 3 basis points to 0.62% while the 90 day bank-bill swap yield was unchanged at 0.85%.

Foreign Exchange: Trading in currency markets reflected cautious sentiment. The US dollar index closed higher at 99.076, with movements restricted to a narrow range.

The Australian dollar, along with other currencies of commodities exporters, headed lower. Global growth concerns made it one-way traffic for the AUD, which declined to US$0.6554 this morning. Weaker-than-expected construction work done data yesterday also added to RBA rate cut expectations.

Commodities: WTI oil futures moved further below US$50 per barrel, falling US$1.1 to US$48.7 overnight. A report from the Energy Information Administration (EIA) said that crude inventories rose last week, but by less than the market had been expecting. This supported prices somewhat, but prices fell anyway as the Covid-19 impact looms large.

Rio Tinto reported its best profits since 2011, helped by iron ore prices. However, its CEO said that the year ahead looks challenging with a short-term impact on its supply chain and demand for its products probable. The company said it expects China to unleash a sizeable construction stimulus response to the coronavirus, which will boost the demand for steel.

Gold prices rose overnight on safe-haven buying.

Australia: Construction activity fell 3.0% in the December quarter. It was the biggest quarterly decline in construction work done since the September quarter of 2018 and leaves the level of construction activity at the lowest in 3¼ years.

2019 was dominated by a large fall in residential construction and to a lesser degree in civil engineering activity. Non-residential construction was volatile, but on an upward trajectory.

Residential construction plunged 4.6% over the quarter, capping a torrid 2019 where growth fell 12.8% over the year. At six consecutive quarterly declines, the residential construction downturn is now in its longest phase since the mid-2000s. New residential building fell 5.1% while alterations & additions fell 1.3%.

We expect higher dwelling prices and turnover to eventually flow through to residential construction investment, but for the increase to take some time to materialise.

Engineering construction fell 1.5% following a 0.6% fall in the September quarter. The underlying components of civil engineering construction activity have been mixed. Work carried out in the public sector increased for the third consecutive quarter (+1.0%), supported by the large pipeline of public infrastructure projects. Private sector engineering activity fell 3.1%.

Detailed data by state suggest that the mining downturn has bottomed. Engineering activity (which includes mining activity as well as other infrastructure works) fared better in QLD, WA and the NT compared with in other areas.

Europe: The UK and EU are bracing for a protracted post-Brexit trade negotiation. Europe’s top negotiator Barnier said that a deal this year is “highly unlikely”. Negotiations are set to being next week.

United States: New home sales surged in January, adding further evidence to the strength of the US housing market. New home sales rose 764k in January compared with a 708k increase in December. It was the biggest increase since January 2007. Median house prices rose to a record high, and were up 14.0% over the year.


Today's key data and events:

NZ Trade Balance Jan exp -$549m prev $547m (8:45am)

NZ ANZ Business Confidence Feb prev -13.2 (11am)

AU Private Capex Q4 exp -0.2% prev -0.2% (11:30am)

EZ M3 Money Supply Jan exp 5.3% prev 5.0% (8pm)

EZ Consumer Confidence Feb prev -6.6 (9pm)

US National Accounts Q4 annualised (12:30am)

   -GDP exp 2.1% prev 2.1%

   -Personal Consumption exp 1.7% prev 1.8%

   -Core PCE exp 1.3% prev 1.3%

US Durable Goods Jan exp -1.5% prev 2.4% (12:30am)

US Initial Jobless Claims w/e Feb 22 exp 212k prev 210k (12:30am)

US Pending Home Sales Jan exp 3.0% prev -4.9% (2am)

US Kansas Fed Manf. Activity Feb exp -1 prev -1 (3am)

US Fed’s Evans Speaks (3:30am)


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