Main Themes: There was a flight to safety overnight as fears of a global pandemic heightened. Stocks erased yesterday’s gains and gold rose. Global governments have promised to act as appropriate to support growth without providing many specifics.
Share Markets: Global equities suffered heavy losses overnight, led by falls on Wall Street. The Dow Jones is down 4.2% the S&P 500 is currently down 4.0%. All sectors are down, with losses most concentrated in financials and transport stocks.
Stock market volatility has moved to extreme levels in recent weeks due to the coronavirus outbreak. The VIX spiked to 42.21 overnight, its highest level in almost 9 years.
Interest Rates: US treasuries rallied amid safe-haven buying. The yield on the US 10-year treasury note fell 7 basis points to 0.92%. The US 10-year yield has fallen to record lows over the last week, after breaking through the symbolic 1% level for the first time ever. The US 3-month treasury bill fell 7 basis points to 0.63%.
Australian bond yields were firmer yesterday, but futures are pointing to softer yields today as coronavirus panic flares up again. The Australian 10-year bond yield closed at 0.79% yesterday and the 90 day bank bill swap rate is at 0.56%. Interest rate markets are now pricing in a near certain chance of a 25 basis point rate cut when the Reserve Bank (RBA) meets in April.
Foreign Exchange: The US dollar index fell is at an 8-week low of 96.648 as expectations of further Fed rate cuts mount. The US dollar has weakened following the Fed’s surprise 50 basis point cut on Monday. Even following the cut, at 1.00-1.25% US interest rates are at a much higher starting point than most of its global peers. The apparent indiscriminate spread of the coronavirus means that the entire global economy looks increasingly likely to be affected. With other major economies already at or near their effective lower interest rate bounds, the interest rate differential between the US and other countries looks set to decrease.
The Australian dollar weakened for the first time in 4 sessions, falling to US$0.6600. A weaker US dollar had left the Australian dollar up by default earlier this week.
Commodities: Oil prices slid lower despite a statement from OPEC backing its biggest output cut since 2008. Investors are holding their breath because the cut is conditional on Russia (who is not part of OPEC but forms part of an extended OPEC+ group), on joining in. Russia has previously argued not to cut production further. OPEC+ talks are scheduled for today. WTI futures are currently US$45.9 per barrel.
Gold prices rose further amid safe-haven buying. Gold is currently trading at US$1,672.6 per ounce.
COVID-19: Global coronavirus cases crept towards 100,000, with 87 countries confirming cases.
Australia: An equal fall in exports and imports left Australia’s trade surplus little changed in January. There was a $5.2 billion trade surplus in January, down slightly from a revised $5.4 billion in December.
Exports and imports both fell 2.8% over the month.
Exports were driven lower by a 7.3% drop in metal ores & minerals. Other mineral fuels rose 4.8%.
A plunge in capital goods imports drove the fall in imports in January. Capital goods imports fell 9.7% over the month. Machinery & equipment registered a mild 1.7% fall while ADP equipment imports fell 3.1%.
The data show that the supportive growth role played by net exports is waning. The trade surplus is now being driven by falling imports, which is offsetting the fall in exports. The bushfires and in particular the coronavirus are likely to have a significant effect on the service component of exports in particular in the coming months.
United States: More data out of the showed the US economy was on stable footing before the outbreak of the coronavirus. Weekly jobless claims fell 3,000 to 216,000 for the week ending 29 February.
Today's key data and events:
AU AiG Perf of Services Feb prev 47.4 (8:30am)
NZ Building Work Done Q4 exp 0.6% prev 0.4% (8:45am)
US Fed’s Kaplan Speaks (10:30am)
JN H’Hold Spending Jan y/y exp -4.0% prev -4.8% (10:30am)
AU Retail Sales Jan exp -0.5% prev -0.5% (11:30am)
US Fed’s Kashkari, Williams Speak (12:00pm)
US Trade Balance Jan exp -$46.1b prev -$48.9b (12:30am)
US Nonfarm Payrolls Feb exp 175k prev 225k (12:30am)
US Unemployment Rate Feb exp 3.6% prev 3.6% (12:30am)
US Fed speakers Evans (1:20am), Bullard (3:20am), Williams & Rosengren (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