Main Themes: It was a dramatic trading session overnight. Coronavirus fears and a falling oil price fuelled an equity sell-off and a flight to safety. The S&P 500 is on track for its worst day since the GFC and the entire US bond yield curve has fallen below 1% for the first time in history.
Share Markets: Global share markets are a sea of red as investors attempt to quantify fears over the coronavirus spread and the breakdown of an OPEC deal which led to a sharp fall in oil prices. US equity bourses are suffering their largest falls since the GFC in volatile trading. At the time of writing the S&P 500 is down 7.6% and the Dow Jones is 7.8% lower. Earlier in the session, circuit-breakers were triggered when the S&P 500 fell 7% shortly after opening. Following a 15 minute trading halt, shares fell further. All sectors suffered heavy losses, with the greatest falls in energy stocks and financials.
Interest Rates: Demand for government bonds surged amid a flight to safety. The US 10-year treasury yield is down 14 basis points to a 0.57%. Fixed income trading was highly volatile. At one point, the US 10-year yield touched 0.32% before quickly recovering. The rest of the US yield curve was also lower. The 3-month and 2-year yields are both currently 0.4%.
The Fed acted to ensure liquidity in repo markets. It lifted its overnight offering to at least US$150 billion compared with US$100 billion last week.
Yields elsewhere around the globe were also lower. The yield premium for emerging market debt over US-treasuries rose sharply as investors focussed on safe-haven assets.
Australian bond yields were also lower yesterday. The 10-year bond yield fell 7 basis points to 0.62% and the 3-year yield was down 1 basis point to 0.39%. Interest rate futures markets are pricing in a certain rate cut by the Reserve Bank (RBA)’s next board meeting in April.
Foreign Exchange: Currency trading was volatile. Safe-havens yen, euro and the Swiss franc all advanced against the US dollar. The unwinding of carry-trades exacerbated the US dollar’s fall against its major peers. The US dollar index fell 0.933 to 95.018.
The Australian dollar continued to hold its ground reasonably well, notwithstanding some extreme volatility at various points since the weekend. It is currently trading at around US$0.6583 but earlier yesterday fell to US$0.6313 before rebounding sharply. At one point, it was trading higher than its previous close.
Commodities: Oil prices continue to fall following the breakdown of an OPEC deal to cut crude production. Russia and Saudi Arabia appear to be digging in and preparing for an oil price war. On top of high production from major producers, the International Energy Agency (IEA) forecasts that demand for oil is poised to drop this year for the first time since 2009. WTI futures fell US$10.1 per barrel to US$31.1.
Australia’s major commodity exports including iron ore and coal have so far avoided any major price declines. The price of iron ore remains in the mid-US$80s amid supply disruptions.
COVID-19: The World Health Organisation (WHO) said that there is a real possibility that the coronavirus is declared a pandemic, but has so far refrained from using the designation. Confirmed cases rose to just shy of 110,000 and 3,800 deaths, according to the WHO’s latest situation report.
Italy confirmed that it has locked down the Lombardy region comprising approximately 16 million residents as more countries in Europe begin shutting their borders and implementing containment measures.
Australia: Prime Minister Scott Morrison said that the economic impact of the coronavirus would be worse than the shock from the GFC. The government is set to announce the key elements of a stimulus package worth $5-10 billion today.
Japan: Japan’s current account surplus widened to ¥612.3 billion in January compared with ¥524.0 billion in December.
Europe: Investor sentiment fell to a 7-year low in March, according to the Sentix Investor Sentiment Index. Separate data showed German exports to China fell 6.5% over the year in January, although its statistics office said it was not linked to the coronavirus.
Today's key data and events:
JN M2 Money Feb exp 2.8% prev 2.8% (10:50am)
AU NAB Business Confidence Feb prev -1 (11:30am)
AU NAB Business Sentiment Feb prev 3 (11:30am)
CH PPI Feb y/y% exp -0.3% prev 0.1% (12:30pm)
CH CPI Feb y/y% exp 5.2% prev 5.4% (12:30pm)
EZ GDP Q4 F exp 0.1% prev 0.1% (9pm)
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