China risks become real for rest of the world

Kia ora,

Welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news China's woes are spreading and the impacts are deepening.

But first, the issue of an internationally coordinated digital tax on the global tech giants is back in the limelight as the US tries to do an end-run around the OECD BEPS proposals.

And the annual Warren Buffett letter to shareholders was out over the weekend, but this one contained no special revelations. It did report strong earnings but it didn't say who would take over from the 89 year old legendary investor. He also wants to see corporate CEO's supervised and reined in more effectively by boards of directors.

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The coronavirus now seems to be spreading out of China in a significant way, and not by just travelers from China. Italy, Iran*, Japan and South Korea all seem to have a growing problem. There are now 2000+ confirmed cases outside China and rising sharply. It now threatens to become a pandemic. Inside China a topping out seems to be in place even if deaths keep on rising. Globally, there are now almost 80,000 confirmed cases and almost 2500 deaths. A week ago those levels were 71,300 confirmed and 1773 deaths. 

The interconnected world of tourism and trade is the enabler of the rapid spread.

Economically, supply-chain risk is the next big concern. And in China, the existential risks to the SME sector haven't gone away - if anything they are building despite emergency loan approvals.

Car sales have ground to a virtual halt nationwide. Dealerships are closed and in the first week of February less than 1000 cars were sold nationwide. In 2019 this was a car market larger than the USA.

And China's property market has also ground to a halt. It is a nervous time for public policy officials who continue to reassure that the downturn will be temporary and there will be a strong bounce-back when the crisis passes. It is that 'hope' that is keeping commodity prices from collapsing.

However, steel production has restarted but stocks are building very quickly on weak demand and calls are being made to scale back or halt production.

The giant United States economy is feeling the impacts too. In fact, the latest PMI data for the US reinforces these risks. Their factory PMI has stalled and their services PMI is now contracting in a sharp move lower. In this survey, new orders fell for the first time since this metric began in 2009.

In fact, a Fed Governor has called on Congress to plan for a recession.

Canadian retail sales were flat in December from November and up less than +2% in all of 2019. And Canada's economy is currently hostage to a major shutdown of a key rail network as indigenous political issues come to a head.

And there is more data showing Japan is suffering from a sharp contraction.

The Eurozone has bucked the negative trend however with its latest PMI's now at six month highs, and led by manufacturing.

And inflation is rising in the EU, up +1.7% year-on-year in January, a little less for the Eurozone.

Through all of this, the IMF has again trimmed its 2020 global growth forecast, now seeing +3.3% in 2020 and +3.4% in 2021. These forecasts still rely on a sharp recovery from the coronavirus impacts starting in Q2-2020. But markets aren't convinced.

Equity markets turned lower at the end of last week with Wall Street's S&P500 down more than -1% on Friday (and a -1.3% loss for the week) and European markets lower by nearly as much as well.

Bond market yields fell sharply at the end of last week. The UST 10yr yield is now just on 1.47% and lower by -11 bps for the week. 

Gold has also made another sharp risk-off move to US$1,643 and that has accumulated to a +$60 rise for the week, a remarkable +3.9% advance on top of last week's +1% rise.

US oil prices are unchanged overnight at just under US$53.50/bbl. The Brent benchmark is also lower at just under US$58.50/bbl.

The Kiwi dollar will start today at just under 63.5 USc and a -1c fall for the week. On the cross rates we have held 95.9 AUc. Against the euro we are also down -1c for the week at 58.5 euro cents. That means our TWI-5 is now at 69.6 and its lowest since November.

Bitcoin is now at US$9,889 which is a +1.5% rise since we left it on Saturday.

You can find links to the articles mentioned today in our show notes.

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