Down-weighting the China risks

Kia ora,

Welcome to Thursday'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 investors seem to have down-weighted the China risks.

Equity markets are buying the idea that the coronavirus impacts will be short and shallow. European markets were up +0.9% overnight and so far today Wall Street is also higher, with the S&P500 up +0.6% in mid-day trade. Yesterday, Shanghai and Hong Kong rose +0.9% and Tokyo rose +0.8%. More locally, the ASX200 was up +0.5% and the NZX50 Capital Index was up a similar amount.

Much of the analysis around the longer-term impacts is circular. Certainly the RBNZ yesterday accepted the sanguine view, relying on "whole of government" analysis that the China bounce-back will be strong when it comes making up for some short-term pain.

And equity investors just assume central banks will bail out any downside market risk.

But the actual data out overnight suggests that even prior to the early February onset of coronavirus implication, there was a sharpening slowdown underway, one that this latest emergency will intensify.

Production logjams and lower commodity prices are spreading worldwide.

In the US, Boeing is now saying it won't be back in full normal production on the 737MAX for another two years. That alone will crimp American manufacturing.

Japanese machine tool orders fell almost -36% year on year in January as car-makers held off ordering. That drop is similar to the year-on-year fall reported for December.

Malaysia released its Q4 GDP data yesterday, showing growth had slipped sharply to a ten year low of just +3.6% pa.

EU industrial production took an unexpectedly large tumble in December, down -4.1% year on year when less than half that drop was expected. That takes it back to levels last seen in 2016.

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The reporting of new cases of COVID-19 and the number of deaths seems to be slowing. At 45,200 officially confirmed cases, that is now less than a doubling in a week (24,500 seven days ago) but the new death count of 1118 is still more than double the 492 level a week ago.

Chinese housing sales have virtually dried up. Chinese travel has virtually halved.

In Australia, giant Aussie insurer IAG (the dominant general insurer in New Zealand) has seen its profits halve, mainly because of "exceptionally harsh" risks in Australia. To recover, premiums could face upward pressure as a result. And they are warning that they won't insure more risks exposed by the changing climate.

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The UST 10yr yield is at just on 1.63% and another +4 bps rise from this time yesterday. 

Gold has risen today, up +US$5 to US$1,570/oz.

US oil prices have made another gain today and are now just over US$51/bbl. The Brent benchmark has also firmed to just under US$56/bbl. But both are still at low levels.

The Kiwi dollar will start today firmer at just on 64.7 USc. On the cross rates we are also firmer at 95.9 AUc. Against the euro we up to 59.4 euro cents. That raises our TWI-5 to 70.5 and a +1.1% rise in a day.

Bitcoin is still over US$10,000 and is now at US$10,403 which is another +1.7% rise in a day.

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

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