Equities in relief rally, but bonds don't follow

Kia ora,

Welcome to Tuesday'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 of a relief rally - that has the look of being a bit premature.

But first, the core data being released today is for January PMIs. In the US, the widely watched ISM one actually moved from contraction to a very minor expansion (even if its employment subcategory remained negative). The internationally-benchmarked Markit one was previously expanding, but it turned lower on slowing new orders.

American construction spending slowed in December from November, but it is still +5% higher than a year ago. Turning negative however was non-residential private construction.

All this data of course is before the influence of the Chinese virus emergency.

The reopening of China's financial markets saw a very sharp fall in Shanghai with equities there down an eye-watering -7.7%. And Chinese benchmark bond yields also fell sharply, as did their currency. But it wasn't the all-out rout some feared, and the rest of the world seemed to breath a sigh of relief.

In fact, there was something of a relief rally in European equities, with most bourses up +0.5% or so. Wall Street is also in a relief rally at the moment, currently up +0.8% in mid-day trade. As a pre-cursor, Hong Kong closed yesterday up +0.2%.

Helping was a range of PMIs from other countries for January that weren't as negative as feared. Most still are contracting, but the shift is minor - so far at least.

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In China, their central bank lowered interest rates on some wholesale transactions in a bid to keep liquidity flowing. And in Hubei, banks have trimmed loan rates to customers and keeping credit lines open. Somehow, officials in China still think the impact of the emergency will be "only temporary". But still, China is asking the US for "flexibility" in its recently agreed Phase One trade deal to help it adjust.

In Hong Kong, medical staff are on strike in a bid to get their Government to close the border with China. Restrictions have been imposed but this group say it is not enough.

It does look like the virus transmission is peaking in China.

In Australia, building consents dipped and their factory sector contracted sharply. But at least they are feel a bit more upbeat because their house prices are rising. Not everyone is positive of course, the ASX200 fell -1.3% yesterday (and the NZX50 fell a similar amount).

In financial markets, the Americans are about to issue new 20 year Treasury debt as they raise money at a record rate to keep up with their -US$1 tln deficits. All this will work for a while yet so long as investors are prepared to tolerate very low yields.

The UST 10yr yield will start today at just on 1.53% and up +2 bps in a day. 

Gold has retreated today, down -US$10 to US$1,579/oz as risk perceptions ease.

US oil prices are still falling, down to just under US$50.50/bbl and that is another -US$1 drop in a day. The Brent benchmark is down even more to just under US$55/bbl.

The Kiwi dollar is unchanged this morning at 64.6 USc. On the cross rates we are holding at 96.7 AUc. Against the euro we are firmish at 58.4 euro cents. The net of these minor shifts leaves our TWI-5 just on 70.

Bitcoin is a little lower from where we left it yesterday, down -2% at US$9,241.

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

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