Equity investors look beyond current risks

Kia ora,

Welcome to Wednesday'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 an air of optimism is returning to financial markets.

But first, this morning's dairy auction was nowhere near as weak as some had expected. Prices were down -4.7% led by WMP which was down -6.2%. SMP was down -4.2%. But the exchange rate came to the rescue and its recent devaluation means that overall prices were down 'only' -2.8% in New Zealand dollar terms. And there were bright spots. One is that volumes were lighter because this is the back end of the season. And another was Cheddar Cheese which actually rose +6% from the prior auction taking it to its highest price since April 2014. Current shipments to China might be a real stress point right now, but collapsing prices aren't a crisis worry.

American data wasn't so negative either. Factory orders rose in December (up +1.8%) after falling in November (down -1.2%), but the December level was virtually unchanged from the same month a year ago, and calendar 2019 was lower than calendar 2018. (Tariffs haven't helped US factories at all.)

In China, there is no signs yet of the virus emergency easing.

Their central bank pumped almost NZ$90 bln into their banking system with reverse repurchase agreements, the largest single-day addition in more than a year. And it set their currency rate at almost 7 to the US dollar, easing exporters burdens. But local carmakers have mostly halted production. And in many cities, house sales centres are shut. The growth in the number of confirmed cases is still rising, but at a slower rate and the growth in the number of deaths reported is slowing. The human and economic toll on China will be huge. 

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Equity markets turned very positive in Europe overnight, with most markets up +1.8%. Wall Street is also rebounding today with the S&P500 up nearly +1.7%. This follows Shanghai and Hong Kong which were both up about +1.3% yesterday at the end of their trading sessions.

And the enthusiasm in Hong Kong is after a year of widespread local trouble, with the coronavirus the latest setback. In fact, Hong Kong was in recession in 2019.

In the UK, they have set a new aggressive target of banning fossil fuel (including hybrid) cars from 2035.

And in Australia, their central bank left all its policy rate settings unchanged, convinced the country can ride out the trade and climate pressures in the longer run. Its implication is that the 2019 'normal' will return fairly soon.

The UST 10yr yield will start today at just on 1.60% and a strong +7 bps recovery a day. 

Gold has retreated sharply, down -US$27 to US$1,552/oz as risk perceptions ease further.

US oil prices are holding at just on US$50.50/bbl. The Brent benchmark is also holding at just under US$55/bbl.

The Kiwi dollar is little-changed this morning at 64.8 USc. On the cross rates we are lower by -½c to 96.2 AUc. Against the euro we are firmish at 58.7 euro cents. The net of these shifts puts our TWI-5 just on 70.3.

Bitcoin is marginally lower from where we left it yesterday, at US$9,201.

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

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