Global risks rise suddenly

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 it is becoming clear that the China public health emergency is going to have widespread economic impacts.

China of course is gripped by the Wuhan coronavirus flu emergency. The large-scale lock-down now affects four core cities, travel is restricted in 16 other cities and that now affects more than 60 mln people. Beijing has announced that the the week-long Spring Festival holiday that started on Friday (January 24) will be extended by at least another week. They are hoping the extra time will allow the virus to peak and wane in that period. But it is still expanding. In fact, more than 5 mln people left Wuhan before they locked down the area.

And the economic impacts won't fade quickly. Commerce is grinding to a halt in Hubei province with firms who shut for the Sping Festival week unsure when they will open. And Hubei is the 7th largest province in China from a GDP point of view.

And it won't only be local Chinese companies impacted. It is very likely to affect most imports, including food imports. New Zealand runs a huge trade surplus with China, about +NZ$3.7 bln per year - and that will undoubtedly shrink quickly now. It may recover quickly when the crisis passes, but in the meantime there will be knock-on effects, and worldwide, as suppliers scramble to offload product elsewhere.

And recall, the SARS epidemic wiped -1% off China's GDP in 2003 when China was a much smaller economy. Today, -1% would cost them -US$140 bln or about -0.2% of world GDP. It is an impact that may be felt everywhere and New Zealand won't be immune.

Equity markets were in full risk-aversion mode at the end of last week. On Wall Street, the S&P500 was down -0.9% at the end of the week. Prior to that European markets were actually very positive with most up more than +1% but that just made back earlier losses so they were flat for the week.

However Shanghai equities crashed -2.8% taking their weekly loss to more than -3% and pushing the 2020 levels below where they started. The Shanghai market was going to be closed anyway for this week, but it may be closed longer now. Hong Kong and Tokyo were flat on Friday and just on the positive side.

[Advert]

And here is a message from our friends at Hatch.

With Hatch, anyone can invest in the US share markets.

Through Hatch, Kiwi investors can easily invest in over 2900 of the world’s best-known companies like Apple, Microsoft, Berkshire Hathaway, and Amazon. With no minimum investment and fractional investing, investors can buy portions of companies they might not normally be able to afford and quickly build an exciting investment portfolio.

Visit www.hatch.as/investing to learn more.

In the US, their internationally-benchmarked PMIs came in marginally expansionary. And that was the case for both their factory and services sector and both were a pick-up in activity. But the movement is small.

There were small improvements in Europe as well in the same PMIs, but their factory sector is contracting, even if less, while their services sector is expanding.

In Japan, the same PMIs are recording a rebound to start 2020. A good rise for services back to expansion is more than offsetting the contracting factory sector which also improved and is now close to a steady state.

Both the Australian factory sector and their services sector are contracting now, according to the latest PMI update for January 2020. And the rate of decline is getting steeper even if neither is large yet. Their factory PMI is at 49.1 and their services PMI is contracting faster at 48.9. 

But the China coronavirus factor undermines all of this.

The UST 10yr yield is staying lower at 1.68% and that means over the past week it has declined -16 bps. That is its largest weekly drop in more than three months. 

Gold is holding higher, now at US$1,572/oz and that is a +1% gain in a week.

US oil prices are also sharply lower yet again, now just under US$54/bbl and the Brent benchmark is down too at just under US$60.50/bbl. Both represent falls of more than -US$4/bbl in a week.

The Kiwi dollar has settled back a bit and is now at 66.1 USc and broadly similar levels to this time last week. On the cross rates we are more than +½c higher at 96.8 AUc and equaling a ten month high. Against the euro we are also higher for the week at 59.9 euro cents. The net of these shifts leaves our TWI-5 at 71.5.

Bitcoin has moved back up this morning from where we left it on Saturday, now at US$8,473 and that trims the weekly loss of -1%.

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

Get more news affecting the economy in New Zealand from interest.co.nz and subscribe to receive this podcast in your favourite podcast app - we're on Apple Podcasts, Google Podcasts, Spotify or subscribe on our website.

Tell your friends and leave us a review - we welcome feedback.