Major selloff underway on China virus jitters

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 investors are heading for the exits today.

Markets are in full retreat. Equities worldwide are being hit hard. Bond yields are dropping fast. Rate curves have either turned negative or are quickly heading that way. Gold has jumped to a seven year high. The oil price is tanking.

Wall Street opened sharply lower and has stayed down. It is -1.2% below where it closed on Friday, and has almost lost all its 2020 gains. Overnight European markets fell even harder, down -2.5% across the board. Yesterday, Tokyo lost -2%. Hong Kong had very limited trading before closing early for its Chinese New Year holiday today. Shanghai markets will be closed all week, and maybe longer now.

We are witnessing a rush to safe havens and away from commodities and risk.

The few data releases in the US overnight weren't especially positive either. The expected pickup in new home sales in the US in December from November didn't happen and that surprised analysts. That is the third straight month they had dropped. But at least it was well above the data for the same month a year ago, an easy beat because it was so weak back then.

The Dallas Fed regional survey picked up in January but their general business activity metric is still negative, just less so. The very recent sharp fall in the oil price won't be positive here.

All eyes will be on tomorrow's release of American durable goods orders for December. Recall, they declined in November and excluding defense orders, that decline was sharp.

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The China coronavirus pall is worldwide. And it won't be helped by Hong Kong research that suggests the actual number of local infections is 44,000 and far, far above the official tally.

In China, emergency measures for those not directly affected include free travel via a massive rail refund program, and mortgage payment deferrals. Some policy limits on medical insurance have been waived for those affected.

The Chinese lockdown will create many losers. It may also create winners. Some think that will include India.

When the ASX opens today, a large fall is expected. Yesterday the NZX50 fell -0.6% which in the circumstances was pretty modest. But it will be hostage to the ASX today. There won’t be many investors ‘buying the dips’ today.

The global economy was vulnerable before the China virus, and investors will now be very nervous about where to from here.

And we should note that another heatwave is about to hit Australia. Severe conditions will be widespread with extreme conditions forecast for Canberra, eastern Victoria, south-east New South Wales and eastern Tasmania.

The UST 10yr yield has dropped even further, down another -7 bps so far today and now at 1.61% and its largest weekly drop in more than six months. 

Gold is sharply higher, now at US$1,578/oz and that is another +US$6 gain in a day.

US oil prices are also sharply lower yet again, now just under US$52.50/bbl and the Brent benchmark is down too at just under US$59/bbl. Both represent falls of more than -US$5/bbl in a week.

The Kiwi dollar has fallen by -½c today due it its vulnerability to its China trade. It is now back at 65.5 USc. On the cross rates we are higher at 96.9 AUc because markets assume Australia has even higher vulnerability. Against the euro we down at 59.4 euro cents. The net of these shifts leaves our TWI-5 at just under 71 and that's its lowest in more than a month.

Bitcoin has moved back up this morning from where we left it yesterday, now at US$8,792 and that is a daily rise of +3.8%.

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

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