Risk aversion rises on virus concerns. EUR lower following ECB meeting. NZD hugs 0.66 ahead of today’s CPI

Risk off sentiment has percolated through markets overnight. Equities and bond yields are lower, while JPY has lifted. Commodity prices are generally lower, although safe-haven gold is an exception.

More concerns that the coronavirus will spread further and dent Chinese and world growth has kept markets cautious. Risk aversion rose yesterday as China stepped up efforts to contain the virus, essentially putting Wuhan, the epicentre of the outbreak, in quarantine. Outbound flights, rail, bus, and ferry services were halted in the city of 11 million. Macau has cancelled all Lunar New Year festivities.

China’s CSI 300 equity index closed down more than 3%, with negative sentiment continuing into the European and US sessions. The US State Department suggested people reconsider travel to China in raising its advisory for the country to level three and to ‘exercise increased caution’. World Health Organisation said it needs more time to make a decision on whether the outbreak should be declared a public health emergency of international concern. The shift in sentiment has been orderly with the S&P 500 currently down 0.3%.

IMF revising down its 2019 and 2020 growth estimates and forecasts by 0.1% a piece, to 2.9% and 3.3% respectively, added to the more sombre market tone.

In other news, the ECB held its policy tools unchanged, including the deposit rate at -0.5%, as widely expected. The Bank was marginally more confident on core inflation and the economy and didn’t discuss changing the tiering multiplier. The ECB launched its policy review, as expected, and will look into price stability, communication practices and environmental sustainability. Nothing too surprising here, but the market took the view that it all means policy is going nowhere while the review is undertaken even though President Lagarde said policy would be set independently of the review. EUR was in a very tight range ahead of the statement, tried to rally immediately post release looking above 1.1100 before falling. Weaker-than-expected consumer confidence added to the downswing, seeing EUR dip below 1.1040 at one point before settling.

The US dollar edged higher, although JPY outperformed in the risk off environment. USD/JPY eased 0.4% to open this morning around 109.40.

Renewed global growth concerns saw oil prices drop to a two month low. Brent crude prices are down nearly 3%, to around US$61.50/bbl.

AUD couldn’t hold its gains made yesterday following the stronger than expected labour market data. Employment rose 29k against 10k expectations and the unemployment rate unexpectedly fell to 5.1%. The AUD quickly lifted toward 0.6880 from near 0.6840 before the release. But as risk sentiment soured and commodity prices fell, AUD has given back all of yesterday’s gains to currently sit around 0.6840.

The NZD ebbed and flowed on changing risk sentiment but ultimately held up reasonably well, perhaps in anticipation of a firmer CPI print today. At open we are back to a very familiar level near the 0.6600 mark. This sees NZD/AUD sit around 0.9645, recovering more than its losses yesterday after the Aussie job numbers.

The strong AU jobs report also saw the market lessen the chance of the RBA cutting interest rates. Pricing for a February cut moved from around a 60% chance before the data to around 30% chance shortly after.

NZ short end swap rates rose in sympathy with AU rates yesterday, albeit to a lesser degree. NZ 2 year swap closed up 1.5bps on the day, to just under 1.22%, generating a flattening of the curve as the long end remained broadly steady. NZ 10 year swap closed virtually unchanged at 1.63%. Bond yields eased following moves in the previous offshore session. Overnight moves suggest some further downward pressure at open today, although the market will also be focused on today’s CPI.

Overnight, US 10 year Treasury yields continued to fall on global growth concerns, currently sitting around 1.72%, down nearly 5bps on the day. Long end yields were also encouraged lower as US Treasury Secretary Mnuchin indicated that he still hopes to issue 50- and 100-year bonds, but it may take ‘a bit longer’.

In the day ahead, Q4 CPI for NZ is released this morning, where the result is expected to be higher inflationary pressure than the RBNZ projected back in November, both headline and non-tradeables inflation. Overall, the data should support the view that no further policy easing is required, or likely, and NZD-supportive, although this view should already largely be in the price after the stronger ANZ inflation gauge last week. That said, we see the balance of risk around our (and market) expectations of +0.4% q/q and +1.8% y/y as shaded slightly to the upside.

Markit PMIs are released tonight for the euro area, UK and US. They will be closely monitored for signs of further green shoots of recovery in the global economy.