3rd February 2020 - Wary start in Asia, AUD lower, awaits return of China markets



Good morning


OVERNIGHT DATA AND HEADLINES


• Global equity markets posted their biggest weekly and monthly loss since August as growing concerns about the economic impact of the coronavirus outbreak in China sapped risk appetite. Gold posted its best month in five, while yields on U.S. debt fell to almost five-month lows as the United States, Japan and other countries tightened travel curbs to China, where the death toll from the virus rose to 213.

• Wall Street tumbled more than 1.5%, sealing its worst week in six months. Dow Jones fell 603 points (2.09%) 28,256, S&P 500 lost 58 points (1.77%) 3,225 and Nasdaq fell 148 points (1.59%) to 9,150. For the week, the Dow fell 2.5%, the S&P lost 2.1% and the Nasdaq declined 1.8%.

• A gauge of U.S. Midwest manufacturing activity slid to a four-year low in January, with new orders and production tumbling and producers forecasting tepid activity in 2020 despite the Trump administration's recent trade deals. The Chicago Business Barometer fell to 42.9, the lowest level since December 2015, from 48.2 in December. Economists polled had expected an improvement to 48.8.

• U.S. consumer spending rose steadily in December, increasing 0.3% last month as households spent more on prescription medication and healthcare services. That followed an unrevised 0.4% rise in November. December's increase in consumer spending was in line with economists' expectations.


CURRENCIES


• The U.S. DXY index fell 0.52% down from 97.97 highs towards 97.35.

• EUR jumped up from 1.1015 lows up towards 1.1096 highs.

• GBP gained from 1.3100 lows up towards 1.3214 highs.

• JPY rose to a three-week high (dropped from 109.12 to 108.30), while CHF climbed to a two-week peak (0.9626).

• China's stock, currency and bond markets have all been closed since Jan.23 for the Lunar New Year celebrations and are scheduled to reopen on Feb. 3.

• AUD loitered near multi-month lows, diving to 0.6682 and down 1.5% last week, on track for its fifth straight weekly loss.

• NZD touched a 2 month low, dropping 0.6% to 0.6452 before rebounding up towards 0.6475.

• AUDNZD remained in a relatively tight 1.0335 / 1.0360 range yet again.

• AUDEUR suffered yet another major selloff, this time falling from near 0.6100 down towards 0.6020,

TREASURIES


• Benchmark 10-year Treasury yields dropped to more than three-month lows and two-year note yields fell to their lowest levels since 2017.

• Benchmark 10-year note yields dropped as low as 1.519%, the lowest since Oct. 8. Thirty-year bond yields briefly fell below 2% for the first time since September. Two-year note yields fell to 1.337%, the lowest since September, 2017.

• The closely watched yield curve between three-month bills and 10-year notes moved in and out of inversion on Friday, a bearish signal for the U.S. economy.

• Euro zone government bond yields held at four-month lows as coronavirus fears remained the market's focus despite growth and inflation data releases. Most 10-year bond yields were flat, with Germany's 10-year yield at -0.44%, having fallen earlier to -0.397%, a nearly four-month low.


COMMODITIES


• Gold prices rose and were heading for their best month in five - Spot gold was up 0.8% at $1,585.66 per ounce. Gold has gained more than 4% so far this month.

• Chinese commodities exchanges delayed their re-opening dates post Lunar New Year as part of the country's effort to contain a fast-spreading coronavirus.

• Copper hit a five-month low – Benchmark LME copper ended down 0.4% at $5,567 a tonne.

• Oil prices fell and were on track for a fourth straight weekly loss. Brent crude fell 13 cents to settle at $58.16 a barrel and was down about 4% on the week. U.S. West Texas Intermediate fell 58 cents to end the session at $51.56 a barrel, down 4.8% on the week.


ECONOMIC DATA TODAY


• Australian Economic data today : Jan Core Logic home value index (last 1.2%). Prices have now clawed back two thirds of their correction.

• Australian - December dwelling approvals (last 11.8%, forecast –5.0). Nov jump driven by temporary spike in NSW.

• Australian - Jan ANZ job ads (last –6.7%). Down 18.8%yr, job ads have been week since early 2019. Jan MI inflation gauge (last 1.4%).

• HK - Q4 GDP %yr (last –2.9%, forecast –4.0%). Outlook for Hong Kong economy highly uncertain.

• Jan Caixin China PMI 51.5 51.0 – Growth ahead of new year holidays was modest.

• US - Dec construction spending 0.6% 0.4% – Business investment weak, and will remain that way.

• US - Jan ISM manufacturing 47.2 48.4 – A bounce from Dec very weak level likely.


AUD THOUGHTS


AUD extended its fall from January's peak to a near 4-month low (0.6682), and virtually no signs suggest the slide will end.


Economic impacts of the coronavirus have yet to be determined and could be severe to Asian economies as the crisis intensifies. Investors are taking virus concerns seriously as equity markets and bond yields fall hard. Concerns about the economic impact are being highlighted by continued falls in copper and oil markets. Emerging market currencies are being sold in favour of safe havens and CNY remains on the defensive as USD/CNH is buoyed near 7.00. The AUD bounce from the weekend low was small, suggesting longs see little reason to be aggressive. Options investors are hedging for lower AUD levels, highlighting the downside risks. Risk reversals show premiums for puts over calls are increasing further. AUD bulls see October's 0.6670 low as a last line of defence.


Australian data today will be non-eventful however tomorrow all eyes will be on the RBA meeting announcement (seen holding interest rate in Feb; cut seen Apr).

We also have Governor Lowe speech on Wednesday and the Statement of Monetary policy on Friday as key events this week.


TECHNICAL ANALYSIS


AUD starts week on cautious note as China virus fears grip markets. Down 4.75% in Jan, worst performance since May 2016; stops below 0.6670 eyed. China virus toll rises, PBOC to inject liquidity Monday. Although daily RSI is oversold and monthly RSI suggest downside momentum is intact. A break below 0.6670 is likely to trigger stops. Shorts will then target psychological and likely option barrier support at 0.6600. Beyond that, shorts will target 0.6565/70 and 0.6510/25 supports.



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