World economy hostage to a Chinese virus

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Kia ora,

Welcome to Friday'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 of rapidly building economic consequences from the latest Chinese health scare.

Yesterday, the China coronavirus threat spooked Asian equity markets further with the Shanghai index down a whopping -2.8%, Hong Kong was down -1.5%, and Tokyo was down -1.0%. That carried on to European markets with most falling by -0.9% in the overnight sessions that have just ended. And Wall Street is realising how dependent it is on a healthy Chinese economy, with the S&P500 currently down -0.3% and falling. Some disappointing earnings aren't helping Wall Street either.

At the epicentre of the virus outbreak, Wuhan, an 11 mln person city is in lockdown and quarantined, public transport is closed, and Spring Festival travel plans of millions are in disarray. The virus has now been identified in five overseas countries; Thailand, Japan, South Korea, the US, and now Singapore.

In New York, there was another very big Fed repo transaction, two in fact, together amounting to US$75 bln overnight. But because of the expiry of earlier actions, the net was a pull-back in liquidity support.

A Chinese company has scooped up a huge stockpile of rare and critical tech minerals, for volumes far greater than the annual mined output of many miners.

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The first ECB monetary policy review of 2020 has kept policy rates on hold, as expected. That means their zero and negative rates continue, and that they will keep on adding €20 bln per month in their QE program. The ECB is to review its mission, with broad scrutiny of their objectives and policy tools. Separately, the BIS says climate change could spark the next financial crisis.

The first survey of consumer sentiment in Europe was expected to show an 'improvement', being not as negative. But in fact, there was no change to the net negative levels at the end of 2019.

And France has revealed that its tech tax strategy has lured the US into the OECB BEPS arrangements, something the US was earlier very wary of.

In Australia, their unemployment rate fell to 5.1% seasonally adjusted, taking pressure off the RBA to cut interest rates when it meets next on February 4. The Aussie dollar rose on the news. (The actual jobless rate rose to 4.9% from 4.8% in November.) Their actual participation rate rose to 66.4% and a record high (at least, since 1978). Full time jobs were unchanged in December from November, but part time jobs rose by +29,000.

The UST 10yr yield is a again softer today at just under 1.72% and that is a notable -5 bps fall, large in the world of benchmark bonds.

Gold is up +US$7 today at US$1,564/oz.

US oil prices are down sharply again today to now just over US$55/bbl while the Brent benchmark is lower at just under US$62/bbl. Over the past three days, the crude oil price has fallen more than -5% on demand fears.

The Kiwi dollar is a little softer today as the greenback rises and is now just on 65.8 USc. On the cross rates we are unchanged at 96.4 AUc. Against the euro we are marginally firmer at 59.6 euro cents. That leaves our TWI-5 at just on 71.1.

Bitcoin is much lower now after yesterday afternoon's drop, now at US$8,322 and a -3.8% drop.

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.

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