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ASX futures are pointing to relatively modest losses to the start the week, compared with the violent sell-off over the previous five sessions.

Futures were down 40 points or 0.6% to 6334. On Friday, the S&P/ASX 200 shed 166 points or 2.5%; for the week the benchmark lost 697.8 points, or 9.8 per cent.

The local currency fell sharply – plunging to a low of US64.34¢ according to Bloomberg data – before ending down 0.8% at US65.15¢.

Investors are waiting to see if the Reserve Bank of Australia will cut its key interest rate tomorrow with bets that the Bank of Canada will cut this week.

For its part, the US central bank’s boss Jerome Powell issued a statement over the weekend signalling he is open to cutting rates, though strategists were divided over whether there’d be an emergency one this week or whether the Federal Reserve will wait until later this month.

Regardless, US government bond yields plumbed fresh lows for a fourth day on Friday in New York. The yield on the US 10-year note was 11 points lower to 1.15 per cent, resetting its record low during the day at 1.1159%.


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Australian government yields could drop at the start of trading today. The 10-year yield was at 0.81% on Friday.

Mr Powell’s statement led TD Securities to bring forward its forecast for Fed rate cuts.

“We now expect a 25bp cut in March and another 25bp cut in April. We expect rates to remain on hold after that, but that assumes that the economic fallout from COVID-19 ends up being much more modest than feared. We are assuming that COVID-19 does not trigger a recession. That said, we acknowledge a high level of uncertainty.”

Today’s agenda

Local: AiG performance of manufacturing February, CoreLogic dwelling prices February, MI inflation February, Business indicators fourth quarter, ANZ job ads February; NZ fourth quarter terms of trade

Overseas data: China Caixin manufacturing PMI February; US construction spending February, ISM manufacturing February

Market highlights

ASX futures down 40 points or 0.66334%

  • AUD -0.8% to 65.15 US cents
  • On Wall St: Dow -1.4% S&P 500 -0.8% Nasdaq flat
  • In New York: BHP -3.6% Rio -0.7% Atlassian +1.4%
  • Tesla -1.6% Apple -0.1% Facebook +1.4% Microsoft +2.4%
  • In Europe: Stoxx 50 -3.7% FTSE -3.2% CAC -3.4% DAX -3.9%
  • Nikkei 225 futures -2.5%
  • Spot gold -3.6% to $US1585.69 /oz in New York
  • Brent crude -3.2% to $US50.52 a barrel
  • US oil -5% to $US44.76 a barrel
  • Iron ore -2.1% to $US83.96 a tonne
  • Dalian iron ore -3.1% to 616.5 yuan
  • LME aluminium +0.2% to $US1694 a tonne
  • LME copper +0.3% to $US5635 a tonne
  • 2-year yield: US 0.91% Australia 0.54%
  • 5-year yield: US 0.94% Australia 0.53%
  • 10-year yield: US 1.15% Australia 0.81% Germany -0.61%

From today’s Financial Review

Market seeks comfort from RBA: The Morrison government and financial regulators are co-ordinating an emergency economic response to the coronavirus crisis, starting with a possible interest rate cut on Tuesday by the Reserve Bank of Australia.

Australia most exposed to virus: Trump adviser: Donald Trump’s former chief economic adviser says the Fed could go all out if the coronavirus continues to ramp up, and if it’s still here in June “all bets are off”.

Long-dominant UMNO emerges winner of Malaysia’s latest chaos: The party tainted by the 1MDB scandal has secured its choice installed as prime minister, less than two years after it was defeated at the ballot box.

United States

In New York, the market’s losses moderated on Friday local time after the Federal Reserve released a statement saying it stood ready to help the economy if needed. Investors increasingly expect the Fed to cut rates at its next policy meeting in mid- March.

The Dow swung back from an early slide of more than 1000 points to close around 350 points lower. The S&P 500 fell 0.8% and is now down 13% since hitting a record high just 10 days ago. The Nasdaq reversed an early decline to finish flat.

The latest losses have wiped out the S&P 500’s gains going back to October. The benchmark index is still up 6.1% over the past 12 months, not including dividends. Its weekly loss of 11.5% was the biggest since an 18.2% drop in the week ending October 10, 2008.

The CBOE volatility index, also known as Wall Street’s fear gauge ended the day near its session low, up 0.95 point at 40.11, after rising as high as 49.48.

Of the S&P’s 11 major sectors, the rate-sensitive financial index weighed the most on the benchmark S&P 500 index, ending the day down 2.6%. The utilities sector was the S&P’s biggest percentage loser with a 3.3% drop. Real estate and consumer staples – also rate-sensitive sectors that are often seen as safe havens – both fell more than 2%.

Europe

European shares ended the week down roughly $1.5 trillion in their worst weekly performance since the 2008 financial crisis as the rapid spread of coronavirus outside China saw sustained selling on fears of a recession.

The pan-regional STOXX 600 index fell 3.5% on Friday, deepening its slide into correction territory with a 13.2% plunge from a record high hit on Wednesday last week.

“The move today, and the week-over-week move is driven by systematic, self-enforcing flows. We have seen a significant amount of position reduction (this week),” said Philipp Brugger, head of investment strategy at Union Investment.

All European sub-sectors were well in the red, with chemicals, insurance and telecom leading losses for the day, shedding more than 4% each.

Germany’s BASF was among the biggest percentage losers in the chemical subindex after it warned that earnings could drop further this year.

Travel and leisure stocks underperformed their peers by a wide margin over the week, dropping about 18%.

Airlines were the worst hit, with the situation intensified after British Airways owner IAG said its earnings would take a hit this year as passenger numbers tumbled.

The stock fell 8.4% on the day, while other airlines Easyjet PLC, Air France, and Lufthansa AG dropping between 0.9% to 6.4%.

Milan-listed shares fell 3.6%. The number of people infected in Italy, Europe’s worst hit country, surpassed 850 on Friday.

German stocks dropped 3.9% as the number of cases in the country rose to 60. Insurer Munich Re was among the worst performers for the day after its fourth-quarter profit dropped.

Asia

Japanese shares plummeted in heavy volume on Friday to their lowest in nearly six months as global markets sold off on the rising possibility the coronavirus outbreak would become a pandemic.

The benchmark Nikkei average tumbled 3.7% to 21,142.96, its lowest closing level since September 5.

The index was down 9.6% for the week, the biggest in four years. For the month, it was down 8.9% – the worst in 14 months.

Looking ahead, analysts say the Nikkei could be supported around 20,700, where it will be traded on par with its book value.

The Nikkei’s volatility index, a measure of investors’ volatility expectations based on option pricing, spiked to as high as 42.85, its highest level since June 2016.

An increase in volatility prompts automatic selling by “risk-parity” funds, which target a constant level of volatility, as well as trend-chasing commodity trading advisers (CTA), and often exacerbates turbulence in prices.

Analysts said such selling should already be happening, since market saw volatility spikes over the past four trading days.

The broader Topix shed 3.7% to 1,510.87, its lowest since early September, in very active trade, with the volume hitting the heaviest since May 2018 at 4.13 billion shares, partly due to MSCI’s quarterly index rebalance.

In a sign of broad-based selling, all of the 33 sector sub-indexes on the Tokyo Stock Exchange were trading lower, with real estate, information and communication and fish and forestry being the worst three performers.

Currencies

Bank of America sees a rate US cut: “The Fed is being called into action and we expect a 50bp cut at the upcoming March 18th meeting. An emergency cut by the Fed prior to the meeting is possible – it will depend on the extent of market dysfunction.”

A 50bp cut would be “a way to stem panic”, BofA said. “This is not a ‘normal’ easing cycle where the Fed has the luxury of time to see how incremental adjustments in rates impact the economy. The Fed could benefit from providing a significant thrust of easing. The market is also fully pricing in 25bp of easing at the March meeting and it is not in the Fed’s best interest to disappoint.”

As for a move before the meeting: “It is possible that the Fed moves more quickly in an emergency fashion. However, we think the Fed would prefer to wait for the meeting in order to have some data and greater cover to justify the cut. The emergency inter-meeting cut would purely be to stop the panic in markets while a cut at the meeting would have a broader justification.”

Commodities

Oil prices slumped for a sixth day in a row on Friday in New York to their lowest in more than a year, causing futures to drop by the most in a week since 2016.

The most active Brent future for May delivery fell $US2.06, or 4.0%, to settle at $US49.67 a barrel, its lowest since July 2017.

Brent futures for April delivery, meanwhile, lost $US1.66, or 3.2%, to settle at $US50.52 a barrel, while U.S. West Texas Intermediate (WTI) crude fell $US2.33, or 5.0%, to settle at $US44.76. That is the lowest closes for both Brent and WTI since December 2018.

For the week, Brent lost almost 14%, its biggest weekly percentage decline since January 2016, while WTI fell over 16% in its biggest weekly percentage drop since December 2008.

Palladium led a free fall in precious metals on Friday, slumping nearly 13% at one point earlier in the session, while gold slid as much as 4.6% en route to its biggest daily drop in almost seven years.

Russian aluminium group United Company Rusal said the virus would hit the Chinese market in the first half of this year, with weak demand and a bigger supply surplus.

LME aluminium hit its lowest in 40 months at $US1665 a tonne before rebounding to close at $US1694, a rise of 0.2%.

Australian sharemarket

ASX wipes $210b in worst week since GFC: Local shares slumped to their worst week since the financial crisis as coronavirus sparked across-the-board selling, wiping out more than six months of gains.

Coronavirus lessons for investors: Volatility is the name of the game in markets as investors face a choice between rational responses and panic. One leading CEO says this is not the time for a knee-jerk reaction.

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