Asian sentiment stabilises as Japan plays catch up

Emily Nicol
Chris Scicluna

Overview:
After a torrid session in European and US markets (the S&P500 closed down 3.4% to wipe out its gains for the year to-date, while the Stoxx 600 fared even worse), Japanese stocks inevitably played catch up today after yesterday’s national holiday. With no top-tier economic data to distract attention, the TOPIX eventually closed down 3.3%. Elsewhere in Asia, however, the mood was calmer, e.g. with China’s CSI300 down just 0.2% and stocks in Taiwan and Hong Kong little changed on the day. And those in Korea posted a modest rebound (the KOSPI closed up 1.2%) despite the sharpest drop in consumer confidence in the country for five years and while the number of confirmed coronavirus cases there rose 84 to 977 with a 10th related death. The calmer mood in Asian markets left US futures pointing higher this morning and has seen European indices open up about ½% too.

In bond markets, therefore, having plunged roughly 10bps across the curve yesterday, UST yields edged up about 2-3bps in Asian time, leaving 10Y yields just shy of 1.40% and the curve only slightly flatter. JGBs inevitably rallied, however, with 10Y yields down about 4bps to below -0.10% for the first time since November and 2Y yields down more than 3bps to below -0.20% as investors judged that the weekend comments from Governor Kuroda, that the BoJ would be willing to cut rates if necessary due to the coronavirus, were sincere. So far, euro govvies are little changed this morning, with BTPs again underperforming.

All eyes will obviously remain on the coronavirus news-flow today, with ministers from Italy and its neighbouring countries set to meet to try to coordinate a response. Politics will also be back on the Brexit front, with EU ministers set to agree their negotiating mandate for the Commission. This will likely seek to provide some flexibility within so-called level playing field commitments, to allow for the UK to diverge over time on environmental, tax and labour standards, albeit with EU rules as “a reference point” to judge the consequences of such divergence for single market access. And the EU will seek to minimise divergence on state aid rules too.

Euro area:
Like last Friday’s flash PMIs, this morning’s French INSEE business sentiment survey suggested that conditions in the euro area’s second-largest member state had so far remained broadly stable in February despite rising concerns about the coronavirus. In particular, the headline manufacturing index was unchanged from January, which itself was upwardly revised by 2pts, at an above-average 102, as firms were less downbeat about their production over the past month and were more upbeat about their order books, which had increased for a second successive month despite a weakening in foreign orders.

Meanwhile, according to the INSEE survey French services appeared to be unfazed by a possible hit to tourism and travel caused by the impact of the coronavirus, with the relevant business climate index rising 1pt to 107, well above the long-run average and matching the 21-month high reached in December. And confidence among construction firms remained elevated, with the headline index unchanged at 111 for the fourth consecutive month. Overall, the headline business sentiment index was up 0.8pt to 105.4, firmly within the recent range. But given the intensification of the COVID-19 outbreak in Italy over recent days, we would expect to see a notable hit to confidence among French firms in the coming month as concerns about the outbreak spreading across European borders mount.

The updated German GDP figures for Q4, which included the first official expenditure breakdown, were also released this morning. As expected, these confirmed that the euro area’s largest economy stagnated in the final quarter of last year, with GDP growth of 0.0%Q/Q and 0.4%Y/Y. Household consumption growth fell to zero on a quarterly basis too to be up just 1.2%Y/Y. Government spending slowed somewhat too (to 0.3%Q/Q, which nevertheless still left it up a firm 3.0%Y/Y). But while construction investment grew 0.6%Q/Q benefiting from the mild weather, capex on machinery and equipment fell a steep 2.0%Q/Q. Meanwhile, inventories added 0.6ppt but net trade subtracted the same amount from growth as exports fell but imports leapt.

No further euro area data releases of note are due today, although Spanish national bank Governor Hernandez de Cos will speak publicly. And in the markets, Italy will sell inflation-linked and zero-coupon bonds.

Japan:
While financial market developments and coronavirus news dominated attention in Japan today, there were a couple of data releases too although these came very much from the second tier. The BoJ’s latest services producer price figures for January reported the first monthly fall (0.3%M/M) in five. But annual inflation on this measure still edged slightly higher at the start of the year to 2.3%Y/Y, the firmest since March 2015. This principally reflects the impact of October’s consumption tax hike. Indeed, when stripping out that effect, the headline services PPI rate was much softer at 0.6%Y/Y in January, admittedly double that seen in December and the highest since July. The upwards shift last month was underpinned by higher prices of transportation and postal activities, as well as a softer pace of decline in both hotel and mobile phone charges. Overall, however, today’s figures continued to signal still weak price pressures in the pipeline.

Meanwhile, the Cabinet Office’s revised business composite indices suggested a more marked deterioration in conditions at the end of last year than initially estimated even before the outbreak of the coronavirus. In particular, the coincident index declined for the third consecutive month in December, by 0.6pt to 94.1, the lowest reading since early 2013. And while the leading index had implied some stabilisation at the turn of the year (posting the first monthly increase in eight months), this seems bound to decline further over coming months. Indeed, overall, these figures are still consistent with technical recession in Japan.

UK:
In the UK, today will bring the latest CBI distributive trades survey for February, which is expected to suggest that retail sales growth remains relatively subdued having signalled no meaningful growth at the start of the year. The associated quarterly survey will also provide an update on retailers’ employment and investment intentions over the coming year. In the UK, the DMO will sell 10Y Gilts.

US:
In the US, today will bring the Conference Board’s consumer confidence survey for February, along with the FHFA and S&P Corelogic home prices indices for December. The Fed’s Vice Chair Clarida will speak at the NABE’s annual conference on the US economic outlook and monetary policy, while in the markets the Treasury will sell 2Y notes.

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