What's Coronavirus Got To Do With You? Everything.
Sterling has been buffeted from all sides this week - negative political sentiment and the general risk-off market sentiment prevailing due to the Coronavirus epidemic (at the time of publication, it had not yet been declared a pandemic).
A TOUGH WEEK FOR GLOBAL STOCK MARKETS
The past week has been a very difficult one for global equity markets as concerns about the impact of the coronavirus on the global economy continues to rise. On Thursday, Wall Street experienced its biggest one day fall since 2011 and overall equities look likely to have seen their largest weekly decline since 2008. With ‘risk off’’ sentiment dominating, government bond markets have continued to rally. For instance US 10-year Treasury yields slipped to an all-time low below 1.20%. The US dollar has also come under some pressure, falling close to a four-week low against the euro, as expectations of the likelihood of a near-term US interest rate cut go up (See our thematic on recent developments). The reported number of global coronavirus cases is now well above 80,000. Italy has by far the largest number of cases in Europe (655), while the UK total is now 19. The situation remains very fluid with no consensus on when the outbreak is likely to peak. There have been tentative signs that the pace within China is slowing but the number of global cases continue to accelerate. Information on the economic impact remains sketchy. There are reports of factory closures and of people being asked to work from home from an increasing number of countries. Moreover some major sporting events, have been postponed. Numerical evidence on the size of the economic impact has been lacking but that may be about to change.
CHINA PMIS WATCHED FOR CORONAVIRUS EFFECTS
China February PMI data to be released over the weekend will provide the first solid gauge of the impact. The official manufacturing and non-manufacturing readings are due early Saturday and the unofficial ‘Caixin’ manufacturing measure (which is weighted more towards smaller exporting companies) early Monday. The January outturns recorded only modest falls in both manufacturing measures but the February updates are expected to show a much bigger decline. The consensus estimate of a fall in the official manufacturing reading to 45.0 from 50.0 in January would take the ‘headline’ index to its lowest level since 2008. The February PMI updates for the Eurozone and the UK, and the first readings for the US ISM manufacturing and non-manufacturing surveys, will also be watched for virus effects. Aside from a fall in manufacturing inventories and a lengthening in suppliers’ delivery times there was little sign of these in the preliminary UK estimates, which continued to point to a post-election pickup in economic activity. The Eurozone PMIs also surprised on the upside suggesting economic growth has for now been stronger in Q1 than Q4. We expect a similar message from the final readings in both areas and also look for the US ISM data to be consistent with solid economic activity. It is probably still too early to see such effects show up in economic data in all these countries but the March readings will be particularly instructive and closely watched.
MARKETS LOOKS FOR INTEREST RATE CUTS
The stock market slide and growing concerns about economic growth are boosting market expectations of the likelihood of near-term reductions in interest rates. In the US, futures prices suggest that a rate cut of at least 25 basis points at the next Fed policy meeting (18th March) is now seen as a near certainty with further cuts priced for later in the year. Indeed, there is some speculation that the Fed may be forced into an emergency move ahead of the meeting. The probability given to an early easing by other central banks has also gone up – for example a cut by the Bank of England at its next meeting (26th March) is priced at close to 50%. In contrast, the message so far from central bank policymakers has been that they are closely monitoring the situation but see no great urgency to act. However, it will be interesting to see whether that starts to change next week (and in particular a number of Fed speakers are scheduled). Hints of a March cut are possible but Fed policymakers today continued to sound cautious about the likelihood of a move.
NEXT WEEK’S DATA MAY GET LITTLE ATTENTION
The rest of the week’s economic data calendar in the UK, US and the Eurozone seems likely to receive only limited market attention. Aside from the updates to the PMIs it is a very light week in the UK. In the US, the calendar is busier. In particular, on Friday the February labour market report will be released. We expect it to show another sizeable gain in monthly employment consistent with continued solid economic growth. The majority of US economic indicators have surprised on the upside in the first couple of months of 2020, which explains why Fed policymakers see no great urgency to cut rates. However, markets will probably regard this as ‘old news’, which fails to take into account coronavirus effects. Eurozone economic data will probably also attract little interest with the ECB seemingly firmly stuck in wait-and-see mode.
SANDERS LEADS THE RACE TO CHALLENGE TRUMP
The process of choosing the next US President reaches a crucial stage in the coming week. The South Carolina primary on Saturday will be followed by Super Tuesday when 14 states will vote on who should be the Democratic challenger to President Trump in November. Right now Vermont Senator Bernie Sanders is the front runner. If he also does well on Tuesday his campaign will gain further momentum. For now, markets’ focus is elsewhere and probably think that Trump’s re-election is pretty certain. That does seem the most likely outcome but the chances of the Democratic challenger shouldn't be entirely discounted because opinion polls predict a win for Sanders in a head to head contest with Trump.
See you next week!
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