-->More new Coronavirus cases outside China for the first time - markets fear a “global pandemic”
- Safe Havens (JPY & Gold): A fifth session of stock market losses with the S&P 500 and Dow Jones ending the overnight session down -0.3% and -0.46% respectively after starting out strongly earlier in the US session, the Stoxx Europe 600 Index finishing on its longest losing streak since July last year and oil prices (Brent) falling nearly 3%. US bond yields hit new lows (10Yr yield hits 1.2988%) but FX markets are fairly quiet overnight but with overall USD sentiment still soft.
- Safe Havens (JPY & Gold): All this comes as more new Coronavirus cases are reported outside China for the first time coupled with new countries added to the list with more than 10 new countries having reported Coronavirus cases for the first time. Predictably, talk now gathers around the prospect of a “global pandemic”, encouraged no doubt, by the German health minister’s warning that this may be the beginning of an epidemic with the country no longer able to track all infection chains. Meanwhile, cases in Italy, Iran and South Korea continue to rise the most while Thailand’s health minister says the country is at risk of entering “phase 3” and UK warns of school closures, self-imposed quarantines and mass testing.
- Safe Havens (JPY & Gold): Markets await US President Trump’s press conference (this has commenced as I write). Reporters stress that the venue he is choosing has meaning - the conference will be held from the briefing room podium, marking only his second time appearing here. Meanwhile, the US reports that over 80 people are being tested in one New York state county, while others are being quarantined and San Francisco declares a state of emergency over the virus “given the high volume of travel between San Francisco and mainland China”.
- Gold: Against this backdrop, the “lower for longer” interest rate thesis continues to firm and Gold continues to be in demand even if the positive momentum has faded somewhat over the past 2 sessions. Citi analysts also lift their 6-12m level to $1,700 and upgrade their 2020 base-case average Gold price forecast from $1,575 to $1,640 bull case scenario.
USD: Sentiment remains soft – Citi analysts now see market pricing of 2 Fed rate cuts this year as “justified”
- USD: Strong US housing data continues as new home sales increase - US new home sales in January are up 7.9% to 764k from 708k, above consensus at 718k, rounding up another month of solid housing data. After adding 0.2pp in Q3 and Q4 2019, Citi analysts expect US housing could add 0.2-0.3pp to growth in Q1 2020. But Citi analysts now lean towards Fed rate cuts this year, saying “ with inflation expectations dropping, models infer that the >2 cuts priced into market over the next 12 months is justified”.
- USD: US investors now await Super Tuesday (3 March) Democrat convention amid rising probability of a Sanders nomination that would heighten political risk in the US. Super Tuesday is likely to be a pivotal moment as a near majority of DNC delegates are decided on that day. Data wise, Citi analysts expect US durable goods orders at -1.9% and core PCE at 0.2%MM/ 1.7%YY.
- USD: Outlook –Sentiment weaker – The broad based USD index (DXY) remains under pressure following Friday’s weak Markit US services and manufacturing PMI data and as US companies become more cautious about spending due to worries about a Coronavirus – led economic slowdown and uncertainty ahead of the presidential election later this year . US short rates now price close to 75bp of rate cuts from the Fed by year end (Citi analysts think 2 Fed cuts this year is now “justified”) and together with rising political risk associated with the rise of Bernie Sanders in the Democrat race, this now appears to be taking a toll on USD sentiment.
EUR: Germany – Debt brake suspension not signal of fiscal stimulus; ECB reluctant to cut amid positive data surprises from France
- EUR: Brief excitement overnight as a “Die Zeit” article points to Germany’s finance ministry proposing to temporarily suspend the constitutional debt brake, which prevents the federal government from borrowing more than 0.35% of GDP (€10bn) per year. However, the finance minister clarifies this initiative is not meant to fight the Coronavirus, instead, it is to swap some municipal debt into federal debt. Markets await this week’s euro zone economic confidence data (Citi at 103) and German inflation (Citi at 0.4%QQ and 1.8%YY).
- EUR: France: Consumer confidence resilient, with gains in economic situation – Another positive surprise overnight, after the business confidence survey earlier in the week, showing very little impact (yet) from the Coronavirus outbreak, instead illustrating the strength of domestic demand. But risks for March remain skewed to the downside.
- EUR: ECB’s Villeroy – “We should not overstate adequacy of monetary policy response to supply-side shock from virus outbreak; Outbreak to have "negative but temporary consequences" on the economy and a policy response would likely be conditional on new forecasts showing a lower GDP trajectory in 2H-20 and therefore a further undershooting of the ECB’s inflation target at the end of the forecast horizon”. Note markets now discount a 10bps rate cut from the ECB this year.
This is an extract from the Daily Currency Update, dated February 27, 2020. Please approach a Citigold Relationship Manager if you would like more information.