-->No respite from Coronavirus as markets fear a “global pandemic”
- Safe Havens (JPY, Gold & CHF): Risk aversion spikes for the 6th straight session overnight with oil tumbling below USD50 and US equity markets closing at a 4 month low as the Dow Junes falls in excess of a 1000 points for a 2nd time this week and with all 3 US indicies down around 4.5% in last night’s session. The risk aversion spike predictably sees flows continuing to pile into US Treasuries (10Yr yield hits an all-time low of 1.24%) but in FX, it is EUR that outperforms across the G10 space (closing above 1.1000) with JPY, CHF and Gold (in that order) not far behind as USD continues to decline across the board.
- Safe Havens (JPY, Gold & CHF): Key headlines of concern overnight include – (1) President Trump’s speech on Coronavirus doing little to quell fears, downplaying the Coronavirus impact on US but Dr. Anne Schuchat from the CDC noting “we do expect more cases and this is a good time to prepare, the trajectory is very uncertain“. (2) As if one cue from Dr. Anne Schuchat’s comments, US CDC reports the first case of “community transmission” in California where the source of infection is unknown with California’s governor revealing the state is now monitoring 8.400 people with 33 people testing positive – US Coronavirus risk takes its toll on USD. (3) German health minister’s warning this may be the beginning of an epidemic with the country no longer able to track all infection chains while Australia triggers a coronavirus emergency plan with PM Scott Morrison saying “a pandemic is well upon us”. Taiwan also raises its epidemic response to the highest level. (4) In Japan, PM Abe calling for all schools to shut from Monday ahead of approaching spring holidays. (5) All in all, 47 countries now report coronavirus cases, up from 40 yesterday with South Korea and Italy remaining in focus - the former reporting 505 new infections, putting the total at 1595 while Austria, Croatia, Greece and Switzerland report cases involving people who have been to Italy, as does Algeria in Africa and Brazil in LATAM.
- Safe Havens (JPY, Gold & CHF): However, a sliver of brighter news (though ignored) with Zhong Nanshan, a respiratory disease expert advising the Chinese government and leading the research into SARS, confident the coronavirus outbreak will be largely contained by the end of April. This updates previous guidance he gave that the outbreak would peak in China by mid-late February. And after BoK unexpectedly holds rates unchanged yesterday, BoK Governor notes that the Bank is forecasting the coronavirus outbreak to peak in March.
USD: Combination of US coronavirus concerns and rising US political risk continues to weaken USD despite strength in US data
- USD: Strong durable goods orders, surprise in aircraft – January durable orders decline a mere -0.2%MoM in January relative to consensus for -1.4%, unexpectedly supported by increase in aircraft orders. Excluding transportation, orders are up 0.9%, relative to consensus for 0.2% while core capital goods orders advance 1.1%, stronger than consensus. However, 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: Attention however remains squarely on the Coronavirus hit to the US and Democrat primaries with the South Carolina primary due on Saturday followed by Super Tuesday (March 3). USD could recover some of its losses should ex-VP Biden reclaim a front-runner status ahead of Bernie Sanders and a strong showing in South Carolina may improve his chances on Super Tuesday that remains pivotal as a near majority of DNC delegates will be decided on that day.
EUR: Rallies as ECB Chief Lagarde shows reluctance to cut rates
- EUR: ECB President Lagarde overnight suggests that a central bank response to Coronavirus is not imminent. Says (1) ECB would have to determine whether coronavirus was set to cause a “long-lasting shock” that impacts supply and demand as well as inflation. (2) But we are certainly not at that point yet,….It is a fast-developing phenomenon, which requires we monitor carefully.
- EUR: Her comments are backed up by ECB VP Guindos who also does not see “especially relevant” coronavirus impact in Europe and saying the ECB expects a V-shaped recovery and from ECB board member Villeroy earlier in the week saying “We should not overstate adequacy of monetary policy response to supply-side shock from virus outbreak, outbreak to have "negative but temporary consequences" and also expecting a V-shaped recovery in the euro zone.
GBP: Underperforms as UK sets a tough mandate for EU trade talks
- GBP: Underperforms early in the London session (though selloff is short lived) as UK government sets out a tough negotiation stance on trade talks with the EU, rejecting commitments to a regulatory level playing field. The mandate also threatens to abandon talks in June with the statement that – if by June it becomes clear that a broad outline of an agreement would be unable to be finalized by September, then the Government will need to decide whether UK’s attention should move away from negotiations and focus on continuing domestic preparations to exit the transition period in an orderly fashion. However, as Politico succinctly puts it – “we are at start of an intensive negotiation, and both sides are taking up aggressive bargaining positions.”
Asia EM: China – PMI manufacturing data
- CNY: China manufacturing PMI due (Saturday), the first indicator of the economic impact from Chinese containment measures on Coronavirus in February is perhaps the most important data release of the week. Citi analysts forecast a drop to 39 from 50 prior and below consensus for 45.
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.