Events over the weekend saw UST yields plunge further with the 10-year dipping below 0.5% to all-time lows while the 30-year broke through 1%. Aside from continued concerns over the global impact from Coronavirus (Italy has moved to lock-down the Lombardy region), Saudi announced it would be turning on the taps and slashing prices following a breakdown in talks at the OPEC+ gathering, and in an attempt to regain market share and hurt US shale producers. The price of Brent fell 31% in early trading this morning, suffering its second largest plunge behind that during the Gulf war; oil has recovered marginally, to ~$36pb at time of writing. Saudi is expected to suffer the most under these supply conditions as is Oman with its high break-even level; we do not hold either in our Global and Renminbi strategies. Other nations such as Qatar and the UAE should be able to weather the storm due to lower breakeven costs and high levels of reserves.
Interestingly, US and Eurozone yields have compressed to the tightest level in 6 years. With yields at these levels we wouldn’t be surprised if broader fiscal expansion was announced as monetary shock absorbers are diminishing and borrowing is cheap. Currency markets have witnessed a rollercoaster, with the likes of the yen trading over 3% stronger today (at time of writing), at 102 against the dollar. This will no doubt add further stress to Japanese policymakers’ options to boost growth. Although the Ministry of Finance has intervened to weaken the currency before, we are still far off the 75 levels witnessed during the last intervention. The government may, however, announce a new lending facility for small and medium-sized companies. Elsewhere, although the dollar is widely stronger than EM-currencies, the DXY Index has unexpectedly maintained its decline against falling oil prices. Market concerns over a slump in global growth/recessionary fears remain amplified so the dollar could remain under pressure this week; Fed rate cut odds have gained with Bloomberg pricing in a 75bp cut at the central bank’s meeting next week. The offshore renminbi gained 0.73% against the dollar last week and continues to trade within range.
So we expect another exciting week ahead. We have a number of data prints from February due this week, including China and US February CPI. However, we expect they will largely be ignored by markets as they are very much backward looking, as with Friday’s US non-farm payroll reading markets barely flinched following the broadly stronger release. One reading that did stick out for us was the average hourly earnings, which dipped mom and once again pointed to limited wage growth pressures. This coupled with the collapse in oil prices will further hamper any pick up in inflation, so global central banks’ hands may be forced to cut further. Growth concerns will no doubt remain a major focus for markets, so any rhetoric from the central banks will be monitored very closely. Euro Area GDP and employment readings tomorrow will attract attention ahead of the ECB rate decision on Thursday. The UK’s 2020 budget will be presented on Wednesday, measures to counter the impact of coronavirus will no doubt be top priority.