Risk-off sentiment dominated the week as the spread of coronavirus outside of China sparked concerns it could escalate into a global pandemic, prompting a broad-based sell-off across global equity markets. The S&P 500 ended the week down 11.4% (total return basis). Safe haven assets such as USTs rallied strongly: the yield on the UST 10 year fell 32bps to end the week on a yield of 1.15%. Credit spreads widened over the week with lower grade credits under particular pressure. Currency markets also followed a flight to safety with the Yen and Swiss Franc rallying versus the US dollar whereas the Mexican peso, South African rand and Brazilian real sold off against the dollar.
The market is concerned about a hit to global growth and the US futures market moved to discount further rate cuts over the course of the year. Chicago Fed President Charles Evans commented it was premature to think about monetary policy action, but that they were monitoring it closely; James Bullard noted that rate cuts are possible if a pandemic develops but this was not the base-case at this time. Jerome Powell did release a statement on Friday stating: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” In Europe, the outbreak of a number of cases in Italy was concerning. Christine Lagarde was reported as saying that the ECB is monitoring the outbreak ‘very carefully’ but that it was not at the stage to have a lasting impact on inflation. That said, the money market is fully pricing in a 10bps rate cut by the ECB’s April meeting. In Italy, the centre of an outbreak, Ignazio Visco, the Governor of the Central Bank, stated “If we don’t see a rapid V-shaped effect there must be some decision to act in a coordinated way” and “We must use fiscal policy because monetary policy is already very, very accommodative around the world, and it’s uncertain that we can do more on that.”
As the week has progressed, the fallout of coronavirus continued to emerge through the supply chain. For example, Microsoft warned that coronavirus was causing supply chain disruptions and it expects sales from its personal computing business (~35% of sales in the last quarter) to come in below its previous revenue forecast of USD10.75bn to USD11.15bn but it did not give a new target. That said, Microsoft 4.1% 2037 traded up ~1.5 points on the week, likely reflecting its strong balance sheet and ample cash and short-term investment position of USD134bn; it is rated AAA/Aaa by S&P/Moody’s. Sectors such as airlines, shipping, tourism are coming under operational pressure with movement restrictions, travel bans and supply disruption taking effect.
For the week ahead, further developments on coronavirus will remain a key market focus as investors remain concerned it could escalate to a pandemic. On Monday morning (at the time of writing), European equity markets are trading in positive territory with the S&P 500 future indicated up helped by some supportive comments from the BoJ Governor Haruhiko Kuroda that the central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases”. There are also signs that China is now able to ease some restrictions and companies are starting to return to work while the authorities continue to announce measures to support the economy. Any developments on this front will be closely watched to try and gauge the speed of a recovery. In the US, ‘Super Tuesday’ will be a key event for the Democrats as 14 states hold their primary votes and the market will be looking for a read on whether another candidate will emerge to challenge frontrunner Bernie. Datawise, the February US non-farm payroll release will remain a focus with the consensus looking for 160,000 jobs created and average hourly earnings of 3% yoy. Clearly, the market will also be looking to see if there are any signs of the coronavirus starting to impact but this is more likely to show up in subsequent non-farm payroll releases. Other releases include the February US ISM and US non-farm manufacturing data and the Beige Book. Fed speakers include Robert Kaplan, Neel Kashkari and John Williams. In Europe, the Eurozone HICP inflation release will be closely watched ahead of the next ECB meeting on 12 March. Elsewhere, OPEC is due to meet on Thursday this week which will be closely watched for any production cuts; the Brent Crude price is down 13.1% in February and closed the month at USD50.52 per barrel.