This week there were mounting signs of the fall-out from coronavirus disrupting global supply chains with a high-profile warning from Apple that it is likely to miss its Q1 revenue forecasts. Foxconn Technology Group, a contract manufacturer to Apple, also warned about supply disruption. Maersk, the shipping company, added to the warnings from the impact along with tourism-related businesses such as airlines; Air France-KLM warned of a $216m hit to earnings from coronavirus. The PBOC’s Q4 monetary policy report stated that it expects the impact to be short-lived and that it will support growth with counter-cyclical measures but it is not looking to flood the market with excess liquidity. Over the week, the renminbi fell 0.57% (CNH total return) versus the US dollar. The US dollar strengthened against most of the majors only to then concede much of the gains into Friday’s close; the US dollar index (DXY) closed the week 0.14%.
The S&P 500 hit another new high on Wednesday, helped by optimism that the number of new coronavirus cases in China has slowed. The key risk is whether the outbreak spreads and an increase in the number of cases in Japan and South Korea started to unnerve investors towards the end of the week; the S&P sold off ending the week -1.2% (total return). Risk-off sentiment supported a rally in USTs into the end of the week with the yield on the 10-year UST falling 12bps to 1.47% at Friday’s close. The 30-year UST also hit a record low yield (1.89%) but closed the week out at a yield of 1.92%.
The Fed Minutes from the end of January meeting provided little in the way of new news to drive the UST market emphasising that policy is appropriate. The minutes continued to point to a pull back from repo operations and Treasury bill purchases after April, noting “Many participants stressed that, as reserves approached durably ample levels, the need for sizable Treasury bill purchases and repo operations would diminish and that such operations could be gradually scaled back or phased out”. US economic data releases were mixed; the housing starts and building permits data for January exceeded expectations, both the Empire State Manufacturing Survey and the Philadelphia Fed business outlook gauge exceeded expectations on the back of gains in orders and shipments. In contrast, the Market PMI data showed signs of weakness with the services sector gauge falling into contractionary territory and the lowest it has been in 76 months.
The ECB minutes from the January meeting took on a reasonably upbeat tone but the meeting was before the disruption and effects of coronavirus had become apparent. Supporting this, the Eurozone manufacturing PMI for February rose to 49.1 from 47.9 the prior month and was ahead of expectations, although a reading below 50 still points to contractionary conditions. Data on the UK economy continued to point to a post-election bounce; UK retail sales rebounded in January up 0.9% mom against expectations of a 0.7% gain. The Markit Composite purchasing managers’ index was unchanged from January at 53.3. Inflation data also erred on the stronger side with January CPI inflation picking up to 1.8% yoy.
Clearly, with the onset of a number of coronavirus cases in Italy markets are starting the week in risk-off mode and will be reacting to news-flow on the spread and containment and the potential for a greater global impact. On the economic data front, releases from the US include the Chicago Fed National Activity Index for January, Dallas Fed manufacturing activity for February, consumer confidence for February, PCE inflation along with the personal income and spending data. Durable goods data for January will also be closely watched for indications on investment. Elsewhere, the inflation data from European countries will be a focus along with the IFO data from Germany. China is due to release PMI data on Saturday which is expected to be impacted by the coronavirus.