Market sentiment whipsawed half way through last week following concerns over the spread of coronavirus. Lunar celebrations were cancelled and at least 12 cities in China have been put on lockdown; China has extended the Lunar holidays for a further three days (into Feb, 2). Haven assets benefited from the broader risk-off tone, the Japanese yen gained ~0.80% and gold bounced to two-week highs. UST 10-year yields fell to a three-month low, down 14bps over the week, to 1.685%. Although we would have expected further flattening of the curve, US Treasury Secretary Mnuchin reiterated the department’s interest in issuing 50- or 100 year, ultra-long bonds; the 20-year debut is expected in May. Elsewhere, Copper, iron ore and Brent fell (6.4% last week) amid demand concerns. Saudi’s energy minister said there has been “very limited impact” on oil from the coronavirus outbreak, however, added that OPEC+ could step in to manage oil markets if necessary. On the currency front, the dollar bounced 0.25% higher last week and the offshore renminbi closed weaker ahead of the Lunar New Year holidays.
At the 500th ECB meeting all was as expected in terms of monetary policy; the deposit rate was held at -0.5% and the central bank maintained its monthly bond buying at EUR20bn. Christine Lagarde, who hosted her second meeting as President, highlighted the need for a (year-long) strategic policy review at the central bank amid anemic inflation, despite years of monetary stimulus (negative rates and EUR 2.6tn asset purchases). Concerns over globalisation, digitisation and demographic effects have been pushing major central banks to consider more appropriate methods to deal with lowly consumer-price growth.
Staying with central banks, the Fed will meet on Jan 29, with no change to monetary policy expected, especially as recent data has broadly surprised to the upside; except the Chicago Fed PMI which fell in December and disappointing Markit manufacturing PMI. US GDP Q4’19 print follows on Thursday. Across the pond, following the better than expected PMI’s out of the UK last Friday, markets revised expectations for a rate cut the BoE meeting on Thursday (Jan 30) to below 50%, from as high as ~67% at the beginning of the week. At time of writing however, the probability has spiked back up to ~60%; which will make for an exciting final meeting for Carney. On the 31st January the UK will leave the EU following agreement on the Brexit withdrawal deal, from Parliament and the EU last week. Reports suggest “simultaneous” trade deal negotiations with both the EU and US will commence ASAP.
With the coronavirus currently making its way across four continents, we expect risk aversion to remain a theme this week. However, the earning season may take the edge off with strong results expected from the likes of Apple tomorrow. We will also hear from Facebook on Wednesday and Amazon on Thursday. In addition this week, the OECD will discuss taxation policy for internet commerce on Wednesday and Thursday. Ahead of that, we had a disappointing German IFO reading this morning. New home sales in the US will be of interest later today, followed by durable goods and confidence readings tomorrow. German inflation on Thursday will be of interest, followed by Euro-area GDP and inflation readings on Friday.