Growing concerns about an outbreak of the coronavirus in China that has so far killed 17 people have so far only had a very modest impact on financial markets outside of China.
Chinese authorities today confirmed that public transport in and out of the the city of Wuhan, the epicentre of the outbreak, and neighbouring Huanggang had been suspended, only days before the Chinese New Year which begins on Saturday. Chinese equity indices were down nearly 3% today but the Chinese Renminbi is down only 1% versus the Dollar so far this week and other Asian currencies and equity markets have posted even more modest losses.
Moreover, the S&P 500 – which has regularly been hitting record highs in recent weeks – is broadly unchanged from Friday’s close and volatility in developed market currencies remains subdued. Notably, the safe-haven Swiss Franc has been broadly unchanged in the past six trading sessions (in trade-weighted terms), as have the more risk-sensitive Australian and Kiwi Dollars.
Sterling has been the best performing major currency so far this week, an impressive turnaround from only twelve days ago when dovish comments by a number MPC members and weak UK macro data had pushed Sterling to a multi-week low.
Sterling’s recovery has been aided by markets cutting back their pricing of a Bank of England rate cut on 30th January to 15bp (from 20bp on Monday). Markets seemingly took note of yesterday’s CBI quarterly report which showed that manufacturing business confidence was at its highest since 2014. Parliament yesterday also approved the government’s Brexit bill which the Queen and European Parliament are now expected to green-light in coming days, paving the way for the UK to exit the EU on 31st January as planned.
Market focus is now likely to turn to the release tomorrow of flash PMI data for January and only a very downbeat number is likely to convince a majority of MPC members that a 25bp rate cut next week would be warranted.
