Global risk aversion gripped financial markets last week, with the rapid spread of the coronavirus inside and outside of Asia, including Europe, and governments’ responses leading to growing concerns about the epidemic’s economic and financial impact. Global equity markets shed four months worth of gains, with many equity markets entering corrective territory (a 10% or more loss from their peak). The S&P 500 tumbled 12.7% and is down 14% since 19th February. In this context macro data unsurprisingly played second fiddle.
The Shanghai Composite Index initially opened down after the release over the weekend of the weakest ever set of Chinese PMI data. Both the official and unofficial manufacturing and services PMI data fell very sharply in February well below 50, indicating a material slowdown in Chinese economic activity. Some analysts are now forecasting that China’s GDP may contract in Q1.
But the Shanghai is now up 3.2% at time of writing with Asian markets showing signs of responding to government and central bank promises to shore up their economies and better data outside of China. Japan’s manufacturing PMI rose in February (to 48.6), Korean export growth in February (+4.5% yoy) was stronger than expected while Australia’s terms of trade improved materially in Q4 and job ads rose in February.
Bank of Japan Governor Kuroda in a rare emergency statement today said the central bank would take necessary steps to stabilise financial markets and Fed Chairperson Powell, in an unscheduled statement on Friday, signalled that the Fed could cut rates if necessary. The Italian government announced over the weekend a supplementary fiscal package of €3.6bn. Markets are now pricing the Fed to cut rates 100bp this year, the RBNZ 67bp and the RBA 50bp and US 10-year yields fell as low as 102bp overnight.
It was an extraordinary week in more ways than one with even until now dormant FX volatility spiking higher although currency markets have somewhat stabilised in the past 48 hours. The safe-haven Swiss Franc climbed 0.5% to a 5-year, with the Swiss National Bank seemingly unwilling or unable to intervene more forcefully to halt its currency’s relentless march upwards. But it was the Euro which outperformed, appreciating 1.8% in trade-weighted terms to its strongest level since late October with markets unwinding the short Euro positions they had built in recent months.
Conversely, the more risk-sensitive Sterling and Australian and Kiwi Dollars posted sharp losses of, respectively, 2.1%, 2.3% and 1.6% to trade at multi-month lows.
