Breathing room

​​​​​​Today's news headlines:

  • ‘Sajid Javid’s surplus goal at risk as UK finances face £12bn black hole’. Calculations by the Financial Times suggest that the Bank of England’s forecast of lower economic growth rates would leave the Chancellor of the Exchequer with a £12bn budget deficit by 2022-23. This is in stark contrast to the £5bn surplus forecasted by the Conservative Party’s manifesto, and leaves the UK Chancellor having to consider tax rises and more austerity before his first budget on March 11th. (Financial Times)
  • ‘Goldman warns Coronavirus to dent 2020 global economic growth’. According to Goldman Sachs, the outbreak of Coronavirus will depress global growth conditions as the effects spread from China to the rest of the world. Goldman’s Chief Economist has suggested that the near-term impact is quite large, but the overall 2020 impact will hinge on how quickly the outbreak is brought under control. The bank has forecast the global economy will expand at a pace of 3.25% this year, a slight pick-up from last year’s 3.1%. (Financial Times)

Support for the shocked

Yesterday, when Chinese markets opened after the Lunar New Year holiday, they took quite a tumble. Given how long the Coronavirus had been in the headlines at that stage, it didn’t come as a surprise. From one perspective at least, that is a good thing. Yesterday, the Peoples Bank of China intervened in markets, by injecting 150 billion Yuan of funding across seven-day and 14-day maturities, thereby reducing the lending cost by 10bps. 

At times of stress, a fundamental instinct is to pull back from lending, which reduces the availability of capital for routine funding business operations. The PBoC’s move was, much like the Fed’s own intervention into overnight lending, to support the proper functioning of markets. This morning the PBoC announced additional measures to shore up confidence in its fire-fighting capacity, by injecting an additional 400 billion Yuan and reducing borrowing costs a further 19 and 22 bps for seven-day and 14-day maturities. We’ve seen the market react positively to the committed Chinese response, but ultimately, monetary policy won’t fix this issue. It will provide some breathing room while the authorities continue their domestic efforts to contain the virus and stabilise business sentiment.

Bottom line: The virus remains on top of news headlines, largely ignoring the positive uptick in the US Manufacturing Purchasing Managers' Index released last night. Coming in at 50.9, it's the first expansionary reading from this survey in six months, providing yet another welcome sign of the underlying economic expansion. Tonight, the Reserve Bank of Australia will release its latest monetary policy decision and, given the interconnected nature of its economy with China, any comments surrounding the virus have the potential to move markets. 


Sterling came under some intense selling pressure throughout yesterday’s session as the trade-weighted Index trimmed roughly 1.5% of its value from open to close. The Pound’s weakness across the board has been attributed to renewed hard-Brexit fears following Boris Johnson’s tough tone on EU trade talks. Broad-based Dollar strength also emerged from positive US manufacturing data. For now, the pair looks to have bottomed out at the 1.2950 level, as we’ve seen a recovery back to the 1.30 interbank level.


Yesterday, the pair moved in much the same fashion as GBP/USD as the Pound lost 1.3% of its value against the common currency. Interestingly, the UK’s tough tone in advance of EU talks is hurting the Pound more than the Euro, but we suspect both currencies will remain vulnerable until more clarity emerges.


The US Dollar reversed some of its month-end weakness to begin February, but some broad Euro strength has resulted in a limited downside move for the pair. Upbeat US ISM data released yesterday has reinforced Dollar demand and markets continue to watch for news on the Coronavirus outbreak for meaningful price movements.