The ongoing headlines over the coronavirus have been somewhat exhausting, so let's take a look at some more positive economic developments.
The EU Manufacturing Purchasing Managers’ Index came out showing a modest decline – just below the 50.0 no-change level – although not worse than it had been all of last year and is in some ways showing improvement. German manufacturing, which has been the focus of much concern throughout the trade war saga, is notably moving back towards neutral, echoing the bloc-wide pattern of a return to normality.
The UK Manufacturing Purchasing Managers’ Index registered a distinctly positive reading at 51.7, which is also the first positive reading since May last year. While virus-induced supply delays and cost bumps were recorded in the release summary, it highlighted that ‘business optimism also strengthened, hitting a nine-month high, reflecting planned new investment, product launches, improved market conditions and a more settled political outlook.’ What’s more, when the virus story fades and supply normalises, there is reason to suggest firms will be buying at a faster pace than they have since the referendum. Many firms are running down inventory to compensate for temporary supply disruptions, but increased business confidence points to some sizable catch-up demand in the near future.
Over the past week and half, Brent Crude oil has declined from $60 to $50 per barrel, which is a considerable selloff and towards the bottom of what producers can stomach. Much of last year – throughout the trade war debacle – oil was trading between $58 - $70 per barrel, which puts the scale of the longer-term decline into even better context. While it is a sign that demand has dropped, it also means costs have materially declined for all businesses. That’s a wonderful counter-cyclical effect of falling commodity prices. When it feeds through to business energy tariffs it will mean firms have a bit more cash in their pocket – even if temporary – which can offset other virus-related costs.
Bottom line: The market isn’t all sunshine right now, but it isn’t a hurricane either. The best analogy might be a small tropical storm. The winds are strong and there is bound to be some disruption, but with luck the roof will stay on. Sentiment is bad out there, but fundamentals are still about where they were last year. Governments will have to step in for some deeply impacted industries, such as airlines, but this not a disaster. Hopefully, governments will muster the political will to act decisively and help return calm to the situation.
Last week, the trade-weighted Sterling index broke out of its post-election trading range as the coronavirus rattled financial markets. The Sterling index fell almost 3% throughout the week, falling just shy of the 200 daily moving average. In addition to the global health crisis over the coronavirus, Boris Johnson will begin trade talks with the EU – another potential catalyst for economic and political upset. Both sides of the negotiating table have already expressed opposing stances before talks even get underway, posing greater uncertainty for the UK economy and the Pound. Bank of England Governor, Mark Carney will be speaking on Tuesday and Thursday which could trigger significant Sterling volatility, given recent market price action.
On a trade-weighted basis, the US Dollar had one of its worst weeks on record last week, falling almost 16% on fears that the coronavirus - which has rapidly spread to the Western world - will cause a global economic fallout. Expectations of a coordinated effort among major central banks to support the global economy has provided calm to markets this morning and may help lift the US Dollar this week. Several Federal Open Market Committee members will be speaking this week, which will be a focal point for investors seeking signals on how the Fed plan to act on the downside risks posed by the coronavirus outbreak.
Volatility returned to the Euro as its trade-weighted index climbed over 2% last week. The move occurred despite any significant improvement in Eurozone economic data, and is more a side-effect of a sell-off in the US Dollar and the unwinding of heavy short Euro positions. The Euro index climbed above its 50 and 100-daily moving averages and could test the 200-daily moving average this week. The Euro opens the week testing the 1.11 level against the US Dollar while pushing lower towards the 1.15 figure against the Pound.