Coronavirus cases double, risk-off theme continues

​​​​​​Today's news headlines:

  • ‘ECB urged to give more weight to housing in inflation fight’ – In their increasingly difficult fight to achieve target inflation, the European Central Bank has begun a full strategic review on how the measure is calculated. The ECB’s chief economist, Philip Lane, has called for housing costs to be given more weight in the inflation measure, fuelling suspicions that the central back is prepared to move the goalposts to make their target easier to hit. However, as house prices and rents rise across Europe, there’s a risk that the public see the ECB as out of touch on inflation, diminishing the credibility of their policies. (Financial Times)
  • ‘The challenges facing UK-US trade talks’ – Despite optimism from US officials Mike Pompeo and Steven Mnuchin on the eve of Brexit, the reality of a UK-US trade deal is more difficult than the rhetoric suggests. Concerns have been raised that the UK and US disagree on a number of key issues, such as trade and security. The issue of Huawei came to the forefront last week, as the UK decided to allow the tech giant a role in building out London’s 5G network, despite protests from the White House. The two have also been at odds over the China nuclear deal and a planned digital services tax on US tech companies. Not a great tone to start on. (Financial Times)

Batten down the hatches, secure the rigging!

This morning, markets opened to news that Coronavirus cases in China have nearly doubled since Thursday, continuing last week’s risk-off theme. Chinese stock markets also opened for the first time after the Lunar New Year’s holiday and since the scale of the viral threat was generally acknowledged. Not surprisingly, the Shanghai Shenzhen CSI 300 took a beating, giving up nearly 11%. Chinese oil demand has dropped by 20% as a consequence of tightening travel restrictions throughout the country, which has increased talks of a potential emergency OPEC meeting in mid-February. Brent crude reached July 2019 lows but that wasn’t the only sign of market stress. Metal commodities, classically associated with the Chinese domestic expansion, also dropped by daily exchange limits in anticipation of slowing Chinese construction. The storm continues but we still don’t know how long it will last.

Bottom Line: It is important to bear in mind that this morning’s sell-off was expected, since it was the first real opportunity for the market to price in the risk of this intensifying crisis. That said, last week we reported that the World Health Organisation complimented the Chinese government response, although today we’re seeing some negative articles as well. For instance, it is believed Chinese doctors who discovered the virus in early December were silenced which delayed the nations response. As you might expect, the market is ignoring economic data and focusing on news headlines associated with Coronavirus.

GBP/USD

Sterling’s rally continued Friday, following a more hawkish than expected Bank of England on Thursday. The Pound eventually found resistance against the US Dollar around the 1.32 level and has pulled back to the 1.31 handle this morning. This is due to fears that the UK will take adopt a tough stance with the EU over a post-Brexit trade deal.

GBP/EUR

Sterling outperformed the Euro on Friday despite a gain for both currencies’ trade-weighted indexes, as markets eased bets on the BoE cutting interest rates next month. To start the week, Sterling has fallen over 0.5% from Friday’s highs, with the next level of support around the 1.1780 50-day moving average.

EUR/USD

The currency pair rallied back towards the 1.11 level on Friday as subdued US inflation data, along with the continued spread of the Coronavirus, led to a broad sell-off for the Greenback. A repricing in the Fed Funds future, meaning that a US interest-rate cut could come sooner than expected, also contributed to Dollar weakness.