As virus containment measures across the globe become more extreme, equity markets continue to decline, putting pressure on governments to implement fiscal stimulus measures to prop up their domestic economies. Over the past several years, US equities have provided relative safe harbour during periods of stress, but in the past week the major US indices have given back all of this year’s gains and then some. European equities are even worse for wear, which is not terribly surprising given the substantially weaker economic backdrop.
If you wanted confirmation of flagging business activity, you need only look at Brent Crude—given a stable oil supply condition, it's a perennial proxy for global demand—which is a hair away from $50 per barrel or two-and-a-half-year lows. In fact, the commodity complex tells the story better. Precious metals—another safe-haven—and some agricultural commodities are in positive territory on the year. Energy and industrial metals—inputs for business all—are in negative territory.
Bottom line: It certainly paints a dire picture, but is it the whole story, or just a fearful swing in sentiment? Yesterday we saw some rather positive data out of the US economy. US Durable Goods Orders, GDP growth, and home sales were all showing continued resilience in the world’s largest economy. Unfortunately, this morning’s EU price, growth, and spending data all showed a continued decline and perhaps provided some insight into the potential for a continued sell-off in EU assets. The operative question is: where do investors view price levels as ‘good value’, having reached virus-scare exhaustion? We’re already at mid-2019 levels when US-China trade angst was at its most intense, and it actually seems governments have a motivation to add stimulus this time.
The pair moved lower in yesterday’s session, edging closer to the year-to-date lows posted last week. The move was partly driven by UK officials claiming the UK is ready to leave the EU without a trade deal if no progress is made on negotiations by June 2020. A weaker US Dollar limited downward pressure for the pair amid fears over the coronavirus affecting the US economy.
The currency cross extended the week’s significant losses as the Euro continued to rally and Sterling sold-off amid new threats of a hard Brexit. The pair has fallen almost 3% since Tuesday and risks breaking below year-to-date lows of 1.1633 as we end February. The renewed risk of a hard Brexit combined with an extended Euro rally risks pushing the pair below the 1.16 level.
The Euro extends this week’s rally, breaking above the 1.10 level for the first time since the beginning of February. On a trade-weighted basis, the Euro easily broke through the 50-daily moving average in yesterday’s session, and the 100-daily moving average so far today. Today’s Eurozone inflation data is forecast to show improvements in both Italian and German inflation which may support the rally.