A glimmer of positivity

​​​​Today's news headlines:

  • ‘EU deadlocked in Budget summit as rifts laid bare’. Last night, EU leaders were left in disagreement over the bloc’s seven-year Budget plan after the summit ended its first day of talks. Since Britain will no longer be a contributor to the Budget, the EU must somehow fill the 60-75 billion Euro hole. All parties have been asked to give ground, with net payers asked to pay more, and net receivers asked to tighten spending. (Financial Times)
  • ‘Virus epidemic enters new phase as cases outside China multiply’. While the number of new coronavirus cases coming out of China has slowed down, overseas cases are accelerating. The rapid acceleration of the disease in countries outside China points to a new phase of the infection which may cause more global economic disruption than previously thought. (Bloomberg)

Seeking clarity  

As we’ve observed over the past few days, markets are still extremely cautious that the coronavirus could have a significant impact on global growth in 2020. While no one can tell what the final hit to the global economy will be, the protracted flight to safe-haven assets lets us know that this epidemic will have a substantial impact on global supply chains. The US bond market has been in receipt of a significant portion of the risk-off flow as investors bet on future interest-rate cuts from the Federal Reserve. Elsewhere, gold continued its march higher, hitting a seven-year high, and the US Dollar Index held around three-year highs. Data-wise, UK Retail Sales demonstrated a solid uptick as consumers opened their wallets aboard the Boris Brexit Express, and over in the US, the Philly Fed Manufacturing Index signalled a strong increase in US business confidence.

This morning, we’ve seen a little glimmer of positivity as Eurozone Services and Manufacturing Purchasing Managers’ Index data demonstrated the fastest rate of growth in the past six months. Most encouragingly, the manufacturing sector is showing signs of pulling out of the downturn that has been evident over the past year. Also, here in the UK, PMIs demonstrated some decent confidence in current growth conditions as the manufacturing sector returned to expansion. This should help to support both the Pound and the Euro as the day progresses, but the initial move has been relatively muted.

Bottom line: This morning’s solid PMI data from the UK and Europe could mean one of two things. Either the UK and EU economies will be resilient enough to avoid being severely impacted by the fallout from China, or it’s just too early to predict what kind of impact the outbreak will have on growth conditions moving into the next few months. We’re pretty sure it’s the latter

GBP/USD

Cable reached three-month lows of 1.2849 in yesterday’s session after better-than-expected UK Retail Sales figures failed to support the Pound from its recent slump. On a trade-weighted basis, Sterling managed to close above its 50-daily moving average after briefly dipping below the key level. The pair edged higher on the London open amid Dollar weakness ahead of today’s PMI data from both the UK and US.

GBP/EUR

The currency-cross has been primarily Sterling driven in recent sessions and managed to recover most of yesterday’s losses after the Pound rebounded. With both UK and European PMI’s out this morning, the Euro could play a bigger role in price action for the pair as we end the week. However, broader risk sentiment driving the US Dollar could create flatter trading conditions for the currency cross.

EUR/USD

The common currency opened higher this morning, climbing above the 1.08 figure after trading relatively flat over the last few days. This morning’s European PMI data may drive the pair temporarily before US PMI’s take the spotlight in the afternoon. If recent trading patterns are to continue, Euro rallies could be short-lived, risking another dip below the 1.08 level.