As the spread of coronavirus continues, we’re seeing a larger market reaction now that developed nations (in this case, the US) are starting to question the efficacy of their response. A populist leader who is negligent in staffing key areas of the government will fly under the radar in good times, but when an emergency comes and it looks like no one has their hand on the wheel, the panic begins. Overnight, the CDC warned the US to prepare for coronavirus outbreaks.
Not surprisingly, the market sell-off has intensified as safe-seeming US assets look at risk of being undermined by the virus outbreak. Despite all of this, it's still not clear whether the Fed will ease monetary policy to buoy markets. Yesterday, the Central Bank’s second in command, Richard Clarida, repeated the Fed’s 2020 mantra: ‘Monetary policy is in a good place and should continue to support sustained growth, a strong labor market, and inflation returning to our symmetric 2% objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.’
Bottom line: The pull back in US assets is likely to be temporary given the broader risk-off market stance, which tends to favour the relatively healthier economic environment of the world’s largest economy. The Fed’s longer-term assessment is more likely to be correct, but that doesn’t stop knee jerk reactions to virus headlines which spook consumers. Since the start of the year, it has been disconcerting to watch equities steadily rise during a period of greater uncertainty. From that perspective, these utterings provide needed cover for a necessary pull back in over-inflated asset prices. If central bankers continue to be coy about further easing, an asset price resurgence may be limited until the immediate danger passes.
The Pound rose against the Dollar in yesterday’s European session, as flows out of the US and back into Japan caused broad based weakness for the Greenback. These flows came as US health officials warned of the possibility of a domestic outbreak of coronavirus. The Dollar trade weighted index pulled back from recent highs taking the pair briefly back above the 1.30 level.
Coronavirus headlines, mixed with news on Brexit trade negotiations, has meant that we’ve seen some solid two-way price action for the pair over the past 24 hours. A mild recovery in risk sentiment boosted the Pound in early trade yesterday, whilst the Euro suffered as a spate of coronavirus cases were found in northern Italy. Further downside risks for Sterling may be around the corner, as the EU and UK have adopted drastically differing stances on trade negotiations.
Despite news that the coronavirus is beginning to spread around Europe, the Euro is trading higher against the Greenback in this morning’s session. Factors weighing on the Dollar are expectations of a Fed rate cut and record low treasury yields. Reports of additional coronavirus cases may weigh on the Euro as the day progresses.