Reading the tea leaves

Today's news headlines:

'UK Brexit chief rejects EU’s “level playing field” approach’. Britain’s chief Brexit negotiator took aim at the EU in a speech yesterday, suggesting that the UK would never allow EU supervision of its rulemaking in exchange for a trade deal. The UK’s top negotiator, David Frost, said that the bloc wanting oversight of whether British laws are stringent enough would pose a threat to democracy and undermine the meaning of independence. (Financial Times)
‘South Korea warns of economic “emergency” from coronavirus’. The President of South Korea cautioned that the country’s China-reliant economy faces a crisis in the face of the coronavirus outbreak. President Moon called for all possible measures to support the South Korean economy just a day after Japan’s economy hinted at a recession. Around a quarter of South Korean exports are bought by China, and the ongoing disruption to supply chains caused by the virus might lead to a fall in growth for the economy. (Financial Times)

Voice of the people

After weeks of rather disappointing data, the anticipated strengthening of global growth is under question, but lagging indicators aren’t the only game in town. We don’t want to be too dire in our characterisation; not every economy has disappointed. For example, the US has done rather well since the beginning of the year; Purchasing Managers’ Indexes (PMI) have shifted decisively towards growth, measures of employment and consumer confidence have all gone up as well.

Unfortunately, that pattern hasn’t been repeated in Germany and China—the markets preferred barometer for a return to growth. Despite all the disruption caused by the coronavirus—the full extent of the impact is yet unknown—the Chinese Government and People’s Bank of China (PBOC) have made incremental steps to buoy business and support the broader economy.

The story is somewhat different in Germany, which is attempting to transition its economy and reduce its exposure to the fallout in China. The biggest issue is that measures like Factory Orders, Industrial Production, and Retails Sales have been abysmal. At the same time, the measures of confidence like the German ZEW Economic Sentiment Surveys have been showing a distinct uptick since December. Since survey data is forward-looking, the sense is that that poor lagging measures would improve inline. Instead, the run of weak data has persisted, so we are watching the survey data instead to see if it will falter and presage further declines in the German, and consequently, EU economies.

Bottom line: Risk sentiment—which causes investors to purchase safe or risky assets—has been determined by the coronavirus. The collective central bank response we discussed in yesterday’s commentary is a secondary effect and, in some sense, another view into the fallout. If the central bankers—feeling disinclined as they are to add stimulus—talk about more accommodation, the market perceives a worsening outlook for global growth. Germany is another such litmus test of the global economy’s resilience.

GBP/USD

There was a steady grind lower for Sterling against the Dollar during yesterday’s session as the currency pair fell back towards the 100-day moving average after bouncing off the 50-day equivalent. A break below the 100-day measure, currently around 1.2943 interbank, could be met with little resistance down to the low 1.29’s. Interestingly, one-year forward points for the currency cross are hovering around an almost three-year low.

GBP/EUR

Sterling’s slide was also reflected in its move lower against the Euro during yesterday’s session and overnight. This morning it's trading below the 1.20 interbank level as markets await the UK’s latest employment data.

EUR/USD