Market movers today
The coronavirus will continue to attract market attention . As the number of new cases appears to be levelling off, the focus is turning to the economic impact of the virus. The US 3m10s curve has inverted again, highlighting that investors think risks are increasing that the US will fall into a recession (investors are pricing in more than a 50% probability of a recession, according to our model based on US yields).
Chinese markets reopened today with stocks nearly 10% down.
In the US, focus is on ISM manufacturing. The effect of the coronavirus on countries and value chains outside China will likely take some time to materialise and in light of strong regional PMIs, we look for an increase in the ISM manufacturing to 48.2 from 47.2. Boeing’s decision to halt production of 737 MAX is a downside risk, however.
The PMI manufacturing index is also released in Sweden and Norway today.
Furthermore in the US, the Democratic Party’s primaries officially kick off in the US today in Iowa , where a strong showing for one of the left-leaning candidates could rattle financial markets.
The UK has now formally left the EU and the negotiations on the future relationship will soon begin. Today, PM Boris Johnson will hold a speech outlining his objectives followed by a speech by EU chief negotiator Michel Barnier discussing EU’s objectives.
Selected market news
The Chinese CSI 300 index is down nearly 8% at the time of writing, the biggest decline since the 2015 sell-off , as the financial markets reopen after the Lunar New Year holiday. Chinese yields have declined and USD/CNY is yet again above 7. Chinese oil demand is said to have declined by 20%, which also explains why the oil price has moved lower to USD52.4 per barrel. The People’s Bank of China responded by injecting liquidity and cut rates by 10bp to support the economy, which remains under pressure from the extension of the Lunar New Year holiday to stop the coronavirus spreading. The number of confirmed coronavirus cases in China has increased to 17,205 with 361 deaths.
Parts of PM Boris Johnson’s big Brexit speech later today were released yesterday. PM Boris Johnson is set to state that he will rather walk away from the negotiations with the EU than signing up to implementing EU rules and reject the jurisdiction of the EU court. While PM Boris Johnson wants a similar trade deal as Canada, he can accept a less close relationship a la EU-Australia (i.e. WTO terms in most areas). This highlights that there is still a risk of a no-deal Brexit by 31 December 2020, although it is not our base case, and since the negotiations are going to be complicated and create a lot of uncertainty for companies, we still expect GBP to weaken during the year and think Bank of England will cut the Bank Rate by 25bp.
