Market movers today
Also today investors’ eyes will be on the contagion of the coronavirus and its implications for the global economy, which has driven the recent risk-off sentiment.
In Norway we get the monthly LFS labour market report. However, substantial volatility in the labour force measure has over the last years created a lot of noise in the LFS unemployment rate. As a result, most economists, ourselves included, now prefer the more reliable registered labour market report (NAV). This is due on Friday and will be an important indicator of underlying growth to us. Paradoxically the market reaction tends to be larger for the LFS release.
Tomorrow, focus turns to European confidence indicators for February and US core capex for January.
Selected market news
Yesterday started more benign, with most markets in a buy-the-dip sentiment. However, over the day this sentiment reversed and yields continued to go lower, Brent moved below USD55 and cyclical equities such as small cap, energy, technology and autos remained offered.
We see potential for a sharp rebound in the global manufacturing sector given the sharply drawn-down inventories after both trade-war uncertainty and now the virus-related disruption of global value chains. However, the latest coronavirus developments raise doubt about the hope for a quick V-shaped recovery in the global economy. Indeed, it may rather end up U-shaped. If virus contagion accelerates and/or the Fed is slow to react, the risk of more severe downturns and/or credit events in Emerging Markets will also rise. See Emerging Markets Monthly: Softness in EM set to linger , 25 February.
Fed vice chair Clarida in his speech yesterday evening stuck to his view that the US economy is in fine shape but that the coronavirus is a new downside risk. This means as of today the Fed is still just monitoring and not reacting to the coronavirus even after the recent negative developments. He added, though, that the Fed is looking at monetary policy on a meeting-to-meeting basis, which perhaps opened the door slightly for a change in direction in the near future if the situation worsens. Markets did not react significantly to the speech but investors continue to price in slightly more than 2.5 rate cuts from the Fed within 12 months. Investors have priced in around 75% probability of a rate cut in April (which we expect as well).
Besides general market sentiment, stress is increasingly becoming evident in the Energy sector as Brent has moved into the low USD50s. Credit spreads (often high yield) are making new highs and the Energy sector is currently one of the most beaten in equity markets. Prolonged weakness in demand and commodity prices are starting to become a tail risk. Though the NOK remains resilient (see FX section), a further sell-off (in broad markets) will put upward pressure on EUR/DKK and fuel market speculation in an independent Danish rate hike and/or FX intervention.
