Markets:
Yesterday’s intraday U-turn in risk sentiment didn’t really get follow-up today. US markets staged a late session profit taking move on bond markets/short squeeze on stock markets, suggesting some easing in tensions after G4 central banks pledged to take (targeted) measures if necessary. Risk sentiment already dwindled in Asia this morning on Reuters rumours that today’s G7 conference call wouldn’t result in specific coordinated policy action. European assets started the day with a catch-up move against WS, but markets stabilized afterwards. Gains for European stock markets amount 2% while German Bunds remain rather resilient. The German yield curve bear flattens with yields rising by 3.6 bps (2-yr) to 2 bps (30-yr). Peripheral yield spreads also fail to reverse a significant part of the past days’ widening with daily changes around -5 bps. (Greece outperforms: -17 bps). The market reaction after what was supposed to be a comforting statement of the G7 says it all: no continuation of the risk rebound. Markets questions most policy makers (excl. eg Fed) capability to intervene in the short run. Additionally, worries about the longer term economic impact rise. The handling of the virus risks tipping several economies into recession because of combined negative supply (constraints) and demand (services like travel, tourism, leisure; hurts confidence channel) shocks to a late-cycle economy still unable to recover from last year’s weakness (Brexit; Sino-US trade). Corona cases in the US start rising as well and create some additional nervousness. Eco data included EMU unemployment (7.4%) and (core) inflation (both 1.2% Y/Y) and printed bang in line with expectations.
The main risk parameter on FX markets remains USD/JPY. The same reasoning applies. Yesterday’s risk rebound in the pair didn’t continue. It currently changes hands back below 108. EUR/USD stays stubbornly above 1.11. The intraday yield differential might play slightly in the advantage of the dollar, but investors are aware that this week’s move (positioning for sharp Fed rate cuts) probably ends with a permanent loss of the absolute yield benefit. EUR/GBP is slightly lower at 0.8680 after suffering the triple whammy this week of high UK-EU trade stakes, positioning for a March BoE rate cut and global risk aversion.
News Headlines:
South African Q4 GDP fell an annualized -1.4% q/q as agriculture, trade and transport slumped. Quarterly growth was down from -0.8% in the previous quarter thus ending 2019 in a second recession in just two years. Growth for the full year amount to -0.5%, the lowest since the financial crisis and only half of what the central bank projected in January when it unexpectedly cut rates.
To counter the economic consequences from the coronavirus, the ECB is mulling measures to ensure liquidity to small- and medium-sized businesses. SME’s are likely to be the hit hardest during a downturn and possible credit crunch. Among the suggestions are targeted longer-term refinancing operations (TLTRO’s), specifically aimed at those SME’s.
Algerian energy minister and OPEC president said that OPEC+ will be discussing “substantial” oil output curbs during the meeting in Vienna. More specifically, the oil cartel is targeting the quantities that it estimates will not be consumed due to the corona virus.
