Markets brace of central bank rate cuts amid virus fears

Headlines regarding the coronavirus outbreak are continuing to dominate the headlines in the financial markets.

Approximately 82,000 cases of the virus have now been reported across the globe in a total of 50 countries at the time of writing, leading to the deaths of slightly over 2,800 people. The primary cause for concern for investors has been the jump in the number of confirmed cases of the virus outside of China. More than 3,000 cases have now been confirmed outside the Chinese borders, with Italy, South Korea and Iran, among others, announcing a spike in the number of confirmed cases in the past few days. In percentage terms, around 4.1% of the total cases have now been recorded outside of China. While this appears a small number, it is still a fairly sharp increase from the less than 1% recorded throughout most of the outbreak thus far.

Investors have subsequently started ramping up expectations for central bank monetary easing in order to fight the potential downside economic impact of the virus. Money markets are now pricing in more than a 50% chance of a rate cut from the Fed at its April meeting, which we think has been behind at least of the weakness in the dollar in the past couple of days. The dollar index has shed over 1% of its value in the past seven days, despite President Trump’s efforts to downplay the virus’ impact on the US economy.

We have not yet really seen the true impact of the virus on any macroeconomic data around the globe, so in our view it is too early to judge whether G10 central banks, including the Fed, will jump to start cutting rates in response to the outbreak. Next Tuesday’s RBA meeting could be a more important one than usual. Should we see a surprise cut there, then expect other major central banks to follow suit in the coming months.

You can read more regarding our view of the coronavirus and its potential impact on the global economy in our new special report.

Euro defies virus fears, set for fifth straight day of gains

The reaction in the euro this week to the latest coronavirus headlines has been somewhat counterintuitive, with the common currency looking good value for its fifth straight day of gains versus the dollar this morning.

The euro has now risen by around 1.3% in the past week, rallying off its three-year lows to its strongest position since 10th February. This move higher in the currency has come despite the sharp increase in the number of COVID-19 cases reported within the common bloc. Italy, in particular, has emerged as a hotspot for the virus, and with over 450 cases now reported in the country it is the second worst affected in the world outside of China (behind only South Korea).

Given that Italy already suffered its worst contraction since 2013 in the fourth quarter of last year, there is now a reasonable chance it enters into a technical recession in Q1, provided uncertainty surrounding the virus filters its way through to weaker investment and consumer confidence.

As we mentioned earlier in the week, we think that the move higher in the common currency indicates that its sell-off in the past few weeks was driven more by investors taking advantage of the carry trade strategy, rather than fears surrounding the virus. Assessing EUR/USD against an inverse of the S&P 500 index, we can see that the two are now moving in opposite directions, i.e. US stocks are being dragged lower by virus fears, while the euro is rallying in spite of the uncertainty.

Virus headlines will continue to dominate proceedings today. We expect this afternoon’s US growth and durable goods data to go almost entirely under the radar.

2020-02-27T11:10:00+00:00 February 27th, 2020|