Post date: 24/02/2020 11:05

Stock markets worldwide fell last week as fears about the impact of the coronavirus epidemic and its impact on the global economy slammed risk assets. Stock markets fell for the first week in three, emerging market currencies were sold hard and safe havens rallied, with the conspicuous exception of the Japanese yen. This is understandable as Japan’s economy is relatively vulnerable to economic disruptions resulting from attempts to control the spread of the virus.

On the other hand, the Euro appeared to stabilise amid the selloff in financial markets which seems to bolster the thesis that its recent falls are due to the establishment of “carry trades” to take advantage of the interest rate differentials, rather than any perceived deterioration of the Eurozone’s prospects.

With relatively little news on the macroeconomic front, markets focus should remain on the daily figures of coronavirus infections inside and outside China, as well as measures to contain the outbreak. Only the PCE inflation report in the US, out on Friday, could generate some volatility, as this is the measure preferred by the Federal Reserve.


A slate of solid economic data out of the UK, in employment, house prices, wages and PMI indices of business activities, did little to support the Pound, which remains driven by what little solid news there is of the trade negotiations with the European Union. Next week should provide ample news about the outlook for the negotiations. The EU punishes its negotiation mandate on Tuesday, and the UK should reveal details about its own position at some point this week as well, so there is potential for some Sterling volatility, especially around the EU release.


The sharp and somewhat puzzling recent performance of the common currency stabilized this week, and the Euro was able to post a small bounce against every major currency save the Swiss franc. This is modest evidence in support of our view that this recent fall is due primarily to the establishment of “carry trade” shorting the Euro against other higher yielding currencies to take advantage of the interest rate differentials. Risk-averse mood in markets tend to lead to a partial unwind of such trades.

The key PMI indices of business activities all surprised to the upside last week, rising in spite of the coronavirus impact on global supply chain. Details were slightly less positive, as longer supplier lead times caused by the disruption accounted for some of the increase – but far from all. At the margin, the PMIS are an important positive development for the Eurozone economy, though we are yet to see the full impact of the epidemic in the data.


Positive second-tier data releases out of the US were overshadowed by a negative PMI surprise Friday. The dramatic miss, from over 53 expected to an actual number under 50, indicating contraction, should be taken with a grain of salt, given the shorter history of this index in the US, and the lack of established predictive value compared to the same index in the Eurozone, for instance. The main news this week will be the PCE inflation report on Friday, where expectations are for another nudge upward at 1.7%, closer to the Fed comfort zone of 2%.