Fears over the coronavirus impact on the global economy returned yesterday, after South Korea reported accelerating infected cases, while two people in the virus-hit cruise ship in Japan died. As for today, the spotlight is likely to fall to preliminary PMIs for February as investors are eager to find out whether and how much did the coronavirus affected the global economy.
The dollar continued trading higher against most of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most versus NZD, AUD and JPY in that order, while it slightly underperformed only against CHF. The greenback was found virtually unchanged versus EUR.
The weakening of the commodity linked currencies and the strengthening of the dollar and the franc suggest that risk appetite eased yesterday. However, the extension of the yen’s tumble raises questions of that front and thus, we will turn our gaze to the equity and bond markets in order to get a clearer picture. Indeed, major EU and US indices, as well as the German and US 10-year yields, traded in negative waters, with the subdued investor morale, rolling into the Asian morning today. Although China’s Shanghai composite gained 0.31%, Japan’s Nikkei 225, Hong Kong’s Hang Seng and South Korea’s KOSPI slid 0.39%, 1.19% and 1.49% respectively.
Once again, news surrounding the coronavirus dominated the broader market sentiment. Despite China reporting a slowdown in both deaths and infected cases for Wednesday, yesterday, South Korea announced its first death from the virus, while the infected cases within the country accelerated. What’s more, two passengers in the Diamond Princess cruise ship in Japan, hit by the virus, died, while later in the day, Global Times reported that a hospital in central Beijing announced 36 new cases, adding that among them were medical workers. As for the total number of cases and deaths worldwide for Thursday, we are back in acceleration mode.
Remember that yesterday morning we noted that with scientists saying that the virus may spread more easily than previously believed, we cannot rule out the number of cases to start accelerating again, and the overnight reports confirm our view. Despite many equity indices hitting new records recently, we will maintain our cautious stance, and we will stick to our guns that the risks surrounding the market reaction to fresh news may be asymmetrical and tilted to the downside. Anything pointing to the virus getting out of control again may have a larger negative impact than any positive response due to soothing headlines.
With China announcing that the vaccine will be submitted for clinical trials around late April, the fastest, we continue seeing the case of the economic wounds of the world’s second largest economy dragging into Q2. Further stimulus measures by Chinese authorities may have diminishing effects in supporting economic activity going forward, as restrictions and fears may prevent consumers from spending.
Coming back to the currencies, the yen seems to have taken off its safe-haven suit and continued tumbling against the majority of its peers, despite other safe havens like bonds, the US dollar, and the Swiss franc attracting flows. Gold was also among the beneficiaries, with the precious metal rallying to levels last seen in February 2013.
With no clear catalyst behind the extension of the yen’s tumble, it seems that participants may have continued selling the currency on fears over Japan’s economic performance. Remember that on Monday, data showed that the world’s third largest economy contracted during the last three months of 2019, and with the coronavirus expected to have left its marks in Q1, the nation may be headed towards a recession. What’s more, data overnight showed that Japanese inflation stood well below the BoJ’s 2% target in January, adding to concerns over the economy’s performance. However, if investors and traders are willing to continue selling the currency, they may prove Japan’s saviors as something like that could help inflation and exports, at least during the last month of Q1.
Yesterday, the Nasdaq 100 index took a strong beating, which led to a price-drop back to its key support area, between the 9508 and 9526 level, marked by yesterday’s and February 18th’s lows respectively. In the end of the day, the index managed to stay above that support zone, which may now become a key territory to watch. A break lower may help consider a deeper correction to the downside. Our oscillators started pointing lower, suggesting further declines, at least in the near term. However, let’s not forget that overall, Nasdaq 100 is still balancing above a short-term tentative upside support line drawn from the lowest point of December, so any move lower, for now, could be classed as a temporary correction.
If the price falls below the above-discussed support area, between the 9508 and 9526 levels, this would confirm a forthcoming lower low and more sellers could jump in. That’s when we will start aiming for the 9460 obstacle, a break of which could clear the path to the 9370 hurdle, marked by the low of February 10th. The index may bounce back up from there. That said, if Nasdaq 100 struggles to move above the previously discussed area between the 9508 and 9526 levels, this may result in another round of selling. If this time the price breaks the 9370 hurdle, this could clear the path to the next support zone between the 9312 and 9322 level, marked by the lows of February 5th and 9th respectively.
Alternatively, if the price suddenly reverses back up and travels above the 9602 barrier, which is today’s high on the cash index, this may help the buyers to get back into the game. That’s when we will target the 9677 zone, a break of which may clear the path to the 9753 level, marked by the all-time high on the cash index.
After hitting the 144.60 hurdle yesterday, which is also the highest point of January, GBP/JPY retraced back down slightly. Such price action confirms that the pair is currently stuck in a wide short-term range, roughly between the 140.83 and 144.60 levels. The the yen still looks weak and thus we will take a somewhat bullish approach for now, but in order to get slightly more comfortable with higher areas, a break of the upper bound of the range would be required.
Eventually, if we do see a strong push above the 144.60 barrier, this would confirm a forthcoming higher high and could clear the way to some higher areas. That’s when we will target the 145.08 obstacle, which if broken might send the rate to the 145.72 zone, marked by the high of December 17th. At some point we could see a bit of a correction lower, but if GBP/JPY continues to trade above the upper side of the aforementioned range, we will remain positive over the near-term outlook. Another uprise may send the pair again to the 146.35 hurdle, a break of which might set the stage for a test of the 146.35 level, which is an intraday swing high of December 16th.
In order to consider a deeper move lower, we will wait for a break of a short-term tentative upside support line, taken from the low of February 10th, and a rate-drop below its key support area between the 142.14 and 142.31 levels, marked by the lows of February 13th and 18th respectively. If such a move occurs, a further slide may bring the pair to the 141.58 obstacle, or the 141.23 hurdle, which may initially provide a bit of support for the rate. However, if that area is just considered as a temporary obstacle on the pair’s journey south, its break could open the door for GBP/JPY to make its way to the lower side of the aforementioned range. That territory is around the 140.83 and 140.92 levels, marked by the lows of January 5th and February 4th respectively.
As for today, the spotlight is likely to fall to preliminary PMIs for February, as investors are sitting on the edge of their seats in anticipation of finding out whether and how much did the coronavirus hurt the global economy.
The day starts with the numbers from several Eurozone nations and the bloc as a whole. Here we already got a first taste from the disappointing German ZEW survey on Tuesday. However, investors may rely more on what the PMIs will show for the whole Euro area. The manufacturing PMI is forecast to have stayed in contractionary territory for the 13th month in a row, sliding to 47.5 from 47.9. The services index is also forecast to have slid but to still signal expansion. Specifically, it is expected to have decline to 52.2 from 52.5. All this will drive the composite index down to 51.0 from 51.3.
At the press conference following the latest ECB decision, President Lagarde repeated that the risks to the economic outlook are still tilted to the downside but less pronounced, as surveys and data still point to some stabilization. A modest slide in the PMIs is unlikely to make her change that view, but a larger-than-expected decline may raise concerns over the impact of the virus on the bloc’s economy. This could add further pressure to the already wounded euro, as some investors may start betting on more rate cuts by the ECB.
That said, our own view is that given the Bank’s limited scope for further easing, officials may not rush into doing so, even if the PMIs disappoint. After all, an extension of the euro’s latest tumble may eventually prove somewhat supportive for the bloc’s economy as it may give a helping hand to inflation and exports. Although the ECB has clearly stated several times that it does not target the exchange rate, a lower euro may be a welcome development for policymakers and may alleviate some pressure for additional stimulus, at least in the coming months.
We get preliminary PMIs for February from the UK as well. The manufacturing PMI is forecast to have returned to contractionary territory, sliding to 49.7 from 50.0, while the services index is expected to have declined to 53.4 from 53.9 in January. The pound was found lower against the US dollar this morning, despite yesterday’s better-than-expected retail sales data for January. It seems that market participants may be waiting for the PMIs to adjust their bets on whether the BoE will cut rates (or not) in the months to come.
Later in the day, we get even more PMIs, this time from the US. The preliminary Markit manufacturing index is forecast to have declined to 51.5 from 51.9, while the services one is anticipated to have held steady at 53.4. There is no forecast for the composite index. In any case, market participants tend to pay more attention to the ISM PMIs, which are scheduled to be released on March 2nd and 4th.
Apart from the PMIs, from the Eurozone, we also get the final CPIs for January, but as it is always the case, they are expected to confirm their initial estimates, namely that the headline CPI rate ticked up to +1.4% yoy from 1.3% and that the core one slid to 1.1% from 1.3%.
From Canada we get retail sales for December, with the headline rate anticipated to have fallen to +0.2% mom from +0.9%, and the core one to have risen to +0.4% mom from +0.2%. Despite a potential slowdown in headline sales, a rising core rate, following the acceleration in inflation on Wednesday, may distance further BoC policymakers from the easing button.
We also have four speakers on our agenda: ECB Executive Board member Philip Lane, Fed Vice Chair Richard Clarida, Fed Board Governor Lael Brainard and Cleveland Fed President Loretta Mester.
As for the weekend, finance leaders of the G20 nations will meet in Riyadh, Saudi Arabia’s capital, with the main topic perhaps being the coronavirus outbreak.