Global equity markets hovered close to all-time highs despite a resurgence in risk-off sentiment.
Fears of China’s coronavirus spreading dominated trading and increased demand for haven assets.
- The outbreak of coronavirus in China dominated sentiment for much of the week, sending stock prices and bond yields lower.
- Investors struggled to assess the potential economic impact of the virus, were it to spread, given the SARS outbreak in 2003, with much depending upon the Chinese effecting a robust public health response. Given the already elevated stock prices there is an inherent vulnerability to any shift in investor sentiment.
- In terms of sectors, healthcare and utilities rallied in response to the viral outbreak while travel and tourism stocks, which could be hurt by a pandemic, faced selling pressure.
- Such concerns triggered a rally in haven assets causing yields on core government bonds to retreat and the gold price to move higher.
- Chinese equities declined 3.5% last week, as Chinese authorities locked down three cities, halted transportation, and shut businesses in a bid to contain the spreading of the virus.
- Elsewhere, in the US around 10% of the constituent companies of the S&P 500 have now reported fourth quarter earnings results, and around 72% of reports have beaten consensus expectations with average earnings an encouraging 4.6% ahead of expectations.
- Europe had to contend with fresh political uncertainty in Italy after Luigi di Maio resigned as head of the 5-star movement, although he will keep his present government position as Minister of Foreign Affairs.
- Oil prices retreated after the IEA forecast a surplus in supplies and on fears that the coronavirus emergency would curb demand for oil, given the potential damage to the Chinese economy and its dependency on oil imports.
- The IMF trimmed its forecasts for global economic growth this year from 3.4% to 3.3% and cut the forecast for next year from 3.6% to 3.4%. The Fund praised the speedy actions of central banks to loosen monetary policy, saying that global growth would have been 0.5% lower had the Fed, ECB and others not cut interest rates in the second half of 2019.
- In Europe, the ECB left interest rates unchanged as expected, and seemed slightly more optimistic over the economic outlook for the bloc. This was echoed by broadly reassuring economic data.
- In Germany, the ZEW investor confidence gauge came in well above expectations, while the composite PMI came in at 51.5, amid a rebound in both the manufacturing and services sectors, fueled by the improvement in global trade and reduced political risk.
- The French economy also continued its solid performance, as both output and new orders rose for a tenth consecutive month.
- UK employment strengthened in the three months to November, calming expectations for the BoE to cut interest rates later this month. The number of jobs rose by 208,000 compared with the previous three months and was nearly double the 110,000 anticipated. The improvement was driven by a 149,000 increase in full-time employees, which pushed the employment rate up to 76.3%, the highest since records began in 1971.
- The UK’s composite PMI, which reflects the level of orders, hiring, inventories and the like among companies in the manufacturing and services sectors, moved back into expansionary territory in January with a reading of 54.2, up from 49.3 in December. Following the data release, the markets predicted a 46% chance of a rate cut to 0.5% at the BoE’s forthcoming MPC meeting.
- In Japan, the BoJ kept monetary policy steady and edged up its economic growth forecast, anticipating some support from the government’s stimulus package and receding pessimism over the global outlook.
The Week Ahead
|Wednesday||US FMOC rate decision|
|Thursday||US GDP; Europe unemployment rate; BoE base rate; Japan unemployment rate|
|Friday||US PCE; Europe GDP; Europe CPI |
|FTSE All Share
|Dow Jones Industrial
|FTSE Eurofirst 300
|MSCI Asia ex Jap $
|MSCI EM $
|MSCI World $
|UK Gov 10 yr
|US Gov 10 yr
|German Gov 10 yr
|Japan Gov 10 yr
|Brent Crude ($/bbl)
|$ per £
|€ per £
|¥ per $
Source: FE Analytics, Financial Times, JP Morgan Asset Management
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