This morning, the market’s motif
Is central banks’ promised relief
The all-clear has sounded
And stocks have rebounded
But is this more than a fig leaf?
In case you were curious what central bank relief looked or sounded like, I have included the statements from each of the four major central banks addressing Covid-19, starting with the Fed’s statement Friday afternoon that was able to turn the equity market around (all are my emphases). Since then, we have heard from the other three major banks, as per below, and we have also been informed that G7 FinMins would be having a conference call this week to discuss a coordinated response.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
“Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus. The Bank of Japan will closely monitor future developments and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”
The Bank of England is working with the UK Treasury as well as international partners to ensure all necessary steps are taken to protect financial and monetary stability amid the global outbreak of the coronavirus. The bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.
The European Central Bank is vigilant and mobilized when it comes to the fallout from the outbreak of the coronavirus. Any response needs to be calm and proportionate. ECB policy is already very accommodative.
And this has essentially been this morning’s market story, a major relief rally. Friday night, late, China released its PMI data and it was dreadful, with Manufacturing PMI at 35.7 while the Non-manufacturing figure was even worse, at 29.6! This should dispel was any doubts that growth in China has nearly ground to a halt. However, despite the promised support by central banks around the world, and you can be sure pretty much all of them, not just the big four, will be jumping in, if quarantines remain in place as the infection continues to spread, supply lines will remain broken and growth will be feeble. The OECD just released a report regarding the coronavirus with updated GDP forecasts and it is not pretty. Naturally, China is the hardest hit, with Q1 GDP now forecast to turn negative, and 2020 GDP growth to fall to 4.9% before rebounding next year. Meanwhile, global GDP growth is now forecast to fall to 2.4%, its slowest pace since the financial crisis in 2009. And the working assumption is that the virus is contained before the end of Q1. If we continue to see the virus spread, these numbers will be revised still lower.
So, with this as our backdrop, let’s turn our attention to actual market activity. Despite all the promises of support, equity investors remain uncertain as to how to proceed at this time. Support may be helpful, but if companies earnings plummet because of the disruption, then current market valuations are likely still a bit rich. Looking at Asian markets, China was the best performer, with Shanghai rising more than 3.1% as promises of support by the PBOC encouraged investors there. But we also saw the Nikkei (+0.95%) and the Hang Seng (+0.6%) rise although Australia’s ASX 200 (-0.8%) didn’t share in the enthusiasm. Europe has been far less positive with the DAX (-0.45%) and CAC (-0.25%) in the red along with Italy’s FTSE MIB (-2.25%) which is really feeling the brunt of the problems on the continent. The lone equity bright spot is the UK, where the FTSE 100 is higher by 0.5%, largely due to the fact that the pound is today’s worst performing currency, having fallen 0.5% vs. the dollar, and more than 1% vs. the euro.
The British pound story is entirely Brexit related as trade negotiations started today with concerns raised that the red lines both sides have defined may end the chance of any agreement as early as next month. Given the international nature of the FTSE 100 members, a weaker pound is usually a benefit for the stock market. But clearly, if the trade talks collapse, the impact on UK companies would be significant.
But other than the pound, the FX market is the only one that has responded in the manner the central banks were hoping, as the dollar has fallen sharply vs. pretty much every other currency. In the G10 space, SEK (+0.7%) and EUR (+0.65%) are leading the way although even AUD and NZD have managed to gain 0.3% this morning.
In the EMG space, KRW was the BIG winner, rallying 1.7% overnight, but almost every APAC currency jumped on the concerted central bank message. The two exceptions here this morning are INR and MXN, both currently lower by 0.7%, with both suffering from the same disease, new Covid-19 infections where there hadn’t been any before.
Meanwhile, bond markets continue to price in much slower growth as 10-year Treasury yields have tumbled to 1.05%, another new historic low, while German bunds fall to -0.66%, near its historic lows. There is discernment in the market though, as Italian yields have risen 7.5bps as concerns over the safety of those bonds, given Italy’s dubious distinction of being the European country worst hit by the virus, has called into question its financing capabilities.
Adding to all this enjoyment is a very busy data week culminating in the payroll report on Friday.
|ISM Prices Paid||50.5|
|Fed’s Beige Book|
|Unit Labor Costs||1.4%|
|Average Hourly Earnings||0.3% (3.0% Y/Y)|
|Average Weekly Hours||34.3|
At this point, Covid-19 stories are going to be the primary driver of market activity as investors across all markets try to figure out how to react. Havens remain in demand, although the dollar has clearly suffered. Arguably the dollar’s weakness is predicated on the fact that, of all the nations around, the US is the one with the ability to cut rates the furthest. In fact, futures markets are now pricing in 100bps of rate cuts this year, with between 25bps and 50bps for the March meeting in two weeks’ time. Nobody else has that much room, and so the dollar is definitely feeling the pressure. Of course, I continue to believe that if things get much worse, the dollar will rally regardless of the Fed funds rate, as Treasury bonds remain the single safest and most liquid asset available anywhere in the world. For today however, unless there is additional new information, the dollar is likely to remain under pressure, and in truth, that seems likely all week.