LCG MARKET WRAP: Risk aversion back on coronavirus & US-EU Trade.
Risk aversion has taken hold across Asian markets with the sad and worrying news of more deaths due to the coronavirus in China. Official reports now indicate nearly 600 cases and Macau has cancelled Lunar New Year celebrations after a second case of the virus was reported in the city.
Recent gains had already started to stutter on Wall Street which finished mixed with small losses on the Dow and minor gains on S&P 500. European stock indices look soft before the open.
Some unexpectedly hawkish comments on trade by US President Trump caught the street by surprise. The President told reporters at the World Economic Forum that he expects to do a trade deal with the EU this year. Nobody really thought that kind of timetable was possible in a US election year. Trump told CNBC about trade with the EU. “Look, if we don't get something, I'm going to have to take action' and the action will be very high tariffs...”. Markets are visibly too complacent about the prospects for global trade in 2020.
The buy-the-dip mentality is alive and well, but we think now is an opportune time to turn against the crowd. After a big run up, the uncertainty of the coronavirus, US-EU trade and the impeachment trial, earnings season will really need to blow the lid off to stop a deeper correction.
The UK House of Lords approved the Brexit bill last night but it has been baked into the pound ever since the election. It is still quite amazing to think Brexit is now definitely happening. The pound was off yesterday’s highs on Thursday with the Prime Minister saying in a ‘peoples PMQs’ that he was confident a deal could be achieved with the EU by year-end.
There has been very little movement in the euro ahead of the ECB meeting today. It does feel like the ECB is at a tipping point under its new President and the market isn’t quite sure which way it will go. We are expecting a positive tone from President Lagarde to put upwards pressure on the euro.
We have been expecting the ECB to keep rates on hold for the best part of a year and were surprised by the decision to ease in September. We thought it would be ineffective and according to minutes from the last ECB meeting, this seems to be an opinion shared by several policymakers. The minutes talked about core inflation rising and the ‘conservative’ effect of the recent extra stimulus measures. To summarise we think the bias is probably still for lower rates but the emphasis has shifted to cutting rates only if the data worsens rather than cutting rates unless data improves.
The Loonie was the biggest faller yesterday after the surprisingly dovish tone from the Bank of Canada. USDCAD rose to fresh 2020 highs above 1.31 during the press conference. The BOC have opened doors (that had seemed firmly shut) to a rate cut. The logic seems to be rooted in inflation. Governor Poloz described increasing excess capacity that puts downward pressure on inflation. The Bank of Canada are looking at the current weak data trends in Canada, in part caused by headwinds from global trade as a reason to lower interest rates. We think that given the signing of the USMCA and the phase one US China deal, the pessimism about Canada’s economy is unfounded and could provide a bullish opportunity in the CAD if and when the data stabilises.
The risk off tone in markets, as well as a renewed commitment from the PBOC in China to add liquidity has helped gold extend is recent recovery beyond $1560 per oz.
Oil prices have hit fresh 2020 lows with the coronavirus potentially impairing Chinese oil import demand over the near term.
FTSE 100 is set to open 24 points lower at 7547
DAX is set to open 72 points lower at 13,443
S&P 500 is set to open 8 points lower at 3313
Dow Jones is set to open 77 points lower at 29,109