MARKET BRIEFING: Monday 24th February 2020
Monday: JN Holiday, GE IFO Business Climate, UK Gross Mortgage Approvals, US Chicago Fed National Activity, Dallas Fed Manufacturing Business Index, CA Wholesale Sales, BoE's Haldane Speaks, US President Trump in India
Tuesday: JN Leading Index, GE GDP (F), FR Business Survey, SP PPI, UK 10-yr Auction, CBI Distributive Trades Survey, US House Price Index, CB Consumer Confidence, Richmond Fed Manufacturing Index, Weekly API Inventories, 2-yr Auction, Fed's Clarida, Kaplan, BoC's Lane Speak, EU-UK Negotiation Mandate Agreement Deadline Wednesday: JN BoJ Core CPI, FR Consumer Confidence, IT Trade Balance, GE 5-yr Auction, US New Home Sales, Weekly DoE Inventories, 5-yr Auction, NZ Trade Balance, ECB's Lagarde, Fed's Kaplan, Kashkari Speak Thursday: AU ANZ Business Confidence, SP CPI, Business Confidence, IT Business Confidence, EU M3 Money Supply, Business Climate, Industrial/Services Sentiment, Consumer Confidence, UK Nationwide HPI, US Weekly Jobless Claims, GDP (P), Durable Goods Orders, Core PCE Prices, Real Consumer Spending, Pending Home Sales, KC Fed Manufacturing Index, 7-yr Auction, BoJ's Kataoka, Amamiya, Fed's Evans, Mester, ECB's De Guindos, BoE's Cunliffe Speaks Friday: JN Industrial Production, Retail Sales, Unemployment Rate, Housing Starts, Construction Orders, IT CPI, FR GDP, CPI, Consumer Spending, GE Import Price Index, CPI, UK GfK Consumer Confidence, US Goods Trade Balance, PCE Price Index, Personal Income/Spending, Wholesale Inventories, Chicago PMI, Michigan Consumer Sentiment, Baker Hughes Rig Count, CA GDP, Fed's Mester, Bullard, ECB's Weidmann, BoE's Cunliffe, Haldane Speak
Saturday: CN Manufacturing/Non-Manufacturing PMI
MACRO VIEW: Sunday 23rd February 2020
CORONAVIRUS: ARE MARKETS TOO COMPLACENT?
Other than a 24-hour dip in stocks at the first mention of the virus back in late January, markets have been relatively sanguine on the topic, as expectations have been that the combination of a coordinated fiscal and monetary response will result in a v-shaped recovery which would offset any immediate impact to the Chinese and global economy. However, this week this view might be severely challenged.
There are three areas I've been monitoring that could escalate the situation enough to cause market participants to rethink the current risk premium priced into assets. These are:
The number of reported cases outside mainland China
Statistical evidence as to the impact on global supply chains
Behavioural fear in the market attributed to signs towards the development of a full blown pandemic
The first half of the new trading week could be a turbulent one as the first two of the three points above appear to have been met.
Last week saw numbers pick up in South Korea and Japan. This weekend, attention has been on Italy where the number of cases in the Lombardy region have jumped overnight to 89 from 54, leaving the country with over 100 confirmed cases, according to Bloomberg.
Meanwhile, last week's PMI data clearly highlighted the impact the Chinese lock down is having on global supply chains. On Friday, Markit reported that the seven point drop in UK suppliers' delivery times index since January signalled the largest month-on-month slide in supply chain performance since the survey began in 1992.
According to Bloomberg Economics, China is slowly getting back to work, with the economy running at 50%-60% capacity in the week to Feb 21 and forecast to jump from Feb. 24. But here lies an interesting problem. If China takes too long to resume normal service in a cautious approach then it risks a larger impact on global supply chains, but move too quickly and the risk increases of further human-to human transmission given the nature of blue collar work activities. Are markets being too complacent?
The other important, but largely ignored headline from last week, is that despite the plight of the Chinese people, the US government renewed its rhetoric in that China must honour its trade obligations as part of phase 1 of the on-going trade negotiations. Could this be the straw that breaks the camels back? We may well find out this week.
The one asset that has been shining in this uncertain environment is gold. Having crossed above $1,600/oz last week, the psychological level should now provide a solid floor to price in the near-term.
Last week analysts at Citigroup said they expect gold to hit $1,700 in the next 6 to 12 months and $2,000 in the next 12 to 24 months , citing performance based as a convex macro asset market hedge, resilient during on-going risk market rallies but a better hedge during sell-offs and vol spikes. Meanwhile, Goldman Sachs say that lower yields and weaker equities could push gold prices further towards $1,750 even if the coronavirus is contained during the first quarter.
Given all of the above, a key signal to look out for this week is the latest commentary from central bank speakers. Although they will likely maintain a relatively soft response to quantifying the impact of the virus, the recent string of hard data suggests that the impact is becoming more real, so any extension of dovish tones on this matter could have repercussions on rate expectations.
Anthony Cheung - Head of Market Analysis
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NOTE: This blog will be updated at 0900GMT on Monday 24th February with the latest market briefing video from the team.