Financial Markets Outlook 2-6 March
Financial markets are headed toward a busy week. First one to hit the charts is the Dollar. It was sold heavily at times last week amid multiple headwinds for the U.S. currency. This might prevail over smaller, riskier rivals like Pound Sterling in the week ahead. However, it could remain on the back foot against safe havens like the Swiss Franc and Japanese Yen.
The U.S. is also contending with its first signs of coronavirus ‘community outbreak’, and a meltdown in stock markets. Both have helped send investors stampeding into the bond market, driving sovereign yields down to new record lows. In contrast, derivatives market traders are increasingly pricing-in three interest rate cuts from the Fed in the months ahead.
“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,” says Chairman Jerome Powell, in a statement.
The ISM PMI surveys of the manufacturing and services sectors are due this week together with the latest NFP report. However, both events could easily disappear with the evolution of the coronavirus headwind.
The consensus is looking for remarkable stability in the PMI surveys that won’t be difficult to disappoint. Financial markets are looking for the U.S. economy to have created 185k new jobs in February and for the unemployment rate to have fallen back to its earlier 3.5% level, with average hourly wages saw growing at 0.3% on a month-on-month basis.
The Euro outperformed all major currencies other than the safe-haven Japanese Yen last week. Global stock markets fell apart and investors walked away from emerging market currencies in their droves. It has scope to continue outperforming in the short-term.
Europe’s single currency saw its most significant gains over the Dollar last week since August 2019. Back then China sent its Yuan falling to a decade-low, prompting steep losses for other emerging market currencies in the process. This was as coronavirus crept its way further beyond the borders of China. It’s now pushing deeper into Italy and France while also making the first appearance in many other European Union countries, not to mention the U.S. and other parts of the world.
The coronavirus story will doubtless dominate price action. Still, the Eurozone will also see its first estimates of retail sales and inflation. It’s not clear what impact they’ll have on exchange rates.
financial markets hope the inflation to have held at 1.4% in February, with core inflation at 1.1%. The consensus for Eurozone suggests retail sales increased by 0.6% in January.
Pound Sterling received a drubbing heading into the weekend. The government put the idea of an ‘Australia deal’ Brexit on the table ahead of trade talks with the EU. Stock markets crumbled across the globe in response to the increasingly rapid spread of coronavirus outside of China. Both are things that may continue to pressure the Pound in the week ahead.
UK government might encourage companies to allow more staff to work from home in its updated action plan this week. It’s also likely to discourage unnecessary travel as part of a ‘social distancing’ strategy. This would delay the peak of the outbreak until later in the year.
It could also allow the “emergency registration” of staff who’ve left the health service to combat staff shortages in the event of a large outbreak. The document will be published this week. It will also outline steps the government will take to manage COVID-19 if there is a sustained UK epidemic.
This and the weekend’s events mean households, companies and investors could now potentially be facing a momentous disruption to the ordinary course of business. It’s not possible for anybody to reliably say how extended such outage might last for or other effects. For Pound Sterling, which underwrites a financial sector where assets under management are more than three times the UK’s annual GDP, this could be terrible news.
Already the turmoil in financial markets was significant enough to have prompted some economists to contemplate the prospects of the Bank of England (BoE) feeling compelled to issue a statement over the coming days and to potentially even cut interest rates in the weeks ahead. Pound Sterling is not there yet for an interest rate cut. On Friday the overnight-index-swap implied Bank Rate for March 26 was just 0.61%, above the 0.50% that would prevail following an actual cut.
The Canadian Dollar was was in free fall last week after oil prices fell by their largest amount since November 2018. Additionally, stock markets had their worst week since the financial crisis. However, the going could get more robust still in the days ahead if some influential economists are with their revised projections that the Bank of Canada will cut the cash rate this Wednesday to minimise the hit to confidence stemming from the evolving coronavirus crisis.
Oil prices entered bear market territory after falling more than 13% last week in the bloodiest period since the height of the U.S.-China trade war, taking the 2020 loss to 24.1% for Brent crude and well past the 20% decline required to signal a bear market. This hit the oil-sensitive Loonie at the same time as stock markets rolled over into ‘correction territory’ with their worst losses since October 2008. Also, the Loonie sees a positive correlation with those ‘risk markets.’
Financial markets in Canada and the coronavirus
Fears over COVID-19 disruption should continue to favour CAD underperformance. The unwinding of carrying positions and narrowing of yield spreads between Canada with the rest of the world are undermining the CAD. The lower price of oil if sustained, also justifies a shift to a lower equilibrium value for CAD.
Financial markets have gone into freefall and bond yields have seen new all-time lows. Investors increasingly contemplate the downside of a global coronavirus not-pandemic for economies that were already slowing a long time before viral pneumonia established itself in China, but which will face potentially momentous disruption if enforced quarantine measures are rolled out to contain the spread of the disease.
The coronavirus-induced sell-off has been so severe that economists and analysts are increasingly looking toward central banks for more than just words, and the BoC will have an opportunity to indulge them this week. Consensus still favours an unchanged cash rate from Wednesday’s 15:00 decision. However, local firms are increasingly suggesting the bank could cut the cash rate to 1.50%. This would provide reassurance to households and companies.
The AUD has already seen significant losses in reaction to fears over the spread of Covid-19 and the potential pandemic. Still, it may continue to weaken the ‘Aussie’ further.
As concerns over Covid-19’s potential impact on the global economy worsens, the market rush away from risk and trade-correlated currencies towards safer havens could deepen.
This may leave the Australian Dollar continuing to fall throughout the next week. However, next week’s Australian economic calendar will be eventful.
The most significant events of the week will be Tuesday’s Reserve Bank of Australia (RBA) policy decision. If the bank takes a notably more dovish stance on Australia’s outlook due to the virus outbreak, AUD is even more likely to see more profound losses.
Australia’s Q4 growth rate report, due Wednesday, could also be highly influential if it surprises investors. Overall, more volatility is likely to be ahead for the Pound to Australian Dollar exchange rate as coronavirus jitters and growth concerns could hit both currencies.
The spread of the coronavirus has increased market expectations for more RBNZ policy easing to cushion the small open NZ economy. Interest rate probability markets are now pricing a 50% chance of an RBNZ rate cut in March. This is despite the RBNZ’s upbeat public comments in recent weeks. The November 2020 meeting largely prices a follow‑up rate cut.
The WHO is steadfastly reluctant to declare a pandemic. It did warn all governments they should expect cases in their countries. Additionally, central bankers have played down the threat posed to the growth outlook. Still, investors have voted with wallets and feet this week.
Stock markets across the globe have fallen more than 10% this week. This technically places them in ‘correction territory’ and just a few steps off from a ‘bear market’. Investors have flocked toward the safety sovereign bonds, yields of which have fallen to new record lows. This is an utterly inhospitable environment for commodity-backed currencies of ‘small, open economies’ like New Zealand.