Global risk sentiment boosted as coronavirus fears abate

Concerns about coronavirus abated this week as the spread of the virus levelled off. While the number of infected increased to 31472, the daily pace of new cases levelled off somewhat, while the death toll reached 638. Contagion outside Hubei province also seems limited, with only one death related to the virus outside China.

Signs of containment of the virus boosted global risk sentiment. Global equity markets rebounded, reaching all-time highs in many countries. With the impact of the virus on global demand likely to be smaller than feared, commodity prices also went up, although the oil price fell back after OPEC+ failed to agree on cuts on Thursday.

Investors are now gauging what the economic impact of the virus will be. In a note this week, we project a v-shaped scenario for global growth, expecting a large hit to Chinese growth in Q1 and a nosedive for PMI in February, followed by a sharp rebound of PMI in Q2. The rest of the world will also feel the impact somewhat due to lower Chinese demand and supply-chain disruptions, with the most exposed being the Asian countries due to the negative impact on tourism. The spreading of the virus will continue to be a key focus next week and if the number of cases outside of Hubei continues to slow and the death rate remains low, we think the markets will increasingly focus on other things.

This week, the Chinese central bank cut interest rates and injected liquidity into the economy amid heightened risk from the virus. Furthermore, the Chinese authorities pledged further monetary and fiscal measures, if needed; new measures could be announced already next week. In the US, many FOMC members will be speaking next week, where we will look for any change in the Fed's view on the economic outlook. So far, it has highlighted the coronavirus as a downside risk but not more than that despite the market pricing in more cuts from the Fed. Most importantly, Fed Chair Powell is set to testify Tuesday and Wednesday.

Leaving the coronavirus aside, momentum in the global manufacturing sector appears to be strengthening. In the US, ISM manufacturing surged to 50.9 in January from 47.2 in December, while the euro area PMI also increased slightly. Next week, the US retail sales on Friday will be one of the week's most important releases. Private consumption growth has slowed (the Fed says "moderate" consumption growth, from previously "strong" growth) and the question is whether this is just due to noise in the data, while the preliminary consumer satisfaction for February will be the first real post-virus break-out data, although we don't expect the virus to influence US consumers much.

On the US political side, the first Democratic primary election in Iowa got off to a chaotic start on Tuesday. With most of the votes counted, surprisingly Pete Buttigieg tied with Bernie Sanders for first place while Elizabeth Warren and Joe Biden placed third and fourth, respectively. The strong showing for Buttigieg and Sanders gives them strong momentum going into the upcoming primaries, with the New Hampshire on Tuesday being next. In Germany, shock-waves went through the ruling coalition after the CDU voted with the AFD to install a liberal FDP candidate as state premier in Thuringia. A coalition crisis meeting in Berlin has been scheduled for Saturday.

 

Scandi market movers

• In Denmark, we are scheduled to receive December's export figures and January's consumer prices on Monday. Industry has driven much of the growth in exports this year, so the major slump in industrial production of 5.9% in December could very well also spill over onto the final export figures for 2019.

We expect CPI inflation to decline to 0.4% from 0.8% in December. We expect energy prices to weigh down as we have seen large declines in both electricity and gas prices during December and January on the back of an unusually warm winter so far. On top of this comes the reduction in the PSO tariff in Q1, which in itself reduces electricity prices by 1.7% compared to December. Finally last year's big increase in the price of district heating in the wake of the lapse of a government subsidy slides out of the inflation measure, which also deducts 0.10 percentage points from headline CPI. We expect book prices to decline again from a historical high. They are currently up by 33% y/y. Adding to the decline in inflation is also the base effect from food and furniture, the price of which increased significantly in January 2019. We still expect a significant rebound in inflation during the spring, primarily because of the hike in tobacco prices from April. The PSO tariff should also increase in Q2 if forward prices on electricity remain low.

Friday should bring Statistics Denmark's first take on growth in Q4 19 in the form of the GDP indicator, which means we will also get the first glimpse of overall growth in 2019. So far, both production and demand tend to indicate that Q4 was a relatively weak quarter. The autumn's preliminary figures for exports and industrial production have not been as stellar as in H1 19, when they were the primary growth engines, while retail sales have pointed towards weak private consumption. For this reason, we expect growth of 0.2% in Q4 19. Hence, most of 2019 GDP growth occurred in H1 19, while growth in H2 19 was more reminiscent of what we have seen in the rest of the world.

• Under normal circumstances in Sweden, Riksbank policy announcements are important events. We suspect that this time around (and probably the next several announcements) it might turn out pretty much dull. After having moved into holding position (almost) throughout, it is hard to see the Riksbank changing stance anytime soon. In the macroeconomic section the Riksbank can of course point to some improvements in data like manufacturing confidence (NIER) and composite PMI of late (however, before the virus) along with early signs of stabilisation in China and the EZ. At the same time the coronavirus is a new uncertainty, at least for now. In other words, in terms of policy signals, we do not expect the announcement to be a market mover but it is still worth mentioning.

Since the uncertainty about LFS was announced, the more important is the PES unemployment rate. Last print came out at 7.2% and we expect the next number to increase slightly, i.e. our overall assessment is that the labour market continues to deteriorate.

• In Norway, core inflation trended downwards in H2 last year, mainly as a result of prices for imported consumer goods rising more slowly. However, the sharp drop in the krone towards the end of the year means that the downside risk to imported inflation is fairly limited. Wage growth also accelerated from 2.9% in 2018 to 3.7% in 2019, which could mean that domestic inflation pushes up during the course of 2020. Pulling the other way are weak demand and excess capacity in parts of the retail sector, which will make it difficult to raise prices. Owing to base effects, we expect core inflation to climb from 1.8% y/y in December to 2.0% y/y in January. There are, however, some signs that food prices may have risen more than normal and that there has been something of an increase in transport costs, which could pose a slight upside risk to our forecast.

Thursday brings Norges Bank Governor Øystein Olsen's annual address. We do not anticipate any new monetary policy signals, since the bank seems very comfortable with the current balance of risks. Nor has Olsen previously used the occasion as a platform to announce any major change of tack as his predecessors sometimes did. Instead, we think much of the speech will be devoted to a discussion of how Norway should handle the transition to a low-carbon economy. We do not, however, expect him to call for any major changes to economic policy, including when it comes to oil.

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