|

Markets increasingly price in a pandemic/global recession

Market movers today

Also today investors will keep an eye on the spreading of the coronavirus and the economic implications thereof. Yesterday, we hosted a conference call where we had invited Allan Randrup Thomsen (professor in virology at the University of Copenhagen) to discuss the coronavirus.

While we think the Fed should probably soon intervene (see Fed Monitor), today is probably not the day. Non-voting Bullard may be the first one to U-turn given his dovishness but given that he is not voting, he is less important. Fed's George is also speaking today but she is one of the most hawkish FOMC members and also not voting.

In the US, we get PCE data for January. We do not think PCE core inflation will show anything else than that the Fed continues to undershoot its 2% inflation targeting. Far more interesting is whether the weakness in private consumption we saw by the end of 2019 has continued into 2020 even before the coronavirus was a real issue.

In Sweden we have GDP data for Q4. In Norway February unemployment and in Denmark Danish Q4 GDP.

Selected market news

The market rut continued in the US section with major indices down around 4.5% during the session. The VIX index surged more than 12 index points yesterday. Stocks are also under immense pressure in Asia with Nikkei down more than 4% this morning. US Treasury yields continue to sky-dive and 2Y bonds are approaching 1% as the market is now pricing in more than three rate cuts of 25bp over the next 12 months. There is little doubt that market perception/pricing are putting a fast growing probability on a pandemic outbreak and a subsequent global recession That said, it is encouraging that the number of new cases in China continues to stay relatively low at 327 (423 yesterday). However, the number of cases in South Korea continues to rise and the number of countries confirming being affected also continues to rise including Nigeria with weak health systems.

The markets are now awaiting the economic response from policy makers. China including Hong Kong and Singapore are some of the countries that have eased fiscal policy and a monetary response from the Fed is strongly expected as soon as the next Fed meeting on 18 March. Hence, we are now waiting for the more reluctant Europeans both in respect of monetary and fiscal policy. Germany suggested this week to scrap the debt brake but that was to help municipalities and not coronavirus-related. Yesterday, we had a number of ECB speakers on the wires, most notably ECB president Lagarde's interview with the FT. In the interview she said that it was ‘monitoring the outbreak "very carefully" but it was not yet at the stage where it would have a lasting impact on inflation and, therefore, require a monetary policy response'. However, markets are telling the ECB a different story with e.g. 5y5y inflation expectations dropping to 1.15%, the lowest level since October last year. Markets are currently pricing in 10bp rate cut by September this year, which seems fair in the current situation. Whether the ECB will actually cut rates is another discussion.

Download The Full Daily FX Market Commentary

Author

Danske Research Team

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

More from Danske Research Team
Share:

Editor's Picks

EUR/USD looks offered below 1.1900

EUR/USD keeps its bearish tone unchanged ahead of the opening bell in Asia, returning to the sub-1.1900 region following a firmer tone in the US Dollar. Indeed, the pair reverses two consecutive daily gains amid steady caution ahead of Wednesday’s key US Nonfarm Payrolls release.
 

GBP/USD slips back to daily lows near 1.3640

GBP/USD drops to daily lows near 1.3640 as sellers push harder and the Greenback extends its rebound in the latter part of Tuesday’s session. Looking ahead, the combination of key US releases, including NFP and CPI, alongside important UK data, should keep the pound firmly in focus over the coming days.

Gold declines to near $5,050, focus shifts to US jobs data

Gold price falls to near $5,045 during the early Asian session on Wednesday. Traders assess whether prices have found a floor following a historic sell-off. The delayed US employment report for January, which was pushed back due to the recently ended four-day government shutdown, will take center stage later on Wednesday.

Ethereum: Whales buy the dip amid rising short bets

Following one of Ethereum's largest weekly drawdowns, whales are slowly returning to action alongside a drop in retail selling pressure. After slightly selling into the decline at the start of the month, whales or wallets with a balance of 10K-100K ETH began buying the dip last Wednesday as prices crashed further. 

Dollar drops and stocks rally: The week of reckoning for US economic data

Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.

XRP holds $1.40 amid ETF inflows and stable derivatives market

Ripple trades under pressure, with immediate support at $1.40 holding at the time of writing on Tuesday. A recovery attempt from last week’s sell-off to $1.12 stalled at $1.54 on Friday, leading to limited price action between the current support and the resistance.