Coronavirus threat looms large over financial markets

  • Markets
  • Sunday, 02 Feb 2020

Funeral parlour staff members in protective suits help a colleague with disinfection after they transferred a body at a hospital, following the outbreak of a new coronavirus in Wuhan, Hubei province, China January 30, 2020. Picture taken January 30, 2020. China Daily via REUTERS

ONE of the main events of the week was supposed to be Brexit and a possible interest rate cut by the Bank of England.

However, the BOE decided to postpone a cut, thus following the US’s Wednesday decision by keeping interest rates in a range between 1.5% and 1.75%, where it has been since the latter part of last year.

Speaking of the withdrawal of the United Kingdom from the European Union, or Brexit, we have to face the truth that nothing is going to change besides some indexes.

According to the terms of the reached agreement, for the next 11 months the UK remains an EU member state in all but name.

In addition to that, in the coming months, it will continue to pay into the EU budget and comply with any changes to EU law. Finally, the UK still has to negotiate its future relationship with Europe in just 11 months.

As for the FOMC decision, it should be noted that interest rate on excess reserves rose by 5bps to 1.60% vs 1.55%.

Reverse repo rate, in turn, was lifted to 1.5% from 1.45%. Besides that, Fed stated that it would continue Treasury bill purchases at least into the second quarter, as well as overnight repurchase operations at least through April.

“The expansion is in its 11th year, the longest on record. Growth in household spending moderated toward the end of last year, but with a healthy job market, rising incomes, and upbeat consumer confidence, the fundamentals supporting household spending are solid. In contrast, business investment and exports remain weak, and manufacturing output has declined over the past year. Sluggish growth abroad and trade developments have been weighing on activity in these sectors. However, some of the uncertainties around trade have diminished recently, and there are some signs that global growth may be stabilizing after declining since mid-2018.” (Transcript of Chair Powell’s Press Conference January 29,2020).

Of worrying concern is that the coronavirus is becoming a worldwide problem. WHO declared coronavirus a global health emergency, however, it does not mean that governments should impose travel or trade restrictions on China.

According to Dr Tedros Adhanom Ghebreyesus, of the 9,320 confirmed cases so far, only 98 have been outside China (none of them was fatal).

In this context, CDC estimates that influenza has resulted in between nine million and 45 million illnesses, between 140,000 and 810,000 hospitalisations and between 12,000 and 61,000 deaths annually since 2010.

However, coronavirus does have a serious effect on the financial markets. European stocks closed lower as new coronavirus cases were confirmed; meanwhile Wall Street has been going up and down amid a wide range of news.

As for companies earning reports, Amazon stock rose after it reported fourth quarter results that was way beyond investors’ expectations, moving the price of the share 10% up. Amazon Web Services revenue grew 34.0% in the quarter from a year earlier.

As a result, the company’s market cap, once again, surged above US$1 trillion, thus joining Apple, Alphabet and Microsoft, which have all crossed the trillion-dollar threshold.

Apple, Microsoft, Tesla, AT&T, McDonalds, MasterCard, Dow, General Electric and Boeing also pushed the index back up to the sky by reporting better than expected profits.

Finally, certain macroeconomic releases should be mentioned:

1. New orders for US manufactured durable goods increased 2.4% from a month earlier in December 2019, rebounding from an upwardly revised 3.1% drop in the previous month and beating forecasts of a 0.4% rise.

2. US gross domestic product grew at a 2.1% annual rate in the final quarter of last year, the Commerce Department reported on Thursday. For all of 2019, economic growth came in at 2.3%, below the 2.9% in 2018.

3. Business investment fell for the third consecutive quarter with a notable decline in inventories while overall gross private domestic investment fell 6.1% during the quarter.

4. Chicago PMI fell to a four-year low of 42.9 in January, well below the 48.5 consensus and previous print of 48.9; order backlogs were particularly weak.

5. In Europe, the ifo Business Climate Index fell in July from 97.5 (Revised value due to seasonal adjustment) to 95.7 points. Companies were less satisfied with their current business situation and are also looking ahead with increased scepticism. The German economy is navigating troubled waters.

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coronavirus , FOMC , Brexit , interest rates


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