With the coronavirus spreading and the number of casualties rising, Chinese authorities decided to block the traffic in and out of Wuhan a day before the Chinese New Year break. Stocks in Hong Kong and Shanghai tumbled 2% and 3% respectively. Nikkei (-0.97%) and ASX 200 (-0.63%) gave back yesterday’s gains.
WTI crude dipped to $55.50 a barrel, as gold spiked to $1564 per oz as risk-off money poured in.
US equity futures edged lower. FTSE (-0.12%) and DAX (-0.41%) futures hint at another dull session, after yesterday’s failed attempt to push higher. Oil-heavy FTSE will likely feel the pinch of tumbling oil prices and the strengthening Sterling at the open.
The European Central Bank (ECB) meeting is the highlight of today’s economic agenda. From an immediate policy perspective, there will probably be nothing new; the ECB is expected to maintain its current monetary policy unchanged at this meeting. What will matter the most to investors is the bank’s strategy review, which should give some hints about how things would shape up in the Lagarde era. And if there is a change in governance, there should be a certain change in language and style as well.
Lagarde is expected to put in place a two-part approach, one focusing on tools available to policymakers to achieve their inflation goal, the framework and price gauges, the other on financial stability and communication.
Regarding the broad guidelines, Christine Lagarde will have little choice but to walk on his predecessor Mario Draghi’s footsteps. This means that communication with the markets, the so-called forward guidance, will remain a leading policy tool for Lagarde as well. Yet the ECB under Lagarde’s rein could question the benefits and the sustainability of negative rates and massive bond purchases. It is a sure thing that Lagarde will want to wait and see how the European economy reacts to the latest 10-basis-point cut and if the slowdown in Germany and across Europe bottomed out as a result of the latest stimulus measures. But inflation and inflation expectations remain at relatively low levels and at the current speed, it would take the ECB at least another decade to pull the inflation toward the 2% target, if that ever happens in the first place. Hence, it will be interesting to see how Christine Lagarde will navigate through such a challenging environment and how she will form her strategy.
While we remain open to surprise comments and two-sides volatility in euro, we believe that the ECB will maintain its rate policy unchanged at least until the end of 2020 and won’t consider normalizing rates any time before the second quarter of 2021.
The EURUSD consolidates a touch below the 1.11 mark ahead of the much-expected ECB meeting. A less dovish language could help clearing the 1.11 offers and encourage a recovery to 1.12 and above. A dovish surprise however could send the single currency tumbling to the 1.10 psychological support. Put options trail below this level.
Meanwhile, Donald Trump’s impeachment trial continues seeing little to no reaction from the financial markets.
