Fears about the spread of the so-called coronavirus in China weighed on financial markets this week. In particular, Chinese stocks and currency took a big hit. US and German bond yields also declined and both oil and metal prices pushed lower.

The count of people infected with the virus continued to rise over the week, from 440 on Monday to 869 on Friday. The number of people who have died from the disease increased from five on Monday to 26 on Friday. The virus is similar to the SARS virus in 2003, which infected 8,000 people across Asia and some other countries and resulted in the death of 770 people before the disease was contained after three to four months. China has acted faster this time and is co-operating with the World Health Organisation but it is still unclear how much it could spread. A concern is the Chinese New Year holiday, which starts today, as it normally involves hundreds of millions of people travelling to their hometowns to celebrate the New Year with their families. We probably will not know how serious the spread of the virus is until we get to the other side of the New Year.

While growth has been improving in China since Q3, the spread of the virus is bound to have a negative effect on the Chinese services sector , as people will travel less than usual and not go out to restaurants, movies, etc. as long as the virus is still spreading. In the short term, the virus has increased uncertainty, not least for the Chinese economy and markets. Next week, we are due to get the official data on China’s manufacturing PMI and non-manufacturing PMI. Normally we pay most attention to manufacturing but the non-manufacturing PMI may be more in focus this time, as a gauge of any impact of the virus on the services sector.

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It has been fairly quiet in the US this week but we look forward to the release of GDP on Thursday , which should reveal growth of around 2% in Q4. The FOMC meeting will also be in focus but is likely to result in an unchanged policy stance. Speaking of central banks, the ECB meeting this week gave more information about the upcoming review of the ECB’s policy and instruments . It seems the ECB will turn every stone with an open mind and will review climate topics and the effects of the low rates (see Flash ECB Review – Nothing to see so far…keep moving, 23 January). Next week, we are due to get a few interesting data releases in the euro area. GDP for Q4 should give more insight into how the weak 2019 ended, while preliminary inflation for January will tell us whether the recent increase in core inflation is only noise, or whether it is for real. We expect euro core inflation to fall back to 1.2% y/y, from 1.3% y/y in December.

While the ECB meeting was not so eventful, we look forward to the Bank of England (BoE) meeting on Thursday . Following a string of mixed data releases, we expect the BoE to cut rates by 25bp. However, it is likely to be a close call. The following day, on 31 January, the UK officially leaves the EU.

In Japan, the central bank kept the monetary policy stance unchanged this week , but revised up its 2020 growth forecast on the back of the government’s big fiscal spending plan. Next week, we plan to keep an eye on Japanese data on industrial production and retail sales.

Full report in PDF.

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