The spreading of the novel coronavirus remained the key market theme this week . While the pace of new cases discovered worldwide (9,692 at the time of writing) has levelled off somewhat, the death toll has now reached 213. The WHO officially labelled the outbreak a Public Health Emergency of International Concern and measures to contain it were stepped up globally. More Chinese cities and provinces have extended the holiday period until at least 10 February , fuelling fears in the market about the global economic repercussions of the virus. Compared to the SARS outbreak in 2002-03, the Chinese economy is a much bigger driver of global growth today and we estimate the outbreak could reduce Chinese GDP by up to one percentage point in H1. Hence, there is a clear risk that the expected recovery in growth and PMIs could be somewhat delayed or at least be muted (see Research China , 27 January).
Oil and metal prices remained under pressure and global equities started the week deep in red , but recovered some ground after a decent Q4 earnings season calmed nerves somewhat. Global bond yields took another leg lower on the back of the virus fear, dovish Fed communication and the continued hunt for yield evident from strong demand in EGB auctions in Europe. Especially Italian bonds rallied as the risk of snap elections in Italy receded after an important regional election in Emilia Romagna did not propel the right-wing League party to power.
Britain finally leaves the EU more than three years after the Brexit vote, after the Withdrawal Agreement was ratified by both the British and EU parliaments. Focus now turns to the negotiations about a trade agreement with the EU, but time is sparse with the transition period ending by the end of the year.
The Bank of England and the Fed joined the camp of global central banks choosing to leave their powder dry. While policymakers at both institutions signalled that the current monetary policy stance was appropriate, both also struck a dovish tone that left hopes of further rate cuts down the line alive in the market. We still look for another cut from both the Fed and the Bank of England in 2020 , as economic momentum is running out of steam (see FOMC Review and Bank of England review , both published 30 January).
Markets will continue to focus on the developments around the coronavirus and Chinese (Caixin) PMI figures out on Monday will be watched closely for any negative impact. However, just as the official (NBS) PMI figures last week, the survey was likely conducted too early to see any economic impact of the virus yet. The Democratic Party primaries officially kick off in the US on Monday. On the data front things are looking a bit calmer, but we are getting some interesting US releases that could help revive risk sentiment somewhat. The effect of the virus on countries and value chains outside China will likely take some time to materialise and in light of strong regional PMIs, we look for an increase in the (surprisingly low) ISM manufacturing to 48.2 from 47.2 on Monday. Friday’s US jobs report for January should also still paint an upbeat picture of the US labour market situation and we look for growth in non-farm payrolls of 175,000 and wage growth of 3.0% y/y.