US equities renewed record on Tuesday, after the Federal Reserve Chair said he is ‘closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy’. But the Fed will keep its wait-and-see position as long as the ‘incoming information about the economy remains broadly consistent with the outlook’.

Despite early gains, the three major US indices closed near flat on news that the FTC opened new investigations against the big tech companies to examine whether they acquired small tech firms in a way to harm competition.

Most sectors edged higher in New York. Real estate (+1.22%) and energy stocks led gains (+1.04%), as technology stocks (-0.34%) lagged. Speaking of antitrust allegations, the big US techs have been accused of altering competition for many years now, but these allegations had little negative impact on investor appetite.

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Equities in Asia traded mixed. Japanese, Chinese and Korean stocks were mostly up, while sales were dominant in parts of South East Asia. Equities in New Zealand advanced to a record, as the Reserve Bank of New Zealand (RBNZ) kept its official cash rate unchanged at the historical low of 1.00%.

WTI crude eased to $49.5 a barrel then rebounded past $50 as investors who lost OPEC’s support found hope in Fed’s accommodative approach to the coronavirus outbreak and its negative implications on economic growth. Still, WTI is poised to settle durably below the $50 level, as the demand-side shock will likely increase the global oil glut and continue weighing on oil prices.

The euro fell to a four-month low against the US dollar on Tuesday after the investor confidence data missed expectations at a time when confidence was most needed. In her speech yesterday, the European Central Bank (ECB) President Christine Lagarde called for higher government spending, as did her predecessor Mario Draghi multiple times, in vain. If the ECB seeks government support, it is because the European companies prefer investing their cash in the market despite very low returns instead of borrowing at negative rates. This trend could be easily tracked in production data. Due later this morning, the industrial production data in the Eurozone should confirm a 1.8% m-o-m contraction in December versus 0.2% printed a month earlier amid production in Germany took another and an unexpected hit. Soft figures come as a warning that the improvement a month earlier may have been temporary. The fear that German slowdown has probably not bottomed out just yet means that the ECB could be tempted to lower the interest rates in the future, though as discussed above, we are unsure that deeper interest rate cuts would remedy to Europe’s low investment problem. Even though our base case scenario is that the ECB would keep interest rates unchanged until normalisation, each soft figure adds to the probability that this could change and weighs on the single currency by increasing the core short positions.

Across the Channel, the fourth quarter growth data showed that the UK narrowly avoided an economic contraction, as production remained subdued in December. The consumer spending rose by the lowest since 2015. Due next week, inflation should show a rebound in January, but even that could remain insufficient to improve the sentiment in Sterling, which looks poised to revisit the 1.28 levels in the coming weeks. Risk reversals for both short and long term maturities tell us that investors increase hedges for a softer Sterling against the US dollar, as mounting anxiety regarding the second phase of Brexit negotiations and the expectation that the Bank of England (BoE) would cut the rates by 25 basis points in the first half of the year continue weighing on the currency.

FTSE (+0.17%) futures hint at a soft positive start in London. Small rebound in oil and cheaper sterling may give a certain support to the British blue-chip index but may not suffice to maintain it above the 7500p level.


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