Markets

Apple’s Q1 revenue warning because of slowing Chinese demand and supply chain constraints was a rude awakening for US investors returning from a long weekend (President’s Day). The negative economic impact from the coronavirus is taking on a more and more tangible form. We currently think that plenty of negative news is already discounted with this health risk probably taking on a V-shaped recovery in Q2. Today’s market movements nevertheless suggest there’s still some sensitivity to the market theme. Asian stock markets lost up to 1.5% with main European indices shedding up to 1%. Most of the losses occurred at the opening bell though. The same is true for the reaction on core bond markets. The US Note future and German Bund eked out gains ahead of the European start, before stabilizing and even returning some gains afterwards. Interestingly: a disappointing German ZEW failed to push the Bund to a new intraday high, while a better-than-expected US empire manufacturing survey did cause a minor tick lower in the US Note future. US Treasuries still outperformed Bunds in a daily perspective, but of course had some catching up to do. The US yield curve bull flattened with yields declining by 2 bps (2-yr) to 3.2 bps (30-yr). German yields lose up to 1 bp. 10-yr yield spread changes vs Germany are close to unchanged with Greece (+4 bps) underperforming. The Kingdom of Belgium successfully launched a new 20-yr OLO via syndication (Jun 2040). The order book exceeded €27bn, allowing the Treasury to print €5bn. The bond was priced to yield MS +11 bps, down from initial guidance in the MS +12 bps area. Together with a mid-January 10-yr syndicated deal, Belgium now completed €11bn of this year’s stated €28bn OLO funding need.

Last week’s trends on FX markets partially fell apart. Small, illiquid currencies like NOK, CZK or PLN failed to hold the advantage over the euro at the risk-off trading start. As with core bonds and stocks, moves mostly remained concentrated around the start of European trading. The path of least resistance in EUR/USD remains south with the pair dropping below 1.08 for the first time since 2017 and approaching EUR/USD 1.0774 support. The trade weighted dollar changes hands just south of 99.50. The 2019 high stands at 99.67. EUR/GBP approached the 2019 sell-off low (0.8277). Decent UK labour market couldn’t do the trick for sterling unlike UK Chancellor’s Sunak announcement that he will deliver the budget as planned on March 11. There was some confusion on this after previous Chancellor’s Javid abrupt resignation last week. Markets expect quiet some fiscal spending in the Johnson administration’s first budget.

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News Headlines

The ZEW-index, which measures investors’ expectations of the German economy, plunged sharply this month. The subseries on the outlook for the next 6 months fell from 26.7 to 8.7 while economists expected a limited drop to 21.5. Concerns about the possible impact of the coronavirus on the export-oriented Germany economy weighs on sentiment. The assessment of the current situation also became increasingly gloomy (-15.7 from -9.5).

The UK labour market remained resilient in Q4 2019 despite the economy’s stagnation. The economy added a larger-than-anticipated 180K jobs and the number of employed persons increased from 61.4% to 61.7%, leaving the unemployment rate unchanged at a 4-decade low of 3.8%. Yet, wage growth slowed to 2.9% from 3.2% in Q3.

The Spanish government moved ahead and approved a digital services tax despite earlier US threats of retaliation. The levies will be introduced at the end of this year and target companies with at least 750mln euros in revenue and 3mln of digital sales in Spain. The tax would hit the revenue of large US multinationals such as Facebook Inc. and Alphabet’s Google.

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