Virus Scare Grabs the Market’s Attention

January 21, 2020

Nothing changes the mood of investors like the sudden emergence of an unknown unknown. Just last week, markets were rejoicing about the signing of a Phase I trade deal between China and the United States, which engendered hopes of lessening trade tensions not just between the world’s two largest economies but elsewhere as well. Investors weren’t worried about a biological pandemic and didn’t even have reason to include such a possibility on their list of potential risks. That eurphoria is over. A highly lethal coronavirus that began in China is spreading exponentially, with evidence just emerging of people-to-people infection, and little else matters for the very short run — not even Middle Eastern geopolitics or climate change. 

With a fresh risk for which investors were totally unprepared, share prices in Asia fell overnight by 2.8% in Hong Kong, 1.4% in China, 1.0% in Singapore, and 0.9% in Japan. Markets in Europe are down 0.8% in the U.K. and France, 1.0% in Italy, and 0.6% in Spain.

U.S. stock and bond price futures are lower, too. So is the dollar by 0.5% relative to sterling, 0.2% versus the Swiss franc and euro and 0.1% against the yen. Alternatively, the dollar has climbed 0.5% against the renminbi, which although not surprising since China is where the virus first surfaced is noteworthy since asymmetric stability in China’s currency was a hallmark of the Phase I trade deal, which held that it’s okay for the renminbi to appreciate but not so if it unduly depreciates.

The German ZEW Institute’s measures of investor confidence toward the euro area and German economies captured the rippling optimism right after China and the United States signed a trade deal. The expectations index in the German instance jumped from a December reading of 10.7 to a 54-month high of 26.7 in January, while Euroland’s reading of 25.6 was its best score in 23 months and 14.4 points above December’s results. Perceptions of current conditions in the German and Euroland economies improved to 6- and 7-month highs.

This month’s Bank of Japan meeting of the Policy Board concluded with no change in policy settings and the release of the quarterly Outlook for Economic Activity and Prices which includes a perplexing mix of upgraded growth forecasts but downgraded estimates of future core inflation. The announcement of no policy change after four hours and 10 minutes of deliberations by the nine Board members retains a short-term policy interest rate of -0.10%, a continuing 10-year JGB yield objective of “around zero percent” and plans to keep purchasing approximately 80 trillion yen of sovereign debt per year. Ultra-low interest rates and quantitative stimulus are to be maintained until core inflation has spent some time above the 2.0% goal. Once again, two policymakers — Harada and Kataoka — wanted additional monetary stimulus to be introduced now. Projected GDP growth in fiscal 2019 of 0.8% and in fiscal 2020 of 0.9% are each 0.2 percentage points (ppts) above forecasts made in October, and the growth estimate for fiscal 2021 was bumped up 0.1 ppt to 1.1%. The growth upgrade follows the recently approved $120 billion fiscal stimulus package, but Governor Kuroda played down the likely impact of that development, noting repeatedly that significant external risks persist and thus make it premature to yet consider the timing of any first tightening of policy. Indeed, core CPI inflation estimates were cut 0.1 ppt  to 0.6% this fiscal year, 1.0% in fiscal 2020 and 1.4% in fiscal 2021.

British labor statistics were mixed. Unemployment claims increased less than expected in December, and ILO-basis employment rose 208k in September-November, which was much more than assumed. But average weekly wage earnings growth decelerated further to 3.2% in November (3.4% for regular pay only) from 3.9% just four months earlier.

New Zealand’s service-sector purchasing managers index fell 1.0 points to an 87-month low of 51.9 in December, indicating the slowest rate of expansion in over 7 years. An earlier release of that economy’s manufacturing PMI flagged a swing back into contractionary territory.

South Korean producer price inflation returned to the black in December with an 0.8-percentage point advance to 0.7%.

Swiss on-year growth in M3 money of 0.7% in December was only half as much as November’s pace.

Spain’s trade deficit of EUR 1.86 billion in November represents a 5-month low.

Portugal’s current account swung from a EUR 1.5 billion surplus in the first 11 months of 2018 to a deficit of roughly EUR 0.4 billion in January-November of 2019.

CPI inflation of 2.9% in Hong Kong last month was the lowest on-year pace since last May.

Chinese foreign direct investment expanded 5.8% last year, more than in 2018 but less than in 2017.

Mexican unemployment fell to 2.9% in December, lowest since March 2018.

Canadian manufacturing sales fell 0.6% in November, their third consecutive monthly drop. Orders recovered 1.9% on month but still recorded a year-on-year decline of 0.8%.

In Davos Switzerland, the World Economic Forum — an annual conference of elites in business and government — kicks into a full day schedule today after last night’s opening. The even will run through Friday. There is also a meeting today or Euroland finance ministers.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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