Risk Back Off after California Declares State of Emergency

March 5, 2020

Yesterday’s U.S. stock market rally extended into Pacific Rim trading hours overnight, with markets advancing 2.1% in Hong Kong, 2.0% in China and New Zealand, 1.3% in South Korea, and 1.1% in Japan, Australia, and Taiwan.

But the covid-19 virus continues to extend its tentacles, and investor fear abruptly overtook hope in Europe where equity markets are down 2.2% in Spain, 1.8% in the U.K. and France, 1.7% in Italy, 1.6% in Germany and 1.2% in Switzerland. Italy has over 3,000 cases and more than 107 deaths. Globally, the case count is close to 100,000 with more than 3300 deaths thus far including 10 in the state of Washington. With over 50 cases in America’s most populated state, California declared a state of emergency overnight, and that appears to have intensified selling in U.S. futures.

The 10-year U.S. Treasury yield plunged 10 basis points to a new low of 0.96%. Prices for oil and gold rose by 0.3% and 0.7%.

All this volatility has had an adverse effect on the dollar, which fell overnight by 0.6% against traditional hard currencies like the euro, yen, and Swiss franc. The dollar also lost 0.3% relative to sterling but rebounded 0.9% versus the peso, 0.2% versus the loonie and 0.1% against the yuan.

The U.S. primary election season moves next Tuesday to Michigan, Idaho, Mississippi, Missouri, North Dakota, and Washington where 352 delegates to the Democratic National Convention in Milwaukee will be decided. The big news overnight is that Mike Bloomberg suspended his campaign and endorsed Joe Biden, which greatly alleviates the latter’s depleted financial resources.

The Central Bank of Sri Lanka chose not to cut its 6.5% standing deposit facility rate and 7.5% standing lending facility rate further at this time. Officials felt policy is already accommodative after three 50-basis point rate reductions in May and August of last year as well as in late January 2020. However, a released statement asserts that the covid-19 outbreak will not spare the Sri Lankan economy and observes continuing global growth concerns. “Inflation is expected to stabilize within the desired range over the 4-6% medium term despite transitory deviations arising from supply side disruptions.”

The Fed Beige Book of regional U.S. economic conditions, which was released yesterday afternoon, identified modest to moderate continuing economic growth in most parts of the United States but flat performances in the Saint Louis and Kansas City Districts. Companies have been increasingly worried about the coronavirus and November’s election implications.

The incoming Bank of England Governor Andrew Bailey favors not acting just yet in response to the coronavirus, preferring more time to assess its likely effect.

On the data release front, Euroland’s construction purchasing managers index advanced 0.6 points in February to a one-year high of 52.5, with the German and Italian components showing their fastest growth rates in 25 and 8 months, respectively. The French construction PMI slid to a 3-month low of just 50.2.

Spanish consumer confidence slid 1.5 index points to a 2-month low¬† in February and was 16.6 points lower than last year’s high in June.

Greek unemployment of 16.3% in December was its lowest since March 2011.

Dutch CPI inflation slowed to a 10-month low in February of 1.6%.

British new car sales were 2.9% fewer last month than in February 2019.

Swedish industrial production rebounded 1.5% in January but to only 0.1% above its year-earlier level, and Iceland experienced its smallest trade deficit last month since January 2016.

Australia’s trade surplus of A$ 5.21 billion in January was at a 3-month low.

South Africa’s current account deficit last quarter of 68 billion rand represents a 34-quarter low. The 2019 deficit equaled 3.0% of GDP, down from the prior year’s deficit of 3.5% of GDP.

The coronavirus hasn’t yet impacted U.S. jobless insurance claims, which averaged 213K over the past four reported weeks versus 211-3/4k in the previous four weeks. Likewise, U.S. labor productivity climbed at a healthy 1.2% last quarter and by 1.9% in 2019 as a whole after gains of 1.4% in 2018 and 1.3% in 2017. U.S. unit labor costs increased 0.9% in the fourth quarter, somewhat less than analysts were expected. Their on-year increase of 1.7% in the quarter matched the annual rise for all of 2019 and was less than gains of 1.8% in 2018 and 2.1% in 2017.

Still to come: U.S. durable goods orders.

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

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