24 February to 1 March: Will the Powell put stabilise markets?

The rally in US Treasury yields (the 10-year slid to 1.10% by the end of Friday) and the double-digit decline in the S&P 500 index (-11.5% by the end of the week) encapsulate the magnitude of fear in the market. In our interpretation, the market has been pricing in a recession, as the coronavirus spreads outside of China (where activity has already started to return to normal; details in the Asian section). One could argue that the market has run ahead of itself and has been behaving an irrational manner, but that does not change the fact that policymakers across the globe will have to send reassuring messages that they are in control and are able minimise the economic impact.

In an attempt to sooth the nerves of the market, Fed Chair Powell signalled strongly that the Fed will ‘act as appropriate to support economy.’ The million-dollar question is whether injecting further liquidity would be of any help, either in terms of economic activity or to improve investor sentiment. In our view, the Fed can potentially provide comfort in the short-term. However, looser financial conditions are unlikely to fix supply-side disruptions.

17 to 23 February: China sneezes and the world catches a cold

The coronavirus continues to dominate headlines. Although 21 Chinese provinces reported zero new coronavirus cases on the 22^nd February, the number of new cases outside of China (such as South Korea, Italy, Iran, etc.) has been increasing. Italy has implemented a similar lockdown process to those used in China, mobilising the army to prevent movement in or out of the affected towns and stopping sporting and cultural events. The economic disruption brought about by the spread of the coronavirus could further dent global growth outlook – the severity and length being in the centre of the issue. To get a sense of the virus’ adverse impact on the macro environment, investors will most likely pay close attention to the official PMIs from China encapsulating economic confidence for February, industrial production data in South Korea, the South Korean central bank’s communique as well as foreign trade data in emerging Asian countries.

10 to 16 February: PMIs might provide guidance on the state of the global economy

New cases of the coronavirus rose sharply from Wednesday to Thursday after Chinese authorities changed the criteria for diagnosing the illness. In Hubei province (the epicentre of the infections) the number of cases saw the largest one-day jump, by 14,840, about nine times the number of new cases a day earlier. The vast majority of newly confirmed cases – 13,332 – were retroactively reclassified. By Sunday, the total number of cases was as high as 51,857 with 683 outside of China, whilst the mortality rate remained around 3%.

As opposed to Hubei province, other parts of China still require either gene sequencing or lab tests to confirm the pathogen, meaning not all cases may be detected. The change in the classification approach by Chinese authorities raise questions about how soon the outbreak will peak. One thing is certain, that the retrospective reclassification makes it more difficult to get a sense of the broader picture of the coronavirus’ spread. As the global economic diary is relatively light on relevant macroeconomic data this week, markets will most likely focus on the February PMIs by developed markets (such as the US, UK and Eurozone) to get a sense how the coronavirus could impact supply chains and industrial activity.

3 to 9 February: Policymakers will remain vigilant

If it was not for the coronavirus, global economic growth would have a promising outlook for 2020. This idea was underpinned by the sustained improvement in the global manufacturing PMI, which rose to a nine-month high of 50.4 in January. However, since the survey was conducted before the coronavirus outbreak, the conclusion might not be as solid as in regular circumstances. The question is to what extent the Chinese and vis-a-vis the global economy will be impacted by the viral outbreak and what proportion of the loss in output is permanent. We are aware that the uncertainties related to the magnitude of the supply chain disruptions due to the shut down of plants and thus we remain cautious with our economic outlook. We are of the view that policymakers (especially in China) are closely monitoring economic developments and will step in with policy support to avoid a scenario where economic growth sharply slows.

27 January to 2 February: The coronavirus-induced uncertainties drive markets

The coronavirus (2019-nCoV) related fears have been spreading globally and dominating headlines. At the time of writing, the number of infected was reported over 15,000 with a mortality rate of approximately 2% (according to the Wall Street Journal). Relative to the SARS in 2002-03, the 2019-nCoV has been spreading faster, whilst the mortality rate remains significantly lower. In reaction to the coronavirus-related news flow, global investor sentiment has been turning increasingly risk-averse. Consequently, stock markets declined during the week, whilst government bond yields eased, as investors sought safe assets. There was also a sharp decline in the Chinese stock market when it reopened Monday morning after the Lunar New Year holiday period. Other markets also exhibited risk-averse behaviour, such as the crude oil market, where Brent prices have now fallen almost 15% since the start of the Lunar New Year holidays. In our view, the market has been pricing in a great degree of permanent loss in demand and thus in economic activity. In order to provide a cushion to the economy and the market, the PBoC injected a large amount of liquidity this morning. Meanwhile, the global economy kept stabilising in December and January, according to the latest soft and hard macroeconomic indicators. Therefore, if it was not for the pandemic, the global economic outlook for 2020 would be brighter, in our opinion.

20 to 26 January: The coronavirus takes centre stage and exerts influence on markets

There is just no time to take a deep breath as – unexpected – events keep unfolding right in front of our eyes. Finally, when we thought the we can take a break from being concerned about the state of the economy (thanks to the Phase One trade truce between the US and China), the coronavirus muddied the proverbial waters. Developments sped up during the week, as Wuhan, the – alleged – centrum of the epidemic (home to over 11 million people) was quarantined with a number of other Chinese cities to stop the spread of the coronavirus. The virus, first reported in late December 2019, is a contagious respiratory illness that is a close relative of severe acute respiratory syndrome (SARS), which spread in 2002-03. The death toll has been rising (claimed to have reached 80) with a mortality rate just below 3% (at the time of the writing). The virus has already spread overseas, including to Hong Kong, Macau, Singapore, Thailand, the US, etc. At this early stage, it is very difficult to estimate the economic impact of the viral outbreak. We are of the view that the coronavirus could prove to be an important driver of asset prices in the coming weeks (or even months) unless authorities contain it quickly.

Meanwhile, we shall not lose sight of economic fundamentals. According to the CPB Netherlands, world trade volume contracted 1.1% YoY in November. Therefore, it is now highly likely (without knowing the actual December figure) that 2019 was the first year after 2009 when merchandise world trade volume fell – despite industrial production’s low but positive growth in that period. In our interpretation, many EM economies posted promising PMI, industrial activity and foreign trade metrics in November and December, which lead us to conclude that there are signs of a more promising time ahead in 2020 in terms of the global macro big picture.

13 to 19 January: Let Phase Two commence!

China’s Vice Premier, Liu He, headed to Washington for the signing of the Phase One Trade Deal. This represents the first concrete de-escalation of tensions between the US and China in nearly two years. The agreement covered items spanning intellectual property protection, market access openings, currency and merchandise trade. The US also stated that current tariffs would be maintained, whilst China committed to a number of large purchases from the US (including manufactured goods, agricultural products, energy and services amounting to USD 200bn in total). As a prelude to the meeting, the US Department of the Treasury issued its semi-annual currency report, within which it rescinded its designation of China as a currency manipulator. The US justified its decision based on the recent strengthening of the renminbi against the US dollar, which has occurred amid firming investor sentiment in advance of the trade accord. In our opinion, the deal’s scope could help business sentiment and consumer confidence stabilise and consequently reduce the uncertainties that have weighed on economic growth prospects throughout 2019. However, since tariffs remain in place, a sharp bounce in either country’s GDP growth in 2020 is unlikely. Now that Phase One is behind us, let Phase Two commence!

6 to 12 January: Looking beyond the Phase One trade deal

The US and Chinese administrations are set to sign the Phase One trade deal on the 15^th January putting (at least a short) pause in the two-year long trade war. Furthermore, the two parties have – allegedly – agreed to hold semi-annual talks to push for economic reform and resolve disputes. The agreement could include a dispute-resolution section that envisions consultations between the two nations to handle any conflicts arising from the agreement. The new talks will be separate from negotiations over a second phase of the trade deal, which is expected to cover fundamental Chinese economic policies, including corporate subsidies and the activities of Chinese state-owned firms. The two sides are considering naming the process the Comprehensive Economic Dialogue, according to multiple sources cited by various media outlets.

Looking forward, this week’s data calendar features trade data from China and India, high-frequency macroeconomic data from the US (such as inflation, retail sales and industrial production), and several Federal Reserve officials could provide insights on the course of the Fed’s policy. Investors will most likely look out for news on geopolitical risks, whilst also awaiting the signing of the Phase One US-China trade deal.

9 to 15 December: Thank you, next

The US and China have reached an agreement on a Phase One deal in which the US refrains from raising tariffs in December (scheduled for the 15^th), whilst halving the 15% tariffs on goods worth of about USD 125bn. China also committed itself to buying more agricultural products from the US (about USD 40bn annually), which is a considerable increase over the usual USD 20-25bn range. If everything goes according to schedule, we believe that the final version of the Phase One deal can be signed as early as January or February, when Phase Two can commence (which might overarch subsidies, cyber-intrusions, data storage and the remaining tariffs). Whilst the deal could bring some certainty, encourage business confidence and strengthen investor sentiment, underlying global growth is unlikely to benefit from the agreement before 2Q20. Although the tone between the US administration and the Chinese government has become more constructive recently, we suspect that the new rounds of negotiations could be noisy and the tone of the parties will be volatile – similarly to what markets experienced throughout 2019. Looking forward, we expect the negotiations between the US and China to remain one of the key themes in 2020 as well as the Presidential elections in the US and the Brexit talks between the UK and the EU. In addition, we will get an answer in 2020 to the billion-euro question whether the German government is willing to start spending in order to aid the ailing German economy.

2 to 8 December: Let it grow, let it grow, let it grow!

Last week was an emotional rollercoaster for global investor sentiment, due to US President Trump’s blunt remarks that singing a trade deal with China could wait until after the US Presidential election in 2020. Shortly after the POTUSs communique, Bloomberg reported that the US and China were close to agree on the amount of tariffs to be rolled back and added that the scheduled tariff hikes for the 15^th December could be delayed (or maybe even cancelled). The report stabilised risk appetite to some extent. On Friday, the latest jobs report positively surprised the market, as the data was unexpectedly very strong and implied that the US’ domestic economy remains in good place. In our opinion, domestic economic drivers in the US remain robust, which makes the world’s largest economy largely resilient to the weakness in world trade and global manufacturing activity. Overall, we arrive at the conclusion that recession fears are overstated – especially if we take into account the Fed’s accommodative approach, who stands ready to provide support to prevent a sharp economic slowdown.