A G7 call of finance ministers and central bankers at 12:00 GMT today is the focal point for markets, after stocks came back to life on hopes for a coordinated international response to the economic impact of the coronavirus. US stocks roared higher, with a 5 per cent gain for the Dow and 4.6 per cent rally in the S&P 500 that was its best day in 14 months. Volatility is back, let's all rejoice.
Australian shares rose as the RBA took the first plunge and cut rates by 25bps to a record low 0.5 per cent. The move only makes the RBNZ certain to cut later this month – shares in New Zealand rallied almost 3 per cent. But let's face it, all central banks are now in full cut mode - although market pricing for interest rate cuts across the board has become extremely one sided and risks disappointment should the policymakers not be as aggressive as the market pricing indicates. Donald Trump was straight on the tweets after the RBA, castigating the Fed for not cutting more and sooner. The man never sleeps.
As per yesterday’s note, the prospect of stimulus from the Fed, ECB, BoJ, Bank of England et al is helping to provide a degree of comfort to bruised and battered markets. Whilst no one thinks central banks can solve the crisis, they can make it easier for indebted companies to weather the storm, and prevent a tightening of financial conditions. Slashing rates also makes equities relatively more attractive than bonds. The real hope is for a fiscal response to this as per Italy’s mooted plans. Given central banks are short on ammo, the ECB most notably, the crisis is kindling hope that the Germans will eventually bow to a looser fiscal stance. ECB vice chairman Luis De Guindos was very clear yesterday that ‘fiscal policy is the correct answer’ to the crisis. Nevertheless, markets have moved aggressively to price in rate cuts.
The question is will a bland statement from the G7, saying governments and central banks are monitoring the risks, stand ready to act, etc, be enough? The stage is set for a let-down and we have yet to see any real momentum from the US session carry forward into Asia.
On Friday I said there are three key questions for the market that remain unknown: how does the outbreak spread, what’s the real economic damage and what is the policy response? Whilst we have a partial answer to the third question – and may find out a lot more today - we are still fumbling in the dark in terms of the first two. Company updates today don’t tell us much. Aggreko, which has a $200m contract to supply the Tokyo Olympics, says it is monitoring the outbreak of the coronavirus but is sticking to its guidance. There’s clearly a big worry should the Olympics not go ahead. Ashtead made no mention of the outbreak in its update, and stuck to guidance. Intertek however said it would suffer a hit from the virus in 2020 but it is too early to quantify the damage. Visa has joined Mastercard in lowering its quarterly revenue estimate due to the impact the virus has had on cross-border payments.
European markets were a bit aimless yesterday, waiting for the US to set the tone. The rally on Wall Street dragged the FTSE 100 back into the green and it closed up 1 per cent. The DAX failed to turn positive though and slipped 0.3 per cent. We may remain in a holding pattern until the G7 decision is known.
The euro rally ran out of legs as the prospect of the ECB easing. EURUSD failed at a little above 1.1180 and retraced to 1.1130. Nevertheless, the dollar is finding the sellers easily enough as euro shorts cover their positions and carry trades are unwound. Quite simply the Fed has a lot more scope to cut rates, so the narrowing in German and US spreads is supporting the euro. A CPI print at 10am this morning might just encourage the ECB further towards cutting, potentially leaving the euro bulls short of the 1.12 handle for now. CPI is seen at 1.2 per cent, well below the 2 per cent target. If the print misses that then we could see bets for ECB easing to rise and the 200-day moving average at just under 1.11 comes into focus.
Neil Wilson is chief markets analyst at Markets.com
