US equity markets made a solid start to Wednesday’s session but closed flat as renewed anxieties regarding the coronavirus dwarfed surprisingly good earnings from some American giants such as Tesla, Microsoft (NASDAQ:MSFT) and General Electrics and an accommodative statement from the Federal Reserve (Fed).
The Fed kept its interest rates unchanged within the 1.5%-1.75% range, made a technical adjustment to the excess reserve rate as expected, and said that the monetary policy is ‘appropriate’ for now. Appropriate, however, the persistently below-the-target inflation seems to annoy Fed Chair Jay Powell and his irritation is made official with the downgrade of household spending from ‘strong’ to ‘moderate’. There is also the unknown impact of the spreading coronavirus on demand and activity. Understandably so, the Fed prefers to play safe. Therefore, if we were to label the Fed’s position following Wednesday’s decision, we would definitely say ‘dovish’.
Investors moved from equities to the US government bonds, pulling the 10-year yield to the lowest since October.
Nikkei dropped another 2%. Stocks in Taiwan (-5.67%) were shattered as they opened for the first time after the Lunar New Year break. Hang Seng tumbled 2.20%, as the coronavirus anxieties added to the already explosive cocktail of political unrest and slowing activity in Hong Kong.
WTI crude slipped below the $53 a barrel on revived demand-side worries fueled by the spreading coronavirus. Gold topped at $1580 per oz.
FTSE (-0.71%) and DAX (-0.84%) futures point at a bearish start in Europe, as the euro and the pound struggle to keep their heads above 1.10 and 1.30 respectively against a relatively strong US dollar despite the softish Fed.
British Airways, among other airline companies, halted its direct flights to mainland China. The World Health Organization could rub salt into the wound if it issues a global alarm at today’s emergency meeting. Hence, energy and travel stocks will likely remain on the chopping block in London on Thursday.
On the policy deck, even though the British policymakers’ concerns over the softening economic data spurred expectations that the Bank of England (BoE) could lower its rates by 25 basis points, the BoE’s MPC will likely vote 6 to 3 to maintain the bank’s policy rate unchanged at today’s meeting.
The January PMI data, which was the first indication regarding the health of the UK economy following the snap election, hinted that the activity may have picked up thanks to less political uncertainty and a growing hope of an orderly divorce from the European Union. Although the soft data may have overreacted to the post-election optimism and may not immediately translate into hard figures such as growth and inflation, the BoE may want to collect a couple of more data points before moving ahead with a possibly premature rate cut. In case of no change at today’s meeting, the pound could brush off the pre-BoE weakness and bounce back off the 1.30 mark.
Across the Channel, a better-than-expected German confidence data couldn’t give a smile to euro traders on Wednesday, but a pick-up in German inflation in January and improved Eurozone sentiment data could put a floor under the euro’s depreciation near the 1.10 mark against the greenback. This being said, the short-term bias will likely remain negative in euro given that the short-end of the European government yield curve became insensitive to data because of the European Central Bank’s (ECB) clear dovish stance and the certainty that the rates won’t move higher in the foreseeable future. This unresponsiveness is especially true for good data, given that the rates could still go lower. And because bad data is more powerful in moving the market than good data, any gains in euro should remain vulnerable.