Equity markets had an altogether softer tone yesterday, weighed down by concerns that the coronavirus currently sweeping through China might spread outside the Asia region. Reports that a case has been diagnosed in the US prompted some light profit taking in US markets, as US investors returned from their long weekend.
Airline shares, along with hotel operators saw some of the steepest falls, along with those brands with significant market exposure in the Asia region.
There is also a concern with Chinese New Year set to get under way this weekend that the amount of travel toing and froing might help spread the virus on a much wider scale. With memories of SARS still fresh in the Asia region, markets appear to be adopting a safety-first approach, just in case the disease starts to become an epidemic.
For the moment the main casualties have been people whose health was already fragile, however if the virus were to spread further, and cause changes in consumer behaviour then markets might well take fright.
As it is for now, investors are cautious but not overly concerned, as can be seen from today’s session in Asia which initially saw equity markets come under further pressure, but which have since rebounded, despite new cases of the virus slowly increasing.
The main focus for investors still appears to be on the underlying economic data, and today’s data out of South Korea was encouraging from an economic activity point of view, helping support the case for improving economic sentiment as we head into 2020. While the virus appears contained investors still appear to be in “buy the dip” mode and as such today’s rebound in Asia markets looks set to translate into a positive open here in Europe as well as a new record high for the German DAX when it opens in a few hours’ time.
The pound enjoyed a fairly decent rebound yesterday after the latest jobs and wages data showed that despite the recent doom and gloom, surrounding recent economic data, the UK economy was still adding jobs and that wage growth was still a fairly healthy 3.4%.
For all the concern that the economy is going through a bit of a soft patch, it is good news that hard-pressed consumers are seeing a real term boost to wages, with headline inflation, currently at 1.3%, over 2% lower. This gap only serves to reinforce the lack of urgency for any policy response next week from the Bank of England. Sometimes it pays to wait a while for some of the fog to clear, a mistake the central bank made back in August 2016, and hopefully won’t want to repeat.
Today’s latest public sector borrowing numbers are expected to show that UK borrowing for December narrowed from £4.9bn in November to £4.6bn.
It’s rate decision day for the Bank of Canada today, and for the most part it is expected to be a fairly low-key affair with the central bank keeping rates on hold. This is a significant change in expectations from a few weeks ago. At the end of last year, weak economic data had raised concerns that the Bank of Canada might well look at cutting rates in the first quarter of this year. This now looks less likely given recent strong jobs data, after December payrolls followed on from a fairly strong November report.
With inflation also looking under control, currently expected to come in at 1.9%, in data released later today, there appears little reason to rock the boat at this stage. As long as the US economy continues to perform well, the economy in Canada is also likely to feel the benefits.
EURUSD – still looking soggy with the 1.1050 level still a key support level line from the lows last year at 1.0878. While above this level the risk remains for a move back towards 1.1200. A move below 1.1040 argues for a retest of the lows near 1.0800.
GBPUSD – solid support remains down near the 1.2960 level with only a move below 1.2950 opening up the prospect of a move lower towards the 1.2870 area. The current rebound needs to take us beyond the 1.3120 area to signal a possible base, and a potential retest of the 31st December peaks above 1.3200.
EURGBP – currently struggling to head higher, with last week’s highs near the 0.8600 level a key resistance. The 0.8470 area remains a key support area, with a break below targeting a return to the 0.8420 level.
USDJPY – having failed to move towards the 110.70 level the US dollar has slipped back. We currently have support at the 109.70 area, which if it breaks could herald a return towards 109.20 and possibly the recent lows at 107.65.
FTSE100 is expected to open 20 points higher at 7,630
DAX is expected to open 65 points higher at 13,620
CAC40 is expected to open 20 points higher at 6,066
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