Europe Set To Rebound But The Health Crisis Deepens

The coronavirus was front and centre yesterday as the fear surrounding the crisis intensified.

The death toll and the number of confirmed infections has increased rapidly since the end of last week. The bulk of the crisis are in China, so traders were scared the health crisis would bring about a drop in economic activity in a country that is already slowing down. Recently it was confirmed that China underwent it lowest level of annual growth in 29 years. To help tackle the health emergency, the Beijing authorities have extended the Lunar New Year holidays. The time of year usually slows down the economy so the effect should be more pronounced this time around.

It was a brutal session in Europe yesterday as the FTSE 100, DAX, CAC 40, plus the FTSEMIB all lost over 2%. Dealers were in cut and run mode as so many firms have exposure to China. It was a broad based sell-off, but some of the worst performers were mining, oil and gas, high-end retailers, car manufactures and travel stocks. It was a similar situation on Wall Street, but the losses endured on the S&P 500 weren’t as severe, the market lost 1.57%.

Overnight, the Chinese government confirmed the situation is getting worse as the death toll has exceeded 100, plus the number of infected individuals topped 4,500. Equity markets in Singapore, South Korea as well as Japan posted losses.

China is the largest import of copper as well as oil in the world, so it was hardly surprising that both markets endured heavy losses yesterday. The bearish sentiment rippled out into other commodities like platinum plus palladium – which posted a record high last week, so profit taking has been common place. It wasn’t all bad news for commodities, as gold gained ground. The metal benefitted from the risk-off strategy of traders, but the move to the upside wasn’t that big when you compare it to the losses incurred in equities.

At 11am (UK time) the CBI distributive sales report will be posted, and the consensus estimate is 3, which would be an improvement from the 0 reading in December. Keep in mind the CBI industrial order expectations report last week came in at a five month high. The Bank of England (BoE) will make their interest decision on Thursday and the markets are pricing in roughly a 59% chance of a rate cut. It is worth noting the markets were factoring in a 70% chance last week. The pro-business Conservative party will get a chance to show off just how pro-business they are really are March when the budget will be announced by Sajid Javid, the Chancellor of the Exchequer. The BoE might hold fire until the budget is revealed as it is likely to include policies that will encourage economic activity.

The US durable goods report will be announced at 1.30pm (UK time). The headline reading is expected to bounce back from -2.1% in November to 0.3% in December. The report that strips out transport is expected to show a 0.2% rise.

The CaseSchiller house price index is expected to show 0.4% growth, which would be the same growth level achieved in November.

EUR/USD – has been pushing lower since late December and while it holds below the 50-day moving average at 1.1096, the bearish move might continue. Support might be found at the 1.1000 area. A break above 1.1172 should pave the way for 1.1249 to be retested.

GBP/USD – while it holds above the 50-day moving average at 1.3036, the wider bullish move should continue. The 1.3500 area might act as resistance. A break below the 1.2900 area could bring 1.2689 – 200 moving average, into play.

EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8400. A rebound might run into resistance at 0.8600.

USD/JPY – has been pushing lower recently and while it holds below the 50-day moving average at 109.17, the bearish move should continue. 107.65 might act as support. If the wider positive trend resumes, it might retest the 110.00 zone.

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