Risk appetite remained sharply weaker on Monday as fears over a global coronavirus outbreak intensified.

Risk appetite remained sharply weaker during Monday as fears over a global coronavirus outbreak intensified and confidence in the international growth outlook dipped sharply.

Equity markets declined sharply with major indices losing over 3% and the sharpest European slide for over 3 years.

The US dollar lost ground as markets priced in a Federal Reserve interest rate cut by the July meeting. The yen regained some ground with USD/JPY trading below 111.00. Commodity currencies drew some protection from a weaker US dollar.

The German IFO business confidence index increased marginally to 96.1 from an upwardly revised 96.0 previously and above consensus forecasts of 95.3. There was a slight decline in the current condition’s component, offset by an improvement in expectations. According to the IFO institute, the German economy appeared unaffected by the coronavirus outbreak for now and the manufacturing component strengthened for a third successive month, although there was still caution that intensification of the coronavirus could have a negative impact. The Euro gained an element of net protection from the current account surplus.

The sharp increase in Italian coronavirus cases still hurt investor confidence with the Italian bourse declining by over 5% as lockdowns took effect in several Northern towns while European bourses posted sharp losses.

Cleveland Fed President Mester stated that it was difficult to assess the risk to the US economy of the coronavirus, but also stated that she was not concerned about an inverted yield cut now.

As equity markets came under pressure, however, there was a shift in interest rate expectations with Fed Funds futures indicating that the chances of a March interest rate cut had increased to over 20% from 10% last week with the chances of a cut before mid-year at close to 75%. Markets were also pricing in two rate cuts for 2020 as a whole. This shift in expectations was a net drag on the US dollar with EUR/USD advancing to a peak around 1.0870 and held around 1.0850 on Tuesday.

Global equity markets continued to decline sharply in early Europe on Monday as global coronavirus fears intensified. US bond yields continued to decline with the 10-year yield dipping to below 1.40% and the lowest level since July 2016. The yield curve also moved deeper into inversion with 3-month rates above 10-year rates by the most since October 2019.

US equity-market indices opened sharply lower and, although underlying yen sentiment remained weak, the Japanese currency secured renewed defensive support with USD/JPY dipping below 111.00 in early New York as yields dipped.

As equities remained under heavy pressure, USD/JPY dipped to lows near 110.30 before a recovery to 110.70. A Bank of Japan official stated that the central bank will take appropriate steps as needed with an eye on market developments including currency moves which curbed volatility to some extent. Asian equity markets registered net losses, although US futures recovered which provided an element of relief and USD/JPY edged above 111.00 before settling around 110.80 with EUR/JPY trading just above 120.00.

There were no significant UK data releases during Monday with attention focussed primarily on global market moves. Trade tensions were a significant underlying factor with tough rhetoric as the UK and EU looked to prepare their negotiating stances ahead of formal trade talks starting next week. EU representatives agreed their negotiating stance with evidence that the tone was slightly less hawkish than expected which could increase the potential for a compromise deal.

Economic Calendar

07:00Germany GDP (Y/Y)0.30%1.00%
07:00Germany GDP (Q/Q)0.10%0.10%
07:30Employment Level-5.137M
11:00CBI Distributive Trades Survey(FEB)3-
14:00US House Price Index (M/M)(DEC, 2019)-0.20%
14:45FOMC Robert Kaplan Speech--
15:00USD CB Consumer Confidence(FEB)132.4131.6
17:15BoC Governor Member Timothy Lane--
20:00FOMC Member Richard Harris Clarida Speech--

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.