Risk aversion dominated markets as coronavirus cases increased rapidly.

Risk aversion dominated markets as coronavirus cases increased rapidly. After a significant US retreat, Shanghai equities slumped close to 10% as Chinese bourses re-opened but there was some relief later in the session as the central bank provided liquidity.

Dollar sentiment was undermined by fresh speculation that the Federal Reserve could cut interest rates in March following a weak Chicago PMI release.

EUR/USD peaked close to 1.1200 as the dollar index dipped to 2-week lows. The yen and Swiss franc continued to attract defensive demand.

Sterling advanced on Friday with month-end demand an important element, before a correction on Monday as trade fears persisted.

Federal Reserve vice-chair Clarida stated that a one or two quarter slowdown due to the coronavirus would not change the bank’s outlook. There was, however, a further shift in futures markets with the chances of a March rate cut seen at around 26%. The dollar overall lost ground with a dip to 2-week lows for the currency index as EUR/USD advanced to highs around 1.1095. There was a slight retreat on Monday as the dollar recovered slightly, and commodity currencies remained under pressure.

There were still sharp losses in Chinese equities with the Shanghai index 7.7% lower at the close and coronavirus cases increased rapidly, but Commerce ministry rhetoric offered some reassurance with export companies restarting operations. Demand for defensive assets faded slightly during the session with USD/JPY edging back to 108.50 with EUR/JPY just above 120.00.

Total UK consumer lending increased to £5.8bn for December from a revised £4.9bn the previous month and the strongest monthly reading since April 2016 as consumer credit increased to £1.2bn on the month. The strength in consumer lending suggests increased confidence and makes a notable contrast with reported weakness in retail sales potentially under-reporting consumer spending.

Sterling was little changed into the New York open, but then gradually gained ground even with increased risk aversion. Month-end position adjustment was significant, and the UK currency pushed higher into the afternoon. London fix. GBP/USD pushed to 3-week highs at 1.3200 with GBP/EUR settling close to 1.1875.

CFTC data recorded a decline in long, non-commercial contracts in the latest week, but positioning will still tend to limit Sterling support. The UK currency was also hampered by underlying trade concerns as GBP/USD traded around 1.3160 on Monday.

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