Risk conditions fluctuated sharply with a significant negative shift on Thursday as global coronavirus fears increased further.

Risk conditions fluctuated sharply with a significant negative shift on Thursday as global coronavirus fears increased further.

The dollar overall failed to make headway with EUR/USD moving above 1.0900. Sterling lost ground with month-end positioning a significant element.

ECB President Lagarde stated that fiscal measures intended to support the economy are welcomed, particularly in the current situation. There were still signs of important divisions over budget policies within the German coalition, but the Finance Ministry stated that it was considering suspending strict rules on the debt-financing limit. Expectations of a shift in the Euro-zone fiscal stance provided an element of Euro support. There was further choppy trading in German bonds, although yields ended little changed on the day and yield spreads narrowed slightly relative to US bonds which supported the Euro.

Ratings agency Moody’s stated that the coronavirus is weighing on Italian growth, but is unlikely to affect the sovereign credit profile. Markets overall were unsettled by the coronavirus outbreak which maintained unease over Euro-zone trends.

There were no significant data releases during the day with markets braced for the Chinese PMI data after the market close on Friday and important US releases next week. Former Fed Chair Yellen stated that coronavirus could push the US economy into recession. The dollar secured net gains against commodity currencies, but the Euro edged higher to the 1.0890 area after the European close and settled close to daily highs as dollar doubts persisted.

There was a renewed shift in interest rate futures on Thursday as markets priced in a 45% chance of a March Federal Reserve rate cut. The US currency edged lower with the Euro edged to 10-day highs above the 1.0900 level.

According to China’s Communist Party Politburo, the economic recovery in China is accelerating, but the risks of an epidemic resurgence in relevant regions cannot be ignored. Equity markets declined sharply in early Europe on Wednesday amid another spike in risk aversion, but the dollar was able to hold above the 110.00 level against the Japanese currency.

Futures recovered into the New York open and US indices opened sharply higher with the dollar advancing to 110.70. Volatility, however, remained a key feature with equity markets sliding again after the European close. Treasuries gained fresh support with the 10-year yield declining to near record lows. The US currency reversed course, although it again held above the 110.00 area with consolidation around 110.40 in choppy trading conditions.

President Trump’s comments failed to offer reassurance with US equity futures declining sharply by around 1.5%. Although Chinese markets were resilient, fears over the global coronavirus spread undermined wider risk appetite. As confidence continued to slide, the dollar retreated to near 110.00 with the Bank of Japan indicating no immediate policy change.

Sterling drifted lower ahead of Wednesday’s New York open with initial disappointment that the currency failed to hold above 1.3000 against the dollar. There was also evidence of Euro buying against Sterling associated with month-end demand.

Markets were also less convinced that new Chancellor Sunak would engage in substantial government spending increase in the March 11 budget which helped dampen sentiment, especially as the market had no data releases to divert attention.

EU chief trade negotiator Barnier stated that the EU is ready to offer the UK super-preferential access to EU markets, but access is not possible without strong fair competition guarantees. Fragile risk appetite remained a significant negative Sterling factor with the Euro strengthening to 0.8435. There was also a decline to test the 1.2900 area against the dollar before a recovery to near 1.2935 on Thursday as the US currency lost ground in choppy conditions.

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