Risk appetite deteriorated on Friday and again over the weekend over Chinese coronavirus fears.

Risk appetite deteriorated on Friday and again over the weekend as Chinese coronavirus fears intensified amid a jump in the official number of cases to over 2,700.

US equity markets moved significantly lower and sentiment remained weaker on Monday, although many Asian markets were closed for holidays.

US 10-year yields declined to 15-week lows below 1.65%. USD/JPY dipped below 109.00 at the Monday Asian open before a tentative recovery later in the session.

The Euro failed to make any headway with EUR/USD at 7-week lows. Sterling failed to take advantage of a sharp improvement in business confidence with markets not convinced that a January rate cut was off the table.

The German flash PMI manufacturing index strengthened to a 7-month high of 45.2 for January from 43.7 and above consensus forecasts of 44.5, although this was still the 12th successive reading below the benchmark 50.0 threshold. The Euro-zone manufacturing index strengthened to 47.8 from 46.3 previously. There was a significant improvement in the German services sector, but the overall Euro-zone services-sector slowed. In comments following Thursday’s ECB meeting, President Lagarde stated that the bank was not yet seeing transmission from wages growth to inflation.

Treasury markets failed to respond to the US PMI data and maintained in positive territory with the 10-year yield dipping to 1.70%. Lower yields undermined the dollar and USD/JPY retreated to near 109.30 as the yen continued to attract defensive demand. There was a significant element of pre-weekend position adjustment given uncertainties over coronavirus developments. US equities also registered significant losses with the S&P 500 index retreating 0.9% and the dollar continued to edge lower.

The Chinese authorities also reported that the lunar holiday would be extended until February 2nd which unsettled sentiment further and USD/JPY dipped to near 108.70 before recovering the 109.00 level.

The UK flash PMI manufacturing index strengthened to a 9-month high of 49.8 for January from 47.5 previously and above consensus forecasts. The services-sector index recorded a stronger recovery to a 16-month high of 52.9 from 50.0 previously. Overall business confidence also strengthened to the highest level since June 2015 and employment made a limited advance. Markit commented within the release that the recovery in business confidence was likely to have killed-off the potential for a near-term Bank of England rate cut.

Sterling initially moved higher, but quickly dipped lower as profit taking emerged. There was also only a slight market re-pricing of the chances of a rate cut this week which limited Sterling support. A GBP/USD dip below 1.3100 triggered stop-loss selling while GBP/EUR drifted lower towards 1.1835.

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