Risk appetite deteriorated very sharply on Thursday as fears over the global growth outlook deteriorated and confidence dipped further on Friday.

Risk appetite deteriorated very sharply on Thursday as fears over the global growth outlook deteriorated and confidence dipped further on Friday.

Equities moved sharply lower with a decline in the S&P 500 index of over 4% and futures declined further on Friday with global equities on course for the worst week in 11 years.

The dollar retreated sharply to 3-week lows as markets ramped-up interest rate cut expectations aggressively with EUR/USD just above 1.1000.

Commodity currencies declined sharply amid growth fears.Sterling lost ground amid multiple concerns as weaker risk appetite dominated.

Latest Euro-zone confidence data recorded an improvement to 103.5 for February from 102.6 the previous month with businesses and consumers more optimistic over the outlook, but coronavirus concerns will inject further uncertainty.

German yields declined on the day as the German DAX index declined by over 3%. There was also a shift in money markets with futures markets pricing in a 10 basis-point cut in benchmark rates at the July meeting. The Euro did, however, gain some protection from the strong current account position and the ECB appeared in no rush to adjust monetary policy.

According to the second reading, US GDP was unrevised at 2.1% for the fourth quarter with an upward revision to consumer spending. Jobless claims increased to 219,000 in the latest week from 211,000 previously. Durable goods orders declined 0.2% for January following a revised 2.9% increase the previous month with the underlying increase of 0.9% above consensus forecasts of 0.2%. The data releases had little overall impact with markets focussing on risk conditions.

As equity markets continued to decline, there was a further re-pricing of US interest rate expectations. Fed Funds futures indicated that the chances of a rate cut at the March meeting had increased to near 70% with strong expectations of two rate cuts by July. The shift in interest rate expectations undermined the dollar with EUR/USD pushing above the 1.1000 level for the first time in 3 weeks.

Risk appetite slumped once again ahead of Thursday’s New York open as coronavirus fears increased further. Equity futures remained under heavy pressure which maintained an element of yen demand as Japan shut schools until the end of March.

Treasuries continued to attract defensive demand with the 10-year yield sliding to fresh record lows around 1.27%. USD/JPY dipped to lows around 109.70 around the US open before a move back above 110.00 as equities rallied in volatile conditions.

Chicago Fed President Evans stated that it was too early to tell if growth forecasts would be cut and that it will take some time for the effects to show. Wall Street equities lurched lower into the close which pushed the dollar back to daily lows.

Bank of England deputy Governor Cunliffe stated that the UK has weak domestic inflation despite cost pressures and a key question was how much is cyclical and how much structural. Overall, he did expect to see inflation from the labour market and for domestic cost pressures to push inflation slightly above target.

Sterling was undermined by further vulnerability in global risk appetite, especially with concerns over global trade flows. The UK government warning that it could break-off UK/EU trade talks if there is no broad outline of a deal by the end of June contributed to the soft Sterling tone.

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