Economic activity in China slumped last month

Financial markets had their worst week since the 2008 financial crisis. All asset classes moved deeper into negative territory as the coronavirus outbreak outside of China gathered pace. The spread of its breadth laid bare the worries over its impact on global economic growth. The MSCI World index dropped -10.9% 5d, yield on 10y treasuries (1.148%) dropped to the lowest level on record and Brent oil prices slumped -15.1%.

The moves in risk assets prompted policymakers to discuss measures to stem the slide. The Federal Reserve, in a rare statement, said that the coronavirus poses ‘evolving risks’ to the US economy and that they will ‘act as appropriate to support the economy’. Following on from this we think the odds are increasing that the Fed will cut rates by 25bps at the March 17/18 FOMC meeting, and we are also now assuming another move by the Fed around the middle of the year. 

The first set of Chinese economic data for February showed, in unequivocal terms, the impact of the viral outbreak on its economy. According to data from the National Bureau of Statistics, the manufacturing PMI index dropped to 35.7 from 50.0 in the previous month and the non-manufacturing PMI index dropped to its lowest level ever to 29.6. The bureau added that as of last week of February, the work resumption rate at mid- and large-enterprises was 78.9%.

Beyond China, economic data suggested that activity in various emerging market economies were showing signs of recovery before the outbreak of coronavirus. Saudi Arabia’s economy grew 0.3% in 2019, a better outcome than our -0.4% forecast.  The oil sector contracted by less than we had expected at -3.6%, while the non-oil sector expanded 3.3% against our forecast of 2.7% non-oil growth.  With OPEC likely to deepen production cuts later this week, our 2020 growth forecast for Saudi Arabia (and other GCC oil exporters) is under review. India’s GDP for Q3 FY 2020 came in at 4.7%, lower than 5.1% growth in Q2 FY 2020 but in line with consensus expectations of 4.7%. The second estimate for full year FY 2020 GDP growth was retained at 5.0%. The sequential slowdown in growth was on account of lower government expenditure and weak investment and exports.

Economic activity in China slumped last month

Source: Bloomberg

Fixed Income

Treasuries extended their rally as risk assets slumped, WHO raised the global risk of the virus to very high from high and the Federal Reserve issued a rare statement assuring markets that it will do whatever necessary to support the economy. At the end of last week, the market has priced in as many as four 25 bps rate cuts from the Federal Reserve over the next 12 months. Yields on the 2y UST and 10y UST closed at 0.91% (-44 bps w-o-w) and 1.14% (-33 bps w-o-w) respectively.

The odds of monetary policy action in other economies also rose. Investors are now pricing in a 45% probability of a 10 bps cut from the European Central Bank.

The YTW on Bloomberg Barclays GCC Credit and High Yield index rose +14 bps w-o-w to 3.01% as investors turned cautious. The credit spreads widened 49 bps w-o-w to 192 bps.

FX

EURUSD rose by 1.66% last week to close at 1.1027, the highest weekly close in a month.  Of note is that on Friday of last week, the price was able to break the 50-day moving average (1.1029) before encountering resistance at the 100-day moving average (1.1055) before retreating just below the former. In addition, while the price was able to momentarily breach the 38.2% one-year Fibonacci retracement (1.1034), the weekly close was below this level. A break and daily close above this level has the potential to catalyze a retest of the 100-day moving average. Should these developments be realized, the price could climb further towards the 1.12 level in the medium term.

A 3.13% loss took USDJPY from 111.61 to 108.11 over the last five trading days. The daily candle chart shows that the 50-day moving average (109.58) was breached on Thursday. With this level acting as a resistance level on Friday, the price quickly fell below both the 100-day and 200-day moving averages in quick succession (109.23 and 108.41 respectively). In addition to this both the 61.8% one-year Fibonacci retracement (109.37) and the 50% one-year Fibonacci retracement (108.43) failed to prevent further declines. Finally the breaking of and weekly close below the 50-week (108.80), 100-week (109.85) and 200-week (109.69) moving averages are bearish for the price. Should we see a daily close below 107.50, not far from the 38.2% one-year Fibonacci retracement (107.49), it could trigger a larger decline towards the 105 level.

Equities

Regional equity markets closed sharply lower as investors remain anxious about the impact of the coronavirus outbreak on region’s economic activity. The sell-off was broad based with all major indices closing in negative territory. The KWSE PM index suspended trading after the index closed limit down. The market had opened for the first time since National Holidays between 25 and 27 February 2019. Elsewhere, the DFM index and the Bahrain Bourse dropped -4.5% and -3.4% respectively.

Commodities

Oil markets crumbled last week as the coronavirus spreads and entrenches outside of China. The economic impact of the virus has been severe with China’s official manufacturing PMI falling to 35.7 for February while the services sector PMI collapsed to 29.6. The virus has just begun to become rooted in other markets such as Italy and while the economic hit may not be as sharp as in China’s case it will nevertheless be significantly negative. Commodity prices reflected the sizeable risk-off sentiment with Brent futures falling almost 14% over the week while WTI was down more than 16% at less than USD 45/b. 

The fixation for oil markets this week will be the OPEC meeting taking place on March 5th, followed by a meeting with partners outside the bloc the next day. OPEC+ is largely expected to endorse more production restraint and we will outline the options available to the bloc and the impact on markets later this week. At a minimum, they may choose to extend the current level of deeper production cuts beyond the end of March, when they are due to expire. Getting to a larger production cut remains a challenge while volatility in oil markets remains high. Saudi Arabia has reportedly mooted a cut of as much of 1m b/d in cooperation with the UAE, Russia and Kuwait, according to press reports. It seems apparent that this week will end with less OPEC+ oil planned for the year rather than more. 

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