The fourth week of heightened volatility will see financial markets continue to focus on the coronavirus spread across Europe and the US. The economic impact of the virus is deepening, and expectations are high for the week ahead to see another wave of massive monetary easing and for governments to inch closer to a fiscal response. The base-case is starting to price in a recession for the US and the length of it will likely determine how long we will see risk aversion remain in place.
A lot of attention will fall on the Fed’s rate decision as economists have a wide range of rate cut forecasts that range between a 25-basis point cut to a full percentage point. The downside scenario on the economy appears likely and the Fed will not want to waste ammunition. The Fed will likely lean towards a more aggressive cut and signal its latest QE program will take the balance sheet well beyond the $5 trillion mark this year. Risky assets will eventually benefit from all this global stimulus, but until a better understanding is reached on how long this virus will impact everyday life, travel and trade, risk aversion could remain the dominant trend.
In addition to the Fed and BOJ, rate decisions will be had in Switzerland, Norway, Indonesia, Philippines, Taiwan, Turkey and Saudi Arabia. Globally central banks seem united in cutting rates further and delivering additional stimulus. The punchbowl will be overflowing with stimulus and for the risk rally to occur it will need to be accompanied with weakening in the spread of the coronavirus for risk appetite to fully return.
Fed
The race to zero could come true at the upcoming Fed policy meeting. Following the February 3rd intra-meeting rate cut, the Fed is about to quickly show how quickly concerned they are with the stresses in funding markets. The Fed will probably be convinced the US will enter a recession and the severe tightening of financial conditions will force them to remain on the offensive with their bond-buying efforts. The balance sheet will go grow tremendously and when the markets are beyond the virus, risky assets will be well supported.
Mexico
Mexico’s economy continues to crumble as coronavirus global pandemic continues to intensify. The Mexican central bank is expected to cut rates however the government may have little room to deliver fiscal support. Mexico’s peso will try to rebound following one of the worst weeks since Trump won the presidency.
UK
Coordinated easing from the Bank of England and the government this week as policymakers began their defense of the economy as the coronavirus properly announces its arrival on UK shores. The measures were substantial but only in line with the minimum being demanded by the markets, as seen by the rather timid response. More measures from both will likely be warranted in the coming months, with the BoE potentially doing so as early as the next meeting in a couple of weeks.
Switzerland
The SNB has rumored to have been active in currency markets recently as they attempt to ease the pressure on the Swiss franc, which has become a favorite again in this risk-averse environment. The central bank may be tempted to cut even deeper into negative territory to -1% next week but markets aren’t currently pricing a move in. Instead, they may adopt more unconventional measures to support the economy through these tough times for the global economy, as we’ve seen from others while continuing to manage the currency in a way all too familiar to them.
ECB
The ECB disappointed traders this week by focusing on measures designed to ease the strain on small and medium-sized businesses, rather than feed the markets another meaningless 10 basis point rate cut. The central bank's toolkit is looking very depleted but more will likely be expected of it. Given the trend for emergency rate cuts, we may get further measures from the central bank in the coming weeks, possibly even that rate cut if traders don’t back down. Given the state of the eurozone economy even prior to the Coronavirus outbreak, it is arguably the most in need of support, especially Italy which has among the least fiscal headspace. Policymakers will have to be more proactive in the coming weeks or the recession there could be brutal.
Turkey
The CBRT is expected to remain in easing mode, with markets pricing in a 50 basis point cut, in line with many other central banks in recent weeks. The central bank is contending with a weakening currency though so may be forced to play it carefully or risk triggering another spike in inflation. They’ve got away with it until now but these markets are less forgiving.
South Africa
The South African central bank is poised to follow the rest of the world and deliver rate cuts at the March 19th meeting. The rand has pummeled along with all the emerging market currencies. The outlook for the South African economy is rather bleak. The economy is in a technical recession and unemployment is at the global financial crisis high. South Africa has high inflation but the SARB can afford to cut rates again from the relatively high 6.25% interest rate.
Hong Kong
The economy is mired in a deep recession due to coronavirus slowdown. On the plus side, protests have subsided to almost nil. No significant data or events next week.
Risk
External. Covid-19 weighs on the economy and national champions like Cathay Pacific are bleeding. Sentiment on equity market very fragile.
China
Feb Retail Sales are due Monday. Loan prime Rate Friday. Expect a rate cut. Investors pricing a recovery China for now as new coronavirus cases are plummeting to zero. Faces an external demand shock from coronavirus. The winner from oil price collapse.
Risk
A resurgence of coronavirus sees double dip. Lots of good news priced in. Authorities tightly managing stock market and currency volatility. Stocks could suddenly collapse if authorities step aside.
India
A huge winner from oil price collapse will help the RBI stagflation fight. No data of significance. Credit markets under strain post the RBI takeover of Yes Bank
Risk
A sudden spurt of coronavirus cases overwhelms the health system. Fall in INR and Nifty as investors flee. Credit markets very tight as Yes Bank failure delivers another blow to the banking system. Potential for domino in the financial sector.
Australia
Panic buying of consumer staples as coronavirus cases increase. The slowdown in the domestic economy as schools are shut and large gatherings banned. Positive is a huge fiscal stimulus and an RBA rate cut.
Risk
A jump in risk aversion sentiment (probably due to coronavirus) could see AUD sell-off resume with force and also hit the stock market. The oil price collapse has flowed to the resource sector, pummelling stocks and the AUD. An increase in virus concerns will weigh disproportionately on Australia.
New Zealand
Very quiet on the data front next week, with high beta to China the main risk. Containment measures appear to be working well with the low number of cases. Like AUD, NZD has been heavily sold and remains vulnerable to further resource price drops. No sign of housing market stress or job losses.
Japan
Doubts persist over the true numbers of coronavirus cases. BoJ interest rate decision Thursday. Expect no cut but increased QE. A fiscal stimulus package from the finance ministry is imminent. No data of note.
Risk
Stock markets have been among the worst-performing in Asia. Extremely sensitive to increased coronavirus risk internationally. Possible postponement of the cancellation of the Olympics deals another huge blow to the economy.
Oil
Oil price volatility is not going anywhere anytime soon. Oil prices resumed their bearish trend after President Trump reminded markets that travel bans are likely to deliver further demand destruction for crude. Crude prices will be subject to wild swings on any surprise disruption in the Middle East or if OPEC + somehow decides to put an emergency meeting on the calendar. The President will try save the shale industry and will provide some support. His first step was to announce the purchase of large quantities of oil for their strategic reserves. He will likely offer more support in the coming weeks.
Gold
Gold investors are wondering when will the scramble for cash end. The patience of many gold bulls has been lost and prices could soon see a very quick snapback once a wrath central bank rate decision signal a lower interest rate environment is here to stay. Gold’s safe-haven status was dealt a blow over the last week.
Bitcoin
Bitcoin is having a terrible month that is seeing many investors panic and get out of the crypto space. Bitcoin could remain under pressure until we see markets have an appetite for risky assets. Bitcoin volatility should remain high and could see wide trading target the $3,500 to $6,300 range over the next few weeks.