Market Overview

2 March 2020

World Markets React on a Coordinated Support from the Central Banks and Government Officials

The yield of benchmark US ten-year Treasuries hit a new record low of 1.03% on Monday in the early hours as futures on Chicago Mercantile Exchange (CME) consider a possible full 50 basis points rate cut by the Federal Reserve (Fed) in March. Many investors predict a lower cost of servicing the US government debt within the next few months and they may consider less profitable to keep money in American government-guaranteed assets.


However, later on Monday on the European session the yield of the US benchmark bond rebounded to 1.15% because of a rather limited demand for any new safe-haven bond buying. That was a clear result of noticeable upward rebound in both Asian and European shares and of the partial recovery of the US stock indexes. The Shanghai Composite index (SSEC) performed +3.15% compared with its Friday close, Euro STOXX 600 was at +1.95% on Monday's opening, then lost some gains while the American S&P500 stock index traded 150 points above Friday's lows after about 550 points sharp drop of the previous week. The US Dow Jones Industrial index rose more than 1300 points after last week's almost 4900 points crash-like correction. Yet, the bond yields remain pressured both in the United States and in Europe: they "reached" minimum levels at -0.635% already for the Deutsche ten-year bonds and 0.382% for the UK government debt, which is the first time since September 2019 when it showed historical lows.


Despite a very weak China's Manufacturing Purchasing Managers Index (PMI) at only 35.7 issued on holidays and another weak China's Caixin Manufacturing PMI at 40.3 published in the HSBC group survey (the normal values for PMI data are 50 points and above) the market participants now pledge their hopes on the expected coordinated global monetary policy response to mitigate the damaging economic impact of the Chinese-origin virus. In addition to the highly likely action to be taken by the US Fed on March 18, they are pricing in a quarter-point cut by the Reserve Bank of Australia's (RBA), which will hold a meeting this Tuesday.


G7 countries will take a "concerted action", and their finance ministers are going to discuss how to act the best, French Finance Minister Bruno Le Maire told France 2 television on Monday. "Yesterday I spoke with the G7 president, the U.S. Treasury Secretary Steven Mnuchin, and this week we will have a meeting by phone of the finance G7 ministers to coordinate our responses," Le Maire commented on details. He also said that he would speak with the ECB chief Christine Lagarde. "We must act so that this impact that we know will be important on growth, be as limited as possible," he added. Le Maire stated that when the coronavirus outbreak was limited to China he had expected the crisis to shave off only 0.1 percentage points from the French economic growth this year, but now that the outbreak is reaching other countries the impact on French economy growth would be much more significant. However, he said that it is too early to provide a new assessment on figures. France has 132 confirmed cases of coronavirus as of Monday morning, the head of the public health service, Jerome Salomon, said, which raised the count from 100 a day earlier.


At the same time, senior officials in the US President Donald Trump's administration tried verbally to calm the crowd. Speaking to NBC's "Meet the Press" on Sunday, Vice President Mike Pence said that the market "will come back." "The fundamentals of this economy are strong. We just saw some new numbers come out in housing and consumer confidence and business optimism. Unemployment is at a 50-year low. More Americans are working than ever before," Pence said, adding that the US government is doing "everything possible" to prevent the virus from spreading. He also expressed confidence that the United States is prepared to combat the virus. President Trump himself once again voiced his view that the risk to the American people remains "very low".


When asked on the "Fox News Sunday" program "if the American people are over-reacting to the current threat", the US Health and Human Services Secretary Alex Azar responded "Yes, absolutely." Azar said that during a meeting of the White House's coronavirus task force, the US Treasury Secretary Steven Mnuchin had discussed the negative stock market reaction, saying that much of it was driven by an uncertainty. "We are trying to give the American people all the information we have when we have it so they don't think there's secret information they're not getting," Azar noted.


Fed's chair Jay Powell on Friday sought to quell fears, stoked by the widely anticipated bad February economic data from China, reiterating "the central bank would take action if necessary to support the economy", which "remained strong".


Given all the facts and expectations mentioned, it might be said that the sell-off is over. The movement has reached some technical point where it may provide a potential room for a bounce. Markets may take advantage of this space, but the main questions have to do with the degree or duration of this "shying" upward reaction.


The markets are still very emotional and volatile, but from the pure rational side some special attention should be paid to the US ISM Manufacturing PMI to be released today at 15.00 GMT and to the Australian interest rate decision on Tuesday at 3.30 GMT. The UK construction PMI, which will be released at 9.30 GMT and the Europe area inflation at 10.00 GMT on Tuesday, also need to be considered. The UK services PMI and the US Non-Manufacturing PMI due to be released on Wednesday, may theoretically ease the negative effect of the notorious US Service PMI released by the Markit on February 21, which has become an important trigger for the sell-off.


The Bank of Canada (BoC) may consider a rate cut action during its Wednesday meeting. Any comments by the BoC after this meeting may provide important information concerning further monetary policy. This week will be closed by the OPEC meeting in Vienna that will certainly be important for the oil market. Any reduction in production quotas by the OPEC members may support oil prices.


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