Coronavirus dominates, fear increases rapidly
The coronavirus outbreak dominated markets during the week as fear intensified.
The previous week there was an element of optimism that the outbreak was being brought under control in China. Although the data continued to point in this direction, any positive elements were swamped by increased fears over a global outbreak.
A sharp increase in cases for South Korea and Italy and wider global spread were key triggers for increased fear, especially with expectations of a major outbreak in the US.
Equity markets decline sharply, volatility increases
As global fear intensified, selling pressure in global stock markets increased sharply. Major global indices came under sustained pressure with Wall Street indices losing over 10% during the week, the worst performance since 2008.
Globally, market capitalisation declined by over US$5trn over the week.
Volatility increased sharply during the week across all asset classes. The sharp moved were enhanced by the fact that hedge funds had been betting on low volatility and were forced to reverse these bets which contributed to further selling pressure.
Interest rate expectations revised dramatically
As equity markets declined and fear over the growth outlook increased, there was a big move in interest rate expectations, especially in the US.
The previous week, markets expected no change in March and one rate cut during 2020. By the end of the week, there were very strong expectations that the Federal Reserve would cut interest rates by 0.50% at the March meeting and cut by at least 0.75% within the next 3-4 months.
US 10-year bond yields also dipped sharply to record lows below 1.25%.
Dollar declines sharply
The change in US interest rate expectation and slide in yields had an important impact in currency markets with the dollar declining sharply during the week.
The dollar had been seen as the most attractive global currency due to high yields and strong Wall Street gains. The reversal in both trends sparked significant dollar selling.
The Japanese yen drew fresh support and the Swiss franc also strengthened, although it appeared that the Swiss National Bank intervened to prevent further gains.
Chinese data shocking
Markets were expecting weak Chinese business confidence data, but the latest PMI readings still came as a shock. The February data recorded a decline in manufacturing to 35.7 from 50.0 while the non-manufacturing index slumped to 29.6 from 54.1, both figures at record lows.
Although there will be expectations of recovery for March, there will clearly be a big impact on global demand with fears over global recession.
US data releases had little overall impact during the week. Federal Reserve officials indicated that it was too early to make any assessment for the March policy meeting.
Chair Powell, however, stated that the coronavirus outbreak posed evolving risks to the US economy and that the Fed will use all its tools and act as appropriate to support the economy.
The comments reinforced expectations that interest rates would be cut in the short term.
There were no major data releases during the week with markets fretting over UK/EU trade negotiations as both sides announced their negotiating positions. The EU emphasised that there needed to be close alignment for a deal while the UK focus was on sovereignty. Fears over deadlock undermined Sterling support
German business confidence data was slightly higher than expected, but coronavirus fears dominated during the week. ECB officials were cautious, but markets assumed that there would be a further slight interest rate cut by June.
Oil prices declined sharply to 13-month lows as Chinese demand for crude oil slumped and global demand fears increased. Canadian GDP data bear expectations for December, but an on-going transport dispute undermined confidence in the economy, especially with oil prices declining sharply. The Canadian dollar declined sharply to 8-month lows
The Australian dollar declined to 11-year lows as commodity-linked currencies declined sharply while the New Zealand dollar touched 4-year lows.