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Coronavirus fears slam financial markets worldwide

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3 February 2020

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Traders spend the week nervously awaiting the latest contagion and death tallies from the coronavirus in China and elsewhere.

tocks worldwide fell sharply, though Chinese exchanges were shut for the Lunar Holiday. As this is written, Chinese markets are braced for the first market trading since the virus was declared a worldwide emergency. Chinese authorities have announced a raft of measures to support the markets, including a net 150 billion yuan in liquidity injection.

Fears over the impact on global supply chains have hammered commodity prices and emerging market currencies. Safe havens like the yen and the Swiss franc have rallied, and the euro and the pound have so far held up well against the US dollar, thanks partly to a perceived dovish message from the Federal Reserve in its January meeting.

This week the focus should remain squarely on the evolution of the coronavirus epidemic. Short positions on risk assets are getting stretched, so any news that the rate of contagion is levelling off, particularly outside China, could lead to a significant rebound. We will not see the impact on economic data for a while yet. Other market-moving news will come from the US. On Monday, the Democratic Party holds a highly contested primary in Iowa, with the left-wing contender Sanders leading the polls. The US payrolls report on Friday should bring more of the same healthy job growth and modest but steady real wage gains.


As we predicted, the Bank of England disappointed market expectations for a cut, sending Sterling higher in spite of the general flight from risk. The decision to hold had a clear 7-2 majority, with members Saunders and Haskel the only two members to vote for an immediate cut, as they did in December. Outgoing governor Carney struck an optimistic note regarding the recent stabilisation in global growth, although UK growth forecasts for the next three years were all revised down. As we noted in our BoE January meeting reaction report, we think that the chance for the bank to deliver an ‘insurance cut’ may now have passed, given UK economic data is expected to pick-up in the coming months.

Sterling is, however, suffering in early morning Asian trading after Boris Johnson suggested he’s ready to walk away from negotiations without a deal, but we think it is mere bluster and think any sell-off in the pound will be temporary.


Economic data out of the Eurozone disappointed expectations last week. GDP growth in the last quarter of 2019 surprised to the downside, printing an anaemic 0.4% annualised rate, as France’s economy contracted slightly contrary to expectations of modest growth. Core inflation dropped back to 1.1%, and the ECB target of 2% looks as far away as ever.

The unwind of “carry trades” on the back of the coronavirus scare did help the common currency rise modestly for the week in spite of the disappointing data. Focus this week will be on speeches by ECB officials, especially President Lagarde on both Monday and Wednesday.


The counterpart to disappointing European data across the Atlantic was a cautious message from the Federal Reserve. Communications from the Fed were optimistic on the prospects for US growth while expressing frustration with inflation that seems to be persistently below the central bank’s target.

Fears over the coronavirus outbreak seem to have had a mixed effect on the US dollar, sending it higher against commodity and emerging market currencies while most European currencies hold their own. We expect the first Democratic primaries to have little effect on US dollar trading, while the US jobs report on Friday should be rather more important. As usual, we will be paying close attention to the annual wage increase numbers to see whether very low unemployment filters through to upward pressure on wages, which the Federal Reserve would be quite happy to see.