Coronavirus Policy Response Continues; ‘Biden Bounce’ in Risk Appetite

The latest market highlights and our views on the key developments as the coronavirus policy response continues with the BoC announcing a 50bps cut; risk appetite firms after Joe Biden storms 'Super Tuesday'; and a number of central bank remarks come into focus today

Previous Day's Market Highlights

Coronavirus Policy Response Continues

After the Federal Reserve surprised markets with an emergency 50bps rate cut on Tuesday, the policy responses to the coronavirus epidemic continued yesterday, with the Bank of Canada the latest to act.

The BoC announced, at yesterday's scheduled policy decision, a 50bps interest rate cut -- the first since mid-2015 -- bringing interest rates to 1.25%, their lowest level in 18 months.

The move should come as no surprise given how far behind the global policy curve the BoC had become, and given the Fed's surprise rate cut yesterday, with Canadian policymakers having noted on numerous occasions their desire not to have policy rates higher than that of their US counterparts.

Loosening policy, as discussed yesterday, will not solve the coronavirus itself, though policymakers are clearly attempting to cushion the blow to the economy in the only way that they are able. Further easing from the BoC is highly likely in the coming months, given the BoC's preparedness to 'adjust policy further if required', and the continued aggressive path of easing priced by markets.

In reaction to the policy decision, the Canadian dollar came under pressure, despite the BoC delivering only slightly more than the 42bps of easing that had been priced in before the decision. The loonie was 0.25% lower at the end of London trading, having once again broken above the $1.34 handle.

Elsewhere, expectations of a policy response continue to grow, with rate cuts priced in across the globe. Interestingly, markets were awash with unconfirmed chatter of an emergency 25bps Bank of England rate cut on Wednesday morning, though such action failed to materialise -- even though the rumours did keep most sterling traders glued to their desks at the top of each hour.

Nonetheless, OIS markets continue to price in an aggressive path of easing from the BoE, with expectations for 40bps worth of cuts to be delivered either on or before the 26th March policy decision.

These rumours resulted in choppy trading conditions for the pound which, despite closing unchanged against the dollar, chopped between $1.2775 and $1.2825 for the majority of the trading day.

Markets also expect the ECB to deliver a 10bps rate cut next week, taking the deposit rate even deeper into negative territory, as expectations of a co-ordinated global policy response to the coronavirus continue to mount.

This pricing exerted pressure on the euro, which snapped its 4-day winning streak to end the day nursing losses of 0.4%.

Turning to the virus itself, the rapid spread of the epidemic continues, with around 94,000 cases now reported worldwide. Here in the UK, 85 cases have now been confirmed, an increase of 34 on a day prior -- the most since the outbreak began. Globally, the virus continues to spread, with the epidemic quickly becoming a pandemic in all but name.

The 'Biden Bounce'

More broadly, risk appetite firmed on Wednesday, as markets continued to digest yesterday's emergency Fed cut, and examined the results of the 'Super Tuesday' Democratic primaries, which showed a surge in support for former Vice President Joe Biden.

The primaries, which see around a third of all delegates allocated, and voters go to the polls in 14 states across the US, saw a surge in support for Biden, with the former Vice President now leading the delegate count.

Furthermore, according to betting markets, Biden is now the firm favourite to win the Democratic nomination and take on President Trump in the November election, showing just how quickly his campaign has gone from languishing in last place, to front-runner status.

Starting with equities, markets in Europe extended yesterday's gains, with utilities leading the way. The pan-continental Stoxx 600 closed 1.2% higher, while London's FTSE 100 closed with gains of 1.45%.

Across the pond, US markets chalked up solid gains, erasing Tuesday's losses and more, as volatile trading continued. The benchmark S&P 500 ended the day 4.2% higher, while the 30-stock Dow Jones gained 4.5%, and the tech-heavy Nasdaq added 3.9%. All sectors ended the day in the green, with healthcare leading the gains.

In the bond market, Treasury yields continued to decline as markets continued to price in additional policy easing from the FOMC, and investors continued to seek shelter amid the ongoing coronavirus outbreak. Benchmark 10-year yields fell a further 4bps on Wednesday, remaining under 1%, while yields at the short end of the curve fell by around 8bps.

This continued bull steepening of the curve -- with the 2s10s spread hitting its widest level this year -- shows, as discussed yesterday, that the bond market continues to scream for additional rate cuts.

In FX, the improving risk environment provided a tailwind for the antipodeans; which saw the Aussie dollar add around 1%, and the Kiwi dollar trade around 0.3% higher. Yesterday's scorecard is as follows:

Finally, in commodities, oil prices lost ground as nerves crept in ahead of today’s OPEC and OPEC+ meetings despite expectations that deeper production cuts will be announced. Global benchmark Brent settled 1.4% lower, while US WTI crude lost 0.85%.

Gold prices also faced headwinds, falling 0.35% in the spot market, as a result of the improving risk appetite.

 

Yesterday’s Data

  • February's final eurozone and UK PMI surveys provided no surprises yesterday, printing 52.6 and 53.2 respectively. In contrast, the US ISM non-manufacturing gauge rose to a 12-month high 57.3, though the figures must be taken with a pinch of salt given the coronavirus epidemic.
  • Elsewhere, February's US ADP employment report pointed to the US economy adding 183,000 jobs last month. Despite this, Friday's labour market report -- for which the ADP figure is a semi-reliable indicator -- has been somewhat overshadowed by coronavirus developments.
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1565 1.2074 1.1435 5.29%
GBP/USD 1.2880 1.3069 1.2725 2.63%
EUR/USD 1.1135 1.1213 1.0777 3.89%
GBP/AUD 1.9420 1.9832 1.9164 3.37%
GBP/NZD 2.0420 2.0673 1.9988 3.31%
GBP/CAD 1.7240 1.7376 1.6973 2.32%

Today's Market Highlights

  • Developments around the ongoing coronavirus outbreak will remain the main driver of risk appetite in the day ahead, while markets will remain alert to the potential of further policy responses from G7 central banks
  • On the data front, today sees a light calendar, which should see releases take a back-seat compared to the epidemic. Today's highlights include the weekly US initial jobless claims report, as well as January's US factory orders
  • Remarks from a host of central bank speakers will also be of interest, with investors set to pay close attention to this afternoon's remarks from BoE Governor Carney and BoC Governor Poloz for any hints on further policy action. BoE Chief Economist Andy Haldane is also set to speak
  • Finally, OPEC and OPEC+ will be meeting in Vienna, with lofty expectations for the cartel to deepen existing production cuts in an attempt to support oil prices amid ongoing concerns over a drop in demand as a result of the coronavirus

Today's Economic Calendar

Time Currency Release Consensus Previous
1.30pm USD Initial Jobless Claims (Feb 29) 215k 219k
3.00pm USD Factory Orders (MoM - Jan) -0.1% 1.8%
5.00pm GBP BoE Gov. Carney Speech
5.45pm CAD BoC Gov. Poloz Speech