Investors will continue to assess the impact of COVID-19 on the global economy next week, central banks in Australia, and Canada will be deciding on interest rates. While the US Democratic primaries and the UK-EU trade negotiations will also dominate the news.
Moreover, important data to be released include the US jobs report, ISM PMI and trade balance; China foreign trade and Markit PMI; Germany factory orders; Canada Employment Change and Australia Q4 GDP and trade balance.
ISM, PMIs and ADP Non-Farm Employment Change will be eyed in the US
Traders have been raising their expectations of FOMC rate cuts as the coronavirus disrupts global supply chains and dents demand, meaning markets will be eager to ascertain the hit to the US economy via PMI data from both IHS Markit and the ISM. Early flash PMI numbers indicated that business activity contracted in February for the first time since 2013 in part due to virus-related factors. The regular monthly employment report will also be scoured for the latest US hiring and pay trends.
EU and UK Trade Relation
The British pound has been unable to capitalize on the dollar weakness as ‘hard Brexit’ fears have unnerved investors as trade negotiations between the UK and the EU start next week, with PM Boris Johnson demanding a broad outline of a deal like that of a Canada-style agreement to be reached by June. Meanwhile, the euro is enjoying a rare rally against the dollar as Fed rate cut expectations and unwinding of carry trades bolster the single currency.
China's Manufacturing PMI tumbles to levels worse than 2008
While we may get some better news out of China on CoVid-19, with the number of new cases reducing daily, the same cannot be said outside China’s borders. Chinese equity markets have outperformed this week (down about 3% so far while Wall Street has slumped more than 10%), but the hold seems fragile and could accelerate quickly
Moreover, the coronavirus outbreak paralyzed many factories in the Hubei province and beyond resulting on China's official Manufacturing Purchasing Managers' Index for February to tumble down to 35.7 points, the lowest on record and well beneath 45 expected. Any score below 50 represents contraction. The figure stood at 50 in January. Meanwhile, The Non-Manufacturing PMI also plummeted to a historic low of 29.6. The services sector was projected to remain in expansion territory, at 51 points after 54.1 in January.
Next week’s data releases include PMI numbers, both from the Statistics Bureau and from Caixin, for February, with surveys anticipating a deterioration. We also get the trade data for February next Saturday
Can the Japanese Yen restore its safe-haven status?
There has been more talk of deeper negative interest rates from BOJ members when faced with CoVid-19. Q4 GDP shrank and Q1 will likely be similar given the supply chain disruptions. Next weak will be the Wage growth and household spending stats for January are due on Friday and any pickup at the start of 2020 would provide some hope to policymakers that the economy wasn’t in such dire straits before being struck by the virus outbreak in February
Any positives in next week’s figures might further help the yen to restore its safe-haven status after the February wobble.
Australia; RBA to hold rates as outlook dims
the Australian dollar had fallen to 11-year lows versus the greenback amid a broad risk-off trade this week. Australia’s Prime Minister Scott Morrison has indicated the government is now considering targeted stimulus for sectors of the economy most severely impacted by the coronavirus outbreak, encompassing tourism and education.
The RBA meeting on Tuesday is expected to result in an unchanged benchmark rate. Note Q4 GDP data on Wednesday is before the wildfires took hold and the impact of CoVid-19 had been felt. As a result, the anticipated better numbers may be discounted, and would probably not help the Aussie too much.
A weaker Australian dollar makes Australia’s exports attractive, but that’s useless if nobody is buying. Weaker GDP numbers ahead of an expected drop in Q1 would apply extra pressure on the Aussie.
Will the BOC deliver a surprise rate cut?
BOC rate cut expectations rose since the coronavirus started spreading globally and markets have now priced cuts of almost 75-basis points in the overnight rate by year end. That may look excessive considering that Canada’s economy isn’t doing too badly, and inflation is running above the 2% target midpoint.
The potential impact from the virus on the current and upcoming quarters, plus the fact that growth already slowed markedly in the second half of 2019, Governor Poloz may decide waiting would be riskier than slashing rates immediately and announce a surprise reduction next week.
How is gold positioned ahead of a busy week?
Gold’s selloff during the worst trading week of stocks since the financial crisis is being attributed to hedge fund selling. Gold volatility will remain intense. If panic selling with stocks continues next week, gold will likely reassert its safe-haven status or if markets show signs of stabilizing, we could see the broad-based commodity plunge with ease.
OPEC+ meeting: will Saudi Arabia do it alone?
OPEC + will have to deliver a deeper production cut as oil prices remain in freefall. How much support that will provide prices will likely be limited as the oil trade remains focused on the global spread of the virus. Next week, will be key for oil prices as any further downward pressure will ignite calls for WTI crude to retest the lows seen during the financial crisis.
