Market news 21 February 2020

Economic data were mixed over the week…

• UK labour market data came in in line with expectations in December, with the employment rate reaching new highs of 76.5%. In the last quarter of the year employment rose by 180,000 jobs (consensus: 148,000) ,+0.6% quarter over quarter, despite the economy reporting 0 GDP growth in Q4 as the manufacturing sector contracted for the 3rd quarter in a row. Wage growth slowed to 3.2% 3m/year (November: 3.4%), largely driven by slowdowns in construction and retail pay.
• The German Zew Survey, which reflects economic sentiment in the country, dropped sharply in February from 26.7 points to 8.7 (consensus: 21.5 points). Analysts attributed the fall to the Coronvairus, which will have a negative impact on German exports. The sentiment index was negative for most of last year, as the German economy has struggled to recover from the auto sector decline following the recent emissions regulations.
• The US Empire Manufacturing Index rose by more than expected in February, +8.1 points to 12.9 (consensus: 5.0), marking a 9-month high. Shipments and new orders conditions increased over the month, whilst the employment component saw declining growth. The index was in contraction for the majority of 2019, reflecting the uncertainty over the US-China trade dispute, however the announcement of the phase 1 deal in January likely improved sentiment.

Central bank policy stance easy…

• At their meeting in January, the FOMC voted to maintain their current policy, leaving rates unchanged at 1.50 - 1.75%. The committee said that maintaining the current policy would allow for “a fuller assessment of the ongoing effects on economic activity of last year's shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook”. They gave no indication of direction or timing of future policy changes, although investors are pricing in a rate cut before the September meeting.
• The People’s Bank of China has lowered its benchmark lending rates from 4.15% to 4.05% on 1-year and 4.80% to 4.75% on 5-year loans. Although the cut is minimal in itself, it signals to investors that the bank are on standby to ease policy further if the Coronavirus outbreak causes further pressure for markets.

Coronavirus fears re-emerged – whilst novel cases in China have stabilised, the virus is appearing in other countries

• The spread of coronavirus in South Korea and elsewhere caused global equities to retrace somewhat from record high levels.
• The US dollar outperformed; gold also made multi-year highs above $1,600/Troy oz despite the strength in USD; at the same time US treasuries yields dropped through last August’s lows.