Monday, February 3, 2020

The UK finally exits the EU bloc; will RBA cut rates tomorrow?

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market Recap: US stocks suffer biggest weekly loss since August 2019

Stocks in the US extended losses on Friday as the coronavirus outbreak in China shows no sign of slowing down. Wall Street's major indices all suffered losses on Friday, despite strong earnings from Amazon.

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Equities markets continued to be plagued by the ongoing coronavirus outbreak to fall for the second week in a row. Hong Kong’s Hang Seng Index were the biggest loser last week, tumbling down 5.86%. As a result, most stocks around the globe suffered losses during the month of January, with the exception of the Nasdaq and ASX200.

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The dollar fell against most major currencies on Friday as a result of mixed economic data. Personal spending remained robust although personal income in December was weaker-than-expected, signalling that 2020's consumption growth in the US might be slower than expected as well. The Chicago PMI fell to 42.9, much lower than economists' forecasts of 48.9 thanks to slowing new orders and as producers forecast weak activity in 2020. The University of Michigan's final revision for consumer sentiment improved to 99.8 from 99.1 earlier in the month.

Sterling extended gains on Friday, surging 0.86% against the dollar as the UK finally exits the EU bloc, allowing it to start negotiations with the bloc on its new long-term relationship.

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Meanwhile, safe haven assets continue to climb as a global economic slowdown starts to look more likely. Gold, yen and US Treasuries gained on Friday. US treasury yields declined sharply, with 2-year yields tumbling 10bps to 1.31% and 10-year yields retreating 8bps to 1.51%.

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Oil continues to face headwinds as OPEC starts to push for an emergency meeting for a discussion on a potential response to plunging oil prices. Both Brent and WTI crude futures fell on Friday and continued to decline on Monday morning after Bloomberg reported that China's oil demand dropped by roughly 200mn barrels a day or 20% of its total consumption. Russia now says that it is open to Saudi Arabia's push for an emergency meeting, with potential dates for the gathering being on February 8th to 9th or February 14th to 15th.

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Asian stocks look set to suffer at the start of the week. As of Monday morning, China reported that the death toll from the coronavirus has reached 361, with confirmed infections in the country soaring to more than 17,000. Expect a sharp drop in Chinese stocks as they reopen after more than a week of closure as a result of an extended Lunar New Year holiday.

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Earnings season continues this week with results from Big Pharma companies (Merck, GlaxoSmithKline, Bristol-Myers Squibb), tech giants (Alphabet, Twitter, Baidu) automakers (Fiat Chrysler, Toyota, Ford, GM, Honda) as well as Disney.

Important economic releases for the day ahead include the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) report for the manufacturing sector at 7pm (GMT +4).

Today’s Analysis: does the AUD/USD currency pair have upside potential?

The Reserve Bank of Australia (RBA) is likely to leave its cash rate unchanged at 0.75% at tomorrow's monetary policy meeting, delaying a likely rate cut to later in the year. Economic data in Australia has been mostly consistent from the RBA's outlook in November. Key indicators such as GDP, inflation and labour market data has been better-than-expected as well, which means that the central bank will likely be relieved of pressure to stimulate the economy and will more probably sit back to assess the effects of its three rate cuts in 2019.

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The recovering housing market is also likely to reduce the need to cut rates. CoreLogic's index of median city home values rose 0.9% month-on-month. The seventh straight monthly rise in the index signals that household wealth should experience a boost although it may not directly reflect a gain in housing spending.

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But the coronavirus outbreak in China is likely to weigh on the Australian economy. As Australia is dependent on China's economy, the coronavirus outbreak will likely put pressure on the Australian dollar as the virus spreads at an accelerated rate and uncertainty on the duration or severity continues. Since the virus is mostly contained in China, the Chinese economy will be impacted the most, which will spill over into Australian sectors such as mining and tourism. As a result, RBA officials will most probably focus on the coronavirus outbreak the most when talking about downside risks.

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Another downside risk that the RBA will likely focus on is the ongoing wildfires in Australia. As the peak of Australia's summer season (which is the season that is most prone to wildfires) is in January and February, the effects of the crisis on the Australian economy is still yet to be seen. The retail industry is likely to suffer as consumer confidence continues to be weighed down by the fires, agricultural and mining companies in the area will also probably be affected in short-term.

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But ahead of the RBA's decision, the ISM is set to release its PMI report for the US manufacturing sector for January. We expect the dollar to be lifted thanks to a slightly better-than-expected PMI reading. But the manufacturing sector is still likely to continue contracting in January (PMI is expected to continue to stay below 50.0). This is due to the signing of the US-China phase one trade deal which will probably help business sentiment, although the transport sector is likely to continue to be weighed down by Boeing's production halt.

AUD/USD is likely to fall on the release of ISM's PMI report later today as the greenback strengthens against most major currencies. But expect the Australian dollar to advance tomorrow against the greenback past 0.6706’s level towards 0.6722 after the RBA's decision, if the central bank decides to keep rates unchanged. Only a slight increase in AUD/USD is expected however, as futures indicate that the financial markets is only pricing in a 26.7% probability for a rate cut, and as the RBA is unlikely to move away from its dovish bias. Downside risk for the aussie is present however, if the coronavirus outbreak worsens more-than-expected.