Domestic and international concern about the economic impact of the tragic coronavirus outbreak in China continued to weigh on financial markets at the end of last week. Gold went up, oil and equities went down, commodity currencies were shunned and safe-havens prospered, as did the pound.
As travel restrictions to and from China became more widespread and tens of millions of Chinese remained quarantined in their cities with thousands of factories closed, investors found it easier to be gloomy than upbeat. A cyclical downturn and America's trade war had already knocked the stuffing out of China's economy: the latest tragic health concern could only exacerbate the situation both inside and outside the country.
On Friday, America's DJ30 equity index fell 2.5% and WTI crude dropped 4.3%. This morning, China's SSE composite equity index opened 8% below its 23 January closing level following an extended new year break, despite significant liquidity stimulus from the People's Bank of China. Investors have no clear idea what will be the eventual effect on China, its neighbours and its trading partners but they can be pretty sure it will not be positive. An early quantifiable impact is on oil, where Chinese demand has plunged 20%. Among the majors the CAD, AUD, NZD and NOK were worst-hit on Friday, all falling 0.7% against sterling.
Since Thursday morning, sterling has been the clear winner among the major currencies, strengthening by an average of 1.1% and picking up half a euro cent and one and a half US cents along the way. The pound did well on Thursday and Friday because of the Bank of England's rate decision; less well this morning thanks to Brexit.
There had been more than a suspicion on Thursday that the Bank of England's Monetary Policy Committee could lower its benchmark Bank Rate. After all, four of its nine members had hinted as much earlier in the month. On the day, however, the committee voted 7-2 to leave the rate unchanged. Although it looks very much as though the decision was leaked, there was no doubt about its positive effect on the pound.
There was less enthusiasm this morning about comments from Downing Street regarding the government's attitude to Brexit negotiations with the EU. Over the weekend it was reported that the Prime Minister intends to impose full border checks on imports. On Sunday, the foreign secretary stated that alignment on trade is "not even in the table", while the PM wrote that there is "no need for a free trade agreement to involve accepting EU rules". Those comments cost sterling about half a cent in early trade.
PMI time again
On the first working day of February it is the purchasing managers' index time of the month. Today's figures mostly relate to manufacturing. On a scale of 0-100 anything above 50 indicates growth.
Of the four readings released ahead of London's opening, only one - ironically from China- came in above 50. The two from Australia and the one from Japan were all in the sub-50 shrinkage zone. The euro zone measures are also expected to miss the cut, as is Britain, where 49.8 is pencilled in.
The action tonight will be in Canberra, where the Reserve Bank of Australia will release its monetary policy statement. No change is expected to the 0.75% Cash Rate but it is not a foregone conclusion.