News is discouraging, but the US surveys show no evidence of spillover from the coronavirus outbreak. Yesterday’s data showed that the
Philadelphia manufacturing index not only rose unexpectedly but also pointed at a three-year high of 36.7 in February, versus 10.1
expected by analysts and 17.0 printed a month earlier.
The US dollar gained more strength on the back of solid economic data, which has been diverging from data released elsewhere in the world.
One explanation is that, there may be a certain disconnect between sentiment and reality in the US, hence even the US hard data could come as a bad surprise in the coming weeks and take some shine off the positively diverging US dollar. For now, the US dollar index is challenging the 100 level.
In Europe, German producer prices jumped 0.8% in January, versus 0.1% expected by analysts and printed a month earlier, but the consumer index reminded that sentiment in Germany remains sour, mostly due to coronavirus worries.
Due today, the PMI data should confirm a further slowdown in German and European manufacturing and service sectors. If this is the case, the combination of soft European data versus strong US figures should set the stage for a deeper sell-off in euro against the US dollar and the pound. Investors will certainly be looking to strengthen their core short positions on advances above the 1.08 mark versus the greenback and the single currency could extend weakness to 1.0750/1.0730 in the continuation of the presently building negative momentum. The European Central Bank (ECB) meeting accounts renewed call for fiscal stimulus, stating that the monetary policy is ‘not the only game in town’, especially given that European businesses seem quite indifferent regarding rock-bottom interest rates. Happily for the ECB, the People’s Bank of China (PBoC) has now loosen its purse’s strings to give its economy the necessary support to fight back the coronavirus-triggered weakness. Dovish PBoC will allow many central bankers beside Christine Lagarde to take a deep breather and hope that the Chinese stimulus would have a global positive effect to uplift activity.
Otherwise, the first quarter earnings will likely feel the pinch of subdued activity and could cause at least a temporary and sharp downside correction in near-term stock prices worldwide.
In the UK, investors will monitor through PMI data how much of the post-election optimism has stayed with the ongoing Brexit shenanigans amid a difficult start to bilateral trade negotiations. The services PMI is expected to ease to 53.4 from 53.9 printed previously. The speed and the extent of the readjustment in business optimism should give a hint about how long the positive spillovers of the post-election enthusiasm would last and how much of the early positivity would translate into hard data. Cable fell to 1.2848 on Thursday faced with the US dollar’s solid race. Encouraging data and downside correction in USD could help the pound gaining some field above 1.29.
By Ipek Ozkardeskaya