BBVA Research | The risk-off mood intensified on Monday, underpinned by the multiple outbreaks of the Coronavirus epidemic (COVID-19) outside China, raising fears of a global pandemic. Infections spiked in South Korea and Iran, whereas new cases flourished in Afghanistan, Bahrain and Kuwait. In addition, Italy imposed strict quarantines across at least 10 towns as the number of infections rose in th ecountry.
The ECB’s Villeroy and Visco have pointed out the need to boost fiscal stimulus in response to the outbreak. During the G20 meeting of central bankers and finance ministers, Villeroy suggested that monetary policy could not be the only measure to support the economy, while Visco stated that monetary policy is very accommodative and it is uncertain if more can be done. Additionally, Italy’s Governing Council member said the outbreak could diminish global growth by 0.1% this year.
German business sentiment shows resilience against global risks. IFO business climate rose unexpectedly in February (96.1; Cons:95.3 Prev:96.0) suggesting that German economy seems for now, unaffected by the coronavirus outbreak as the economy growth will rise to 0.2% in the first quarter. Nonetheless, companies’assessment of their current situation was slightly worse (from99.2 to 98.9), while business expectations marginally improved (93.4;Cons:92.1;Prev:92.9). On the other hand, U.S. regional activity data were mixed: the Chicago Fed National Activity index widened its fall in January (-0.25;Cons:-0.18;Prev: -0.35), while the Dallas Fed Manufacturing Activity unexpectedly increased in February (1.2;Cons:0.0;Prev:-0.2).
The risk-off mood weighed on sovereign yields, attracting fresh safe-haven flows while Italy’s bond auctions attracted weak demand. The 10Y UST yield shrank to its lowest level since 2016, while German yields slid following the virus outbreak in Italy. Peripheral yields followed the downward trend while the risk premium widened (Spain+3.4xxbps, Portugal+3.8xxbps). Nevertheless, Italy’s yield jumped (+5bps) with its risk premium widening almost 10.5 bps. Currently, the market expects a 25bps Fed interest cut by summer (100% probability by June), and 90% probability of a cut of around 50bps by year-end in November. ECB probabilities reflect lower expectations, showing an 85% cut probability by December 2020.
In FX markets, most currencies depreciated. The JPY recovered some ground after last week’s losses thanks to anunexpected drop in the dollar, as the 10Y UST yields reached record lows. The EUR slightly appreciated following the sudden drop in the USD. Elsewhere, emerging currencies remained under pressure, especially the LatAm currencies and the Turkish Lira.
In commodities, Brent oil prices fell 5.2%, dragged by demand concerns on the back of renewed contagion fears. On the other hand, gold prices surged 1.8% reaching seven-year highs as investors sought shelter in safe-haven commodities.
Equity markets tumbled worldwide following the wide spread of the coronavirus epidemic beyond China. European stocks dropped most since 2016, with Italy’s MIB index dropping 5.43%, while the declines were more contained in Asia. Elsewhere, implied volatility increased further (VIX23+6points).