Equity investors’ continued faith in central banks is evident in China’s market today, with the CSI 300 index up more than 1%.The index has now recovered all of its losses since trading resumed after the Lunar New Year holiday, rising 10.9% from a low of 3,639 recorded on February 3. China’s PBOC lowered the rate on its medium-term loans to financial institutions to 3.15% from 3.25%, after earlier lowering rates on reverse repurchase agreements by a similar amount. The central bank also announced an injection of 100 billion Yuan of reverse repo to financial institutions. These actions are likely to be followed up by lowering the country’s benchmark rate later this week, as they continue to fight the spread of the coronavirus.
Fiscal policies are likely to play a significant role in the current situation with the virus outbreak, with authorities in China pledging to reduce taxes on corporations. But whether this will lead to faster production and get the business cycle running at full capacity again, still depends on how soon the virus gets contained.
Monetary stimulus is currently not helping to boost investment or encourage consumers to spend, but it is inflating asset prices. At this stage, companies’ capital expenditure will not rise because of the cheaper cost of money, similarly spending by consumers on housing, cars and other durable goods. The contagion needs to be controlled to bring confidence back and that’s what we should be monitoring going forward.
This week, we’ll get to see how German institutional investor’s sentiment has been affected by the outbreak of the coronavirus. After reaching a four-year high in January, Tuesday’s German ZEW is most likely to have declined in February, but Euro traders will be monitoring the scale of any fall in the sentiment index.
Eurozone companies will reveal how they are coping with the deadly virus on Friday when IHS Markit releases its February manufacturing and services activity for the region.
A worsening economic outlook may lead to further pressure on the Euro, which fell to a three-year low on Friday, with data from before the coronavirus already showing weakness. Industrial production in the Eurozone dropped 2.1% in December, while the Germany economy stagnated in the fourth quarter of 2019 and the wider Eurozone is growing at its weakest pace since 2014.
Traders will have a better understanding of the Federal Reserve’s outlook on Wednesday, when it releases its minutes for last month's meeting. Whether Chair Powell’s warning about the impact of the coronavirus outbreak on the US economy will potentially justify a further cut in interest rates remains to be seen, with speculators already pricing in a 43% chance of a rate cut by mid-year.