Frentic Rally Reverses On Speculation G-7 Stimulus Will Disappoint

Monday's ferocious rally halted and reversed on several occasions overnight, following a report that the G7 meeting that started moments ago, at 7am ET this morning, and which sparked a record point gain in the Dow Jones Index, may disappoint. Specifically Reuters reported that while G7 finance officials and central bankers will discuss ways to bolster their economies against the impact of the spreading coronavirus outbreak, the meeting will not be another Shanghai Accord (contrary to widespread speculation) as they are not expected to specifically call for new spending or coordinated interest rate cuts, but merely will pledge to work together to mitigate damage on economies from coronavirus spread.

As reported yesterday, finance ministers and central bank governors from the G-7, led by Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin will hold a conference call at 700AM ET/1200 GMT to discuss the outbreak. But according to the official, who declined to be identified, a statement they are crafting and which is expected to be released on Tuesday or Wednesday, does not detail any fiscal or monetary steps, which is hardly what the market - which is now pricing in as much as 25 to 50bps in emergency rate cuts by the Fed was expecting. As a result, while global stocks and oil prices made a torrid recovery afters policymakers indicated on Monday a willingness to help ease the economic fallout from the coronavirus, worries about the outcome of the Group of Seven heads’ discussion kept a lid on gains.

“The market is very much wanting a coordinated policy response, but the question here is whether a conventional interest-rate response is sufficient, or whether it requires also a fiscal response,” said Sameer Goel at Deutsche Bank. “The problem is, the severity of the problem is not very clear.”

Yet even as traders got cold feet in the last moment that the G7's response will be far less forceful than expected, with Reuters once again warning not to expect too much:

  • EU FINANCE MINISTERS UNLIKELY TO TAKE ANY DECISIONS AT WED CALL ON CORONAVIRUS RESPONSE - OFFICIALS
  • G7 STATEMENT AS OF NOW DOES NOT INCLUDE SPECIFIC LANGUAGE CALLING FOR FRESH FISCAL SPENDING OR COORDINATED INTEREST RATE CUTS BY CENTRAL BANKS - G7 SOURCE

... the momentum alone from yesterday's record US move higher was enough to send Europe's Stoxx 600 Index at one point more than 3% up as every sector in that region rallied, even as the euro slipped after data showed inflation slowing to a three-month low in February, in part due to slumping energy prices.

Yet despite the early loss in futures, the overall improved sentiment - which apparently improved on an event which may not even happen but traders were too busy buying stocks to ask any questions - helped U.S. S&P 500 futures climb as much as 1% overnight before fading again, while MSCI’s world stocks index was up 0.6% having scored its best day since 2011 on Monday after a roaring Wall Street pushed it up just over 3%.

“Markets will have to decide if the promise of concerted and possibly co-ordinated action from fiscal and monetary authorities will be enough,” said James Athey, senior investment manager at Aberdeen Standard Investments. “For most shocks you would probably say yes, but the scale, magnitude and sheer unknowable nature of this one makes that an open question.”

Earlier in the session, Asia-Pacific shares outside Japan ended 0.8% higher, off earlier peaks but still marking the second straight session of rises. Most markets in the region were up, with Thailand’s SET gaining 3% and Jakarta Composite rising 2.9%, while Japan’s Topix Index dropped 1.4%. Trading volume for MSCI Asia Pacific Index members was 16% above the monthly average for this time of the day. The Researve Bank of Australia on Tuesday cut interest rate by 25 basis point to a record low, although the cut was seen by many as not enough. Still, Australian shares ended up 0.7% after the central bank cut interest rates to a record low of 0.5%, the fourth reduction in less than a year.  The Topix declined 1.4%, with Land Co and HIS falling the most. The Shanghai Composite Index rose 0.7%, with Jinzhou Port and Baoding Tianwei Baobian Electric posting the biggest advances.

The decision to hold a G7 call came after the head of the European Central Bank, Christine Lagarde, on Monday joined the chorus of heavyweight central bank chiefs signalling a readiness to deal with the threat from the outbreak. Earlier messages from the U.S. Federal Reserve that it was prepared to act continued to weigh on the dollar, having fueled expectations of a sizable rate cut at its meeting in two weeks.

The rout in global stocks last week had already prompted Fed Chair Jerome Powell and Bank of Japan Governor Haruhiko Kuroda to flag a readiness to move. “It is reasonable to expect a response that reflects a combination of fiscal measures and central bank initiatives,” Bank of England Governor Mark Carney said on Tuesday.

As a result, money markets are fully pricing in a cut of at least 0.25 percentage points to the current 1.50%-1.75% target rate at the Fed’s March 17-18 meeting as well as a 0.10 percentage point cut to the ECB’s minus 0.5% key rate at March 12 meeting. The frantic moves by policymakers reflected growing fears about the disruption to supply chains, factory output and global travel caused by the new epidemic just as the world economy was trying to recover from the effects of the U.S.-China trade war.

Coronavirus, which has already claimed more than 3,000 lives, now appears to be spreading much more rapidly outside China than within the country. That leads the world into uncharted territory, although the World Health Organization has so far stopped short of calling it a pandemic.

“Barring any further deterioration of the coronavirus outbreak, we believe that the global cyclical recovery is likely to gain further momentum,” Schroders’ Asian multi-asset team said in a report. “This is likely to benefit stocks with higher leverage to global growth, as stronger earnings could support dividend growth.”

In rates, treasuries remain higher, with yields off session lows reached during Asia session and close to yesterday's closing print, as participants awaited details of the G-7 conference call. The rally gathered pace after Reuters reported that the G-7 draft statement doesn’t specifically call for new government spending or rate cuts by central banks, however it has since fizzled on Monday's risk on momentum. Yields were lower by ~2bp across the curve, 10-year by 1.6bp at ~1.145%, vs Monday’s record low 1.028%. In Europe, Bunds (+5bp) and gilts (+3.5bp) continue to lag behind Treasuries, the main beneficiary of safe-haven demand; Italian bonds outperform core European rates, along with Greek debt. Also of note, 3-month dollar Libor +6.05bp at 1.25375%, snapping an eight-day streak of lower settings, including the biggest drop since 2008 on Monday.

In FX, against the yen, the dollar lost 0.4% to 107.95 yen, slipping towards a five-month low of 107 set on Monday. The Australian dollar, seen as a proxy bet on China, sat above a recent 11-year low largely on short covering after its central bank cut interest rates by 25bps, or less than many traders expected, earlier in the day.

In commodities, Brent oil prices gained another 2% after a jump of more than 4% on Monday. U.S. WTI crude futures went to $47.8 a barrel while Brent crude stood at $52.9.

Aside from watching the market, U.S. citizens in states including California and Texas will vote on “Super Tuesday” for a Democratic candidate to run against President Donald Trump in November’s election.  AutoZone, Target, and Veeva are among companies reporting earnings

Market Snapshot

  • S&P 500 futures up 1% to 3,096.00
  • STOXX Europe 600 up 2.8% to 386.55
  • MXAP up 0.04% to 156.90
  • MXAPJ up 0.8% to 517.29
  • Nikkei down 1.2% to 21,082.73
  • Topix down 1.4% to 1,505.12
  • Hang Seng Index down 0.03% to 26,284.82
  • Shanghai Composite up 0.7% to 2,992.90
  • Sensex up 1.1% to 38,568.09
  • Australia S&P/ASX 200 up 0.7% to 6,435.68
  • Kospi up 0.6% to 2,014.15
  • German 10Y yield rose 3.3 bps to -0.591%
  • Euro down 0.2% to $1.1108
  • Italian 10Y yield rose 3.5 bps to 0.969%
  • Spanish 10Y yield fell 3.5 bps to 0.251%
  • Brent futures up 2.7% to $53.28/bbl
  • Gold spot up 0.5% to $1,597.81
  • U.S. Dollar Index up 0.1% to 97.49

Top Overnight News

  • Group of Seven finance chiefs will hold a rare conference call Tuesday under pressure from investors to match their pledges to shield the world economy from the coronavirus with action. Bank of England Governor Mark Carney said policy makers are crafting a “powerful and timely” defense of the world economy
  • After financial markets effectively browbeat global central banks into at least verbal action in recent days, the reaction to Australia’s interest-rate cut Tuesday showcased the danger of under-delivering
  • Former Vice President Joe Biden did something in 24 hours he couldn’t do for more than a year -- coalesce the Democratic Party’s establishment around him as he tries to thwart Bernie Sanders on Super Tuesday
  • Swiss economic growth slowed slightly at the end of 2019, highlighting some fragility as it faces the impact from the coronavirus outbreak.
  • Plans by two distressed Chinese companies to ease their imminent debt crisis are betraying a subtle shift in Beijing’s delicate balancing act between combating financial risk and preserving stability as the coronavirus outbreak continues
  • Andrew Bailey, the man who becomes Bank of England governor in less than two weeks, is set to make the first public appearance connected to his new role on Wednesday. The appearance is all the more important since his views on policy remained virtually unknown, giving investors little insight into the direction the BOE may take when he takes over
  • The Bank of Japan conducted an unscheduled debt buying operation for a second day amid growing expectations of a coordinated effort by global central bankers and finance ministers to mitigate the economic impact of the coronavirus. Group of Seven finance ministers and monetary officials will speak by teleconference on Tuesday, people familiar with the matter said
  • Japanese Prime Minister Shinzo Abe told parliament his government is paying close attention to the effects of the coronavirus on the economy, as it implements a series of measures aimed at stemming the disease. Won’t hesitate to introduce more economic measures if necessary, Abe says. Japanese Finance Minister Taro Asocalls for coordination with other nations on virus
  • The Trump administration is discussing a series of steps to contain the economic and market fallout from the rapidly spreading coronavirus, including a push for the Federal Reserve to enact an emergency rate cut and a possible tax cut.
  • Joe Biden is consolidating support for his Democratic presidential campaign as centrists line up behind him to effectively try to block Bernie Sanders from winning the party’s nomination. Pete Buttigieg, who dropped out of the campaign Sunday night, appeared with Biden at a Dallas restaurant and gave his endorsement. Amy Klobuchar ended her presidential bid earlier Monday and planned to endorse Biden at a rally
  • Oil extended its rebound from last week’s slump as global policy makers pledged to safeguard markets from the coronavirus, while OPEC and its allies are expected to deepen production cuts.

Asia traded mostly higher as the region took impetus from the rally on Wall St amid hopes of a coordinated effort to address the fallout from the coronavirus, with G7 Finance Ministers and Central Bankers planning a call to weigh the coronavirus response which will be led by US Treasury Secretary Mnuchin and Fed Chair Powell, while FFR futures were now pointing to a 75bps cut by the Fed this month. This inspired a surge across the major US indices led by the DJIA which rose over 5% which was the most in over a decade and posted its biggest point gain on record of nearly 1300 points. ASX 200 (+0.7%) and Nikkei 225 (-1.2%) were lifted at the open with Tech and Healthcare frontrunning the broad sector gains in Australia and as markets also awaited the widely anticipated rate cut by the RBA, while the Japanese benchmark was less decisive and retraced all its gains amid detrimental flows into the currency. Elsewhere, Hang Seng (U/C) and Shanghai Comp. (+0.7%) were positive in which the latter breached the psychological 3000 level with sentiment supported by the global stimulus hopes and a continued decline in the pace of coronavirus cases in mainland China. Finally, 10yr JGBs slumped to below 153.50 on spill-over selling from USTs amid the rally in stocks, although JGBs later found reprieve despite mixed 10yr JGB auction results, as the sentiment in Japan deteriorated and following the BoJ announcement for another JPY 500bln unscheduled repo operation.

Top Asian News

  • BOJ Displays Resolve on Calming Markets With Another Repo Move
  • Legally Embattled Netanyahu Claims Victory After Turbulent Year
  • IPhone Maker Expects Return to Normal in China by End- March
  • Local Funds Snap Up Philippine Stocks While Foreigners Sell

European equities (Eurostoxx 50 +2.1%) trade with firms gains as market participants continue to place bets on a coordinated policy response with G7 Finance Ministers and monetary policy officials scheduled to hold a call at 1200GMT/0700EST today. Ahead of this call, a draft version of the statement appears to make no specific calls for fresh fiscal spending or coordinated rate cuts, however, world leaders will pledge to work together to mitigate the economic fallout from COVID-19. Furthermore, reports ahead of the call at midday were based on a draft version of the text, which could ultimately be revised to provide more of a robust response, should it be deemed to be necessary. In terms of sector specific performance in Europe, gains have been relatively broad-based with all ten key sectors trading markedly higher. Travel names including Deutsche Lufthansa (+9.5%), Air France (+6.5%), and Tui (+5.5%) have been granted some reprieve from recent losses, albeit, it’s difficult to gauge exactly how much the sector would benefit from a response by monetary authorities given that travel restrictions would likely remain in place regardless. Elsewhere, Qiagen (+18.7%) sit at the top of the Stoxx 600 after Thermo Fisher announced a USD 10bln deal to buy the Co, Direct Line (+4.3%) trade higher post-earnings, whilst support has been seen for the Spanish banking sector after a court ruling over mortgage terms could prevent lenders from having to make large compensation payments to customers. To the downside, Hiscox (-4.7%) lag peers over concerns about coronavirus-related claims, a disappointing earnings update for Ashtead (-0.5%) has weighed on Co. shares, whilst Novartis (flat) are marginally softer after the Co.’s subsidiary are to pay USD 195 over antitrust violations.

Top European News

  • ECB Joins Central Banks Pledging Coronavirus Action If Needed
  • Bailey Faces First BOE Test as Coronavirus Rewrites Outlook
  • Spanish Banks Soar After Mortgage Cases Sent to Local Courts
  • Six Kids, $17 Billion and Plans to Keep Russia Wealth Stable

In FX, the Dollar is on a firmer footing after extending declines on Monday and the DXY briefly breaching Fib support (97.193) just ahead of 97.000, but crucially from a tech perspective managing to ‘close’ back above. Meanwhile, the Greenback has also gleaned some traction from a rebound in US Treasury yields amidst a strong recovery in equities and risk assets in general on the premise that more global monetary authorities are providing ammunition to combat COVID-19, with additional supportive policies in the pipeline. On that note, G7 Finance Ministers and Central Bankers are holding a conference call around 12GMT to discuss whether the situation warrants coordinated action, which has helped the index return to the 97.500 axis.

  • GBP/AUD - Somewhat perversely perhaps, the Pound and Aussie are among the major outperformers even though BoE Governor Carney and MPC members Tenreyro are hinting at some form of policy stimulus at the post-Budget meeting pending what new UK Chancellor Sunak has in store on March 11. Cable is back above 1.2800, albeit with the aid of an encouraging construction PMI as the headline reclaimed 50+ status, while Eur/Gbp has retreated through 0.8700 after running into resistance fractions shy of the 200 DMA and with contacts noted decent model/program offers on the way back down. Back down under, Aud/Usd has been volatile following the RBA’s 25 bp ease overnight and forward guidance suggesting the official cash rate may be held at the new 0.5% record low until the extent of the nCoV (and bushfire) damage is known rather than reduced again to the lower bound that in theory would only leave QE in reserve for any further economic downturn.
  • JPY/SEK/NOK - The other strong G10 units as the Yen holds above 108.00 vs the Buck following a second test of support circa 108.50 that is now forming a double chart formation, while the Scandi Crowns are rebounding firmly from yesterday’s lows against the Euro on the back of renewed risk appetite that has filtered through to oil and other commodities. Eur/Sek has reversed sharply within 10.6475-5535 parameters and likewise Eur/Nok between 10.3870-3165.
  • NZD/CHF/EUR/CAD - The Kiwi continues to lag its Antipodean counterpart, with Nzd/Usd straddling 0.6250 ahead of the latest GDT auction and awaiting the RBNZ’s response to the coronavirus, while the Franc has handed back some gains vs the Dollar on the 0.9500 handle in contrast to Eur/Chf pivoting 1.0650 in wake of firmer than forecast Swiss GDP. Moreover, the Euro has lost momentum more broadly as Eur/Usd fades around 1.1155 and some distance from Monday’s best levels nearer 1.1185 irrespective of more reports about targeted ECB liquidity and push-backs against near term of knee-jerk rate cuts and QE, via Holzmann this time. Similarly, the Loonie has waned on the approach to 1.3300 and Wednesday’s BoC policy convene that could see a less confident assessment and statement if not action to counter the effects of China’s epidemic.
  • EM - It’s back to broad depreciation against the Usd, but with the Zar also hit extremely hard by the SA plunging into a deep recession via a 1.2% q/q Q4 GDP contraction, while the Try continues to lament heightened military conflict in Syria’s Idlb.

In commodities, WTI and Brent front month futures are bolstered this morning in-line with the generally firmer risk-sentiment, as markets anticipate some form of stimulus package from central banks and with the G7 meeting today at mid-day London time to discuss the situation. In terms of where we currently stand, WTI and Brent are posting gains of around USD 1.50/bbl at present and remain in proximity to their session highs in the mid USD 48/bbl and USD 53/bbl realm. Crude specific, has seen remarks from the Kremlin that we should wait for the OPEC+ meeting for details on whether Russian is ready for additional output cuts. Additionally, Lukoil’s VP expects OPEC to cut production in excess of 1mln BPD; believes that a cut of 600k-1mln would be sufficient to bring prices above the USD 60/bbl mark. Recall the JTC recommended a cut of 600k and Russian Energy Minister Novak has remarked that they have received no communication from Saudi on a 1mln BPD move; are reviewing the 600k recommendation ahead of this week’s Thursday/Friday meeting. Turning to metals, spot gold has remained within a comparatively tight range of around USD 15/oz for much of the session, the yellow metals upside has, thus far, been effectively capped by the USD 1600/oz handle. Focus for the safe haven does remain affixed to the coronavirus, and the potential for a policy response to tackle this, as well as other geopolitical concerns such as the ongoing Syrian conflict; in which the Turkish Military confirm that a Syrian Government warplane was shot down as well as reports of ballistic missiles being fired in the region.

US Event Calendar

  • Wards Total Vehicle Sales, est. 16.8m, prior 16.8m
  • 2:50pm: Fed’s Mester to Address UK Society of Professional Economists
  • 4:30pm: New York Fed’s Logan Discusses Ample Reserves Regime
  • 6:30pm: Fed’s Evans Takes Part in Moderated Q&A

DB's Jim Reid concludes the overnight wrap

Due to being brainwashed (probably correctly) I’ve washed my hands so much over the last few days that I think I need to buy some hand moisturiser as they are rapidly drying out. I’ve also got the taste of hand sanitising gel in my mouth. I’ve no idea why but it may speak to my bad habits and exactly why the advice is given to wash your hands a lot. Given that it contains alcohol I hope that doesn’t count in my weekly units. Anyway last night we published the results of our flash 9 hour covid-19 survey with the results in graph form published here. We had over 600 responses and on a scale of 0 (not at all) and 10 (extremely) on how concerned you were that you or your family would catch the virus the average response was 4.76 with 42% at 6 or higher on this scale. 37% have made no changes to lifestyle with 63% making some changes (most slight). 26% have had a social event cancelled and 40% a work event. A net 7% thought markets overreacted last week but the tails were quite big with 17% strongly agreeing and 14% strongly disagreeing with this. In terms of when the Western World will be mostly back to normal, June (26%) pipped May (23%) as the most popular response. 23% felt later than August and 11% beyond October. In terms of policy approval various travel bans were much less popular than other containment measures. Cancellation of public events such as sporting ones saw 68% approval which, with Liverpool close to winning the league for the first time in 30 years, worries me. Anyway see the link for full graphs.

Onto markets now and last week we discussed how we needed the authorities to be more aggressive to get some more two-way pricing in markets. It seems we have that now but it remains to be seen how powerful and co-ordinated they want or will be able to be. Markets had another roller coaster day but the big boost came with Bloomberg reporting that the G7 finance ministers would be holding a teleconference today to discuss their response to the coronavirus, and that the G7 central bankers would also be joining the call. So cue maximum excitement (S&P 500 +4.61%) but the 2008 template suggests that the biggest response is unlikely to come at the first meeting. They will probably need a fair bit more time to be truly co-ordinated. We will see later today. The call is planned for 1200 GMT/0700 EST. After the NY close, ECB’s Lagarde said ‘We stand ready’ to take appropriate and targeted measures. The word targeted might suggest a response more towards lending (eg LTROs) than straight to rates cuts.

Overnight in Asia, Reuters has reported that G7 countries won’t at this stage include any specific language on fresh fiscal stimulus or coordinated cuts by central banks in a statement they are drafting. The report added that it is likely to include a pledge that the countries will work together to mitigate the damage to economies from the virus. If true there is likely to be some disappointment that nothing concrete has been decided yet.

Asian markets are largely up this morning though but more off the back of the strong US session with the Hang Seng (+0.43%), Shanghai Comp (+1.33%) and Kospi (+1.31%) all advancing. However, the Nikkei (-0.67%) is trading lower after erasing earlier gains as the Japanese yen moved up +0.46% on the prospect of upcoming Fed cuts. The Australian dollar is also up +0.25% despite a 25bps rate cut by the RBA. Elsewhere, futures on the S&P 500 are down -0.11% and yields on 10yr USTs are back down -4.7bps to 1.118%. The Reuters story mentioned above is creating a bit of softness. In commodities, brent crude oil prices are up +2% to $52.97 and are on track to cover almost half of last week’s declines ahead of the OPEC+ meeting in Vienna on Thursday and Friday.

This is all after the S&P 500 finishing at the day’s highs of +4.61% yesterday (largest gain since Boxing Day 2018), taking a further leg higher in the last half hour possibly on news that pharmaceutical companies Gilead and Pfizer had antiviral treatments/compounds that could be effective against the coronavirus. Throughout the session, the best performing sectors were the defensive, bond-proxies like utilities, staples, and real estate companies – supporting the idea that investors are still wary about the economic impact on cyclicals. The NASDAQ also closed +4.49% higher, but semiconductors lagged the larger technology sector and were “only” up +3.51% as concerns over supply-chain exposed stocks remain. The VIX index fell -8.4 points to 31.7. This all followed the STOXX 600 finishing just slightly higher at +0.09%. The FTSE MIB underperformed though to close down -1.50%, as the number of cases in Italy continues to grow and concerns mounts over the economic impacts.

Amid the numerous fixed income record lows of late, inflation expectations in both the US and the Euro Area fell to all-time lows yesterday. In the US, five-year forward five-year inflation swaps fell by -10bps to around 1.78% at midday before climbing in the afternoon to finish down -1.3bps at 1.873, while those for the Euro Area fell to 1.108%. It was another crazy day in fixed income as well, with 10yr Treasury yields initially falling by -11.8bps to another record low of 1.028% before closing up at 1.16%, breaking a 7 session run. 2yr Treasury yields fell by -16bps at one stage before ending -1.0bps lower - still their lowest level since November 2016. The last turn higher in risk markets in the US session also saw yields rise on the US 30yr by +8.6bps at the end of the day (+4.6bps overall), to break a 7 session run of increasingly lower yields. President Trump was also calling for action again yesterday after tweeting that, “As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive. The U.S. should have, for all of the right reasons, the lowest Rate.” Just like with the Italian stocks underperforming Europe, BTPs are also continuing to diverge with bunds – with spread widening 5.2bps yesterday (10yr Bunds -1.7bps) as the spread is now at levels last seen in August.

Moving on, 10 days ago we would have thought today would be all about Super Tuesday but events have overshadowed it. However it still has huge importance for the medium to longer term direction of markets. Karthik on my team has published a 2020 US Election Primer (link here) with all you might want to know about the primaries, Presidential and House/Senate races.

As for today, 14 states will be holding Democratic primaries along with American Samoa. They amount to 34% of delegates for the overall race. The latest from last night is that Klobuchar has dropped out and has lent her support to Biden. This combined with Mayor Pete dropping out over the weekend indicates that the moderate wing of the party is trying to coalesce around Biden. In terms of the different contests to keep an eye out for, California is the biggest prize as it has the largest delegate haul of any state, and Sanders has a commanding lead there with the potential to rack up a sizeable delegate advantage. Texas, which is the third-largest state in terms of delegates, will also be vital to watch – Sanders polls well in the state with young, minority voters, while Biden does better with more moderates. If Biden loses California and cannot win or at least stay very close in Texas it will be hard for him to catch Sanders even over the course of the spring. Early voting started in California on the 3rd of Feb and on the 18th of Feb in Texas – that could potentially effect Biden’s numbers if those are Pete/Klobuchar/Bloomberg voters who might have voted differently following South Carolina. Biden will be hoping for a number of wins of his own, particularly in those southern states with larger African-American populations, where he has stronger support. So watch out for him in states such as North Carolina, Alabama and Tennessee. Another of interest will be Massachusetts, which is Elizabeth Warren’s home state, but where Sanders currently has a narrow poll lead over her. Warren hasn’t come 1st or 2nd in any of the first four states to vote, so a failure to win her home state would not be a great sign for her campaign. Michael Bloomberg will be on ballots for the first time today and is the wildcard. His support has fallen off following his lackluster debate performances over the past two weeks though with his PredictIt betting odds having fallen from 33c on 12-Feb to 7c last night. He still may affect races if he pulls support from Biden, and allows Sanders to pull ahead in otherwise more moderate states. The non-California results should come out at around 0400GMT/2300 EST, while California could take a while to be official - in 2018 60% of the voters submitted absentee ballots as opposed to going to the polls on Election Day, thereby elongating the process.

Now to DB’s updated forecasts. Our economists’ new base case forecasts see the EA and Japan recording two quarters of moderately negative growth with the US hovering near zero with a contraction in Q2. China will experience one negative quarter in Q1 with Australia in recession for the first time since 1991. As discussed at the top the Fed will now cut 100bp (50bp this month) with the ECB cutting the deposit rate 10bps and doing a targeted LTRO to SMEs in areas affected. However the ECB policy may come with a lag as council disagreements delay it. See their full report here.

Elsewhere yesterday, George Saravelos, our global head of FX research, released a note called “Time to sell the dollar” (link here). He sees a number of drivers pushing EUR/USD higher, seeing it head towards 1.20 by the end of the year, and thinks USD/JPY will drop to 100. Among others, the Fed are going to cut rates, and they have more room than other G10 central banks, which will lower the world-US interest rate differential. Meanwhile, the US election could further damage the dollar and there’s the rising probability of a European fiscal response given the ECB are heavily constrained. Funnily enough yesterday, EURUSD was actually up by +0.98%, after a similar +1.1% move higher last week, two of the biggest up days since January 2018. The Euro strengthened by more than 1% against the Japanese Yen and the British pound as well yesterday.

The main data highlight yesterday came from the manufacturing PMIs, though the extent of the coronavirus’ impact was limited as the survey data was only collected up to 21st February, so before global equity markets experienced their worst week since the financial crisis. In terms of the numbers, the Eurozone manufacturing PMI was revised up to 49.2 (vs. flash 49.1), while Germany’s was revised up to 48.0 (vs. flash 47.8), which is a 13-month high even if it remains in contractionary territory. In spite of the data being collected before the last week, there was some initial evidence of the coronavirus’ impact, with the comments in the Eurozone PMI saying that “Supply-side constraints were in notable evidence during February as average lead times for the delivery of inputs lengthened appreciably and for the first time in a year. Manufacturers primarily linked the deterioration in vendor performance to the coronavirus-related factory shutdowns in China.” Meanwhile in the US, the ISM manufacturing for February fell to 50.1 (vs. 50.5 expected), only just above the 50 line that separates expansion and contraction. The anecdotes from respondents were also full of comments on the virus and China, and new orders fell to 49.8 (vs. 51.8 expected).

To the day ahead now, and as mentioned Super Tuesday will be the main event to watch out for today. Otherwise, the data highlights will be the Euro Area CPI estimate for February, along with January’s unemployment rate. In addition, we’ll also get the preliminary Italian unemployment rate for January and the UK’s construction PMI for February. From central banks, we’ll hear from the ECB’s Holzmann, along with the Fed’s Mester and Evans. Finally, Target will be releasing earnings.