A bout of uncertainty returns

Market movers today

Today's highlights are the German and Denmark Q4 GDP figures and US retail sales for January. The latter will be important, as US private consumption growth has slowed recently (the Fed now says "moderate" consumption growth in its statement, from "strong" growth previously) and the question is whether this is just due to noisy data or more persistent factors. The US manufacturing production data for January also due is not that interesting, as it will not yet capture the impact of the coronavirus.

Helped by recovering exports and buoyant consumers, we expect German quarterly GDP growth in Q4 to have remained in positive territory, but a marked slump in industry activity in December leaves some notable downside risks for the figure.

In Denmark, we get the first take on growth in Q4 19, which means we also get the first glimpse of overall growth in 2019 (see next page).

Selected market news

With the sudden jump in registered coronavirus cases in China, a whiff of uncertainty over prolonged disruptions returned to the market on Thursday. The coming days will tell whether the number of 'real' new cases is still slowing, as reports before the methodology changes suggested. Global equity markets halted the last few days' rally and Wall Street in particular had a turbulent day after the NY Fed said it will shrink repo operations further. Safe-havens were back in demand, with global bond yields declining, while the Swiss franc extended its rally to a four-and-a-half year high as euro sentiment continued to sour.

The European Commission's (EC) gloomy outlook for the European economy certainly did nothing to help lift the euro sentiment. Although the EC still sees the euro area on a 'path of steady and moderate growth' with GDP expanding by 1.2% in 2020, the report stressed that risks to the growth outlook remain tilted to the downside, not least with the coronavirus outbreak as a key new downside risk emerging. We share the EC's concerns when it comes to the near-term hit to Europe's manufacturing sector from the virus impact and we have recently lowered our euro area GDP growth forecast to 0.8% for 2020 (see Research: V-shape scenario for global growth on back of coronavirus ).  

With the euro area remaining caught in the 'low-for-longer' growth curse, accompanied by weak inflation dynamics, our baseline is now for a continued relative underperformance of European financial assets relative to USD denominated assets. Hence, we have revised our EUR/USD profile materially, to 1.07 on 12M, down from 1.15 previously.

In a surprise move, UK Chancellor Sajid Javid resigned over Boris Johnson's scheduled cabinet reshuffle. EUR/GBP fell back to 0.83 on the headlines, as markets started speculating over looser fiscal policy under Javid's successor, Rishi Sunak, a rising star in the Conservative Party. We remain sceptical about any large-scale fiscal easing in the UK and still see scope for renewed Sterling weakness ahead, once "No-Deal Brexit" headlines come back into focus amid sluggish progress in EU-UK trade negotiations.

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