Another week with the coronavirus driving markets. First US equities reached another record level on the back of a declining number of newly infected people. The positive risk sentiment was also visible in rates markets, where Italy and Greece led the spread tightening to Bunds. Then there was a big jump in the number of infections as the introduction of a new diagnostic method in Hubei increased the count significantly. The new data fuelled uncertainty about the overall development of the virus and the past few days' rally in global equity markets came to a halt. Wall Street was also affected by the decision of the NY Fed to shrink repo operations further. However, it is worth noting that the daily increase in new infections outside Hubei keeps declining.

In Europe new forecasts from the European Commission (EC) were released. They picture a gloomy outlook for the European economy with GDP expanding 1.2% in 2020 and risks to the outlook tilted to the downside. The gloom was confirmed with German GDP at a standstill in Q4. The EC still sees the euro area on a ‘path of steady and moderate growth', though.

In the UK, Sajid Javid resigned as chancellor during the big government reshuffle, a big blow to Boris Johnson. EUR/GBP fell back to 0.83 on the back of the headlines, probably because Javid's replacement, Rishi Sunak, could ease the grip on fiscal rules in coordination with Johnson. We still expect a rate cut from the Bank of England at the May meeting. Markets currently price about 25% probability of this.

Next week starts with what is likely to be some dire reading from Japan, as we expect Q4 GDP-figures to tick in with a significant decline. A VAT-hike and typhoon Hagibis weighed on economic activity, particularly during October. We expect the slowdown to be temporary and the government's big spending package to help the economy out of its slump in H1 20 and thus we expect the Bank of Japan to remain calm and in wait-and-see mode as further bad news from Q4 ticks in.

Midweek minutes from both the Fed and the ECB are due for release. Not much news expected in either but focus will be on the finer details, e.g. the ECB's strategy review. So far the Fed is monitoring, not reacting to, the coronavirus and the economic risks stemming from it.

February PMI releases are set to attract a lot of attention on Friday, as there are set to be indications of the spill-over effects from the economic shutdown of China on the rest of the global economy. In the US, the big question is whether the manufacturing sector has taken a hit. The service sector could also be affected via transportation, restaurants and hotels due to less trading and fewer tourists, but otherwise we do not expect the US consumers to take much notice. For the euro area, the new orders index will be key to spot any hit from the Chinese shutdown. We expect a dip back in Manufacturing PMI to 47.4 from 47.9 in Jan. Services PMI will also be interesting, particularly if buoyant activity in Germany continues and France can recover some ground after the pension reform disruptions halted activity in January.

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