Coronavirus & Central Banks will drive sentiment
Last week the Coronavirus began making investors nervous creating near-3% declines in China on the final day of trading before the Chinese New Year. This week we could well see things escalate. If they do escalate then risk aversion is likely to result in further gains for safe haven assets. Just to remind you, we are witnessing the very early days of the outbreak and so far the news coming out relating to the virus is nothing short of terrifying.
Putting the Coronavirus aside – this week the markets attention will most likely fall on a few key central bank meetings. First up we have a possible rate cut from the Bank of England as well as our first Federal Reserve meeting of the year.
The UK will be all about Brexit and rate cuts.
The Bank of England will vote Thursday on their decision on whether to cut interest rates or leave them unchanged. Odds of a rate cut have changed a lot in recent weeks but currently it sits at 61% chance of a cut.
Back to Brexit – EU lawmakers are expected to pass the Brexit deal on Wednesday. Assuming this goes ahead then Great Britain will leave the EU on Friday 31st January and enter into the 11-month transitional period. Although this is all expected to go through without any problems, watch closely for any unexpected surprises.
In the US, attention is on the Fed
The Fed is on hold and although we are not expecting any changes to the target range, policymakers could tweak the IOER and provide some clarity on how they are going to end their purchases of Treasury bills in the next quarter. The January meeting by the Federal Open Market Committee is likely to see limited changes as the data since the December meeting has been slightly softer but countered by improved optimism following the US-China phase-one trade deal.
The dollar will continue to remain strong on safe-haven flows, but long-term Fed policy may bring in weakness, as the Fed seems set on a path to see further balance sheet growth.