Cleveland Federal Reserve Bank President Loretta Mester said on Monday that the US economy should continue to perform well this year and monetary policy is currently well-positioned. "The economy has been performing well and I expect that to continue," Mester said in prepared remarks to the National Association for Business Economics conference in Washington. She did, however, note that she has incorporated the potential impact of the coronavirus as a downside risk to her forecast this year, which is for U.S. economic growth around 2%, solid job market gains and low and stable inflation.

Key notes

  • Fed's Mester repeats that US monetary policy is 'well calibrated'.
  • Mester says there are risks to the US outlook, including impact of coronavirus outbreak.
  • Mester says she expects the US economy to continue performing well.
  • Mester says her 2020 economic outlook is for u.s. expansion to continue with growth around trend, a solid labour market and low and stable inflation.
  • Mester says consumer spending slowdown in Q4 of 2019 'isn't troubling'.
  • Mester says she sees PCE inflation returning to 2% goal gradually over next year or two.
  • Mester says she does not 'at this time' support cutting interest rates to spur a faster return of inflation to 2% goal.
  • Mester says the Fed should be particularly attuned to financial market developments in current environment.

Market implications

The US stock markets have hit a three-week low on worries the spread of the coronavirus to multiple countries outside China which could pose an escalating threat to global growth. Fed comments are welcomed as investors look for clarity. "At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring," Mester said.

"That echoed other Fed policymakers, who have so far stuck to the line that it is still too early to predict the economic impact on the US economy of the virus, while showing cautious optimism any effects would be temporary enough not to warrant a change in the path of monetary policy. Those hopes may not last. European shares suffered their biggest drop since mid-2016 on Monday and oil plunged almost 5% on the news of a jump in coronavirus cases in Italy, South Korea, Japan and Iran," Reuters News warned.

Here is what you need to know on Tuesday, February 25th:

  • Panic hit the financial word, amid concerns of the possible effects of the coronavirus on global growth. The illness spread outside China, with Italy, South Korea and Iran reporting the largest number of cases. The dollar gapped higher at the weekly opening, amid demand for safety, but trimmed daily gains on mixed US data and persistent weakens in Wall Street.
  • The EUR/USD pair hit a weekly high of 1.0871, but settled around 1.0845, unchanged from Friday’s close, despite an upbeat German IFO survey.
  • The GBP/USD pair ended the day in the red around 1.2920, amid mounting tensions ahead of the EU-UK trade deal.
  • The Japanese yen firmed up, with USD/JPY trading as low as 110.30.
  • Wall Street collapsed, with the DJIA down over 1,000 intraday.
  • Gold prices soared, spot flirted with $1,690.00 a troy ounce, trimmed most daily gains ahead of the close.
  • Crude oil prices were sharply lower and recovered just modestly, as Saudi Aramco CEO expects only a limited coronavirus impact on oil demand.
  • Cryptocurrencies jumped at the beginning of the day but were unable to hold on to gains. BTC/USD sub-10,000.

BoE Chief Economist Haldane says does not see overstretched balance sheets or asset bubbles generally around the world.

Key comments

  • Bank of England's Haldane says he does not think we have hit peak globalisation.
  • Bank of England's Haldane says government needs to consider if 'social return' of spending is greater than near-zero cost of capital.
  • Bank of England's Haldane says a lot of political and Brexit uncertainty has dissipated in UK.
  • Bank of England's Haldane says reduced uncertainty should help boost investment.
  • Says a lot of political and Brexit uncertainty has dissipated in UK.
  • Says reduced uncertainty should help boost investment.
  • Surveys suggest there could be 'stirring in the undergrowth' regarding UK companies' investment plans.

More to come…

Total Coronavirus cases in China now at 77,362, new cases rose 416 over the last 24 hours.

The coronavirus global cases total reaches over 79,000 now with the death toll has reached 2,620, with 27 of those occurring outside of China. The expansion of outbreaks in South Korea and Italy have brought about fears of a global pandemic and has caused a risk-off start to the week.

People in northern Italy have been in touch with the Guardian to say they have noticed empty shelves in local supermarkets.

The Guardian wrote that Francesco Sole, a trade union regional secretary from Milan, said prices for face masks and antibacterial gel had skyrocketed.

“It’s quite a shock for us in northern Italy. My wife and I rushed to do some grocery shopping in fear of being stuck at home.

“Empty shelves for basic products such as flour, oil and bottled water were easily noticeable,” he said. “Finding a mask or antibacterial gel has become as challenging as finding water on the moon.

“Some companies have organised their workers to switch to smart working while many others are still seeking to find solutions to manage the situation. People in Milan are trying to figure out what life will be like in the days to come. For a city that is always on the move, this is an eerie pause.”

In other news, tor the first time in decades, the National People’s Congress (NPC), where hundreds of delegates gather in Beijing every March, was postponed on Monday. The standing committee for the NPC said a new date for the meeting would be announced separately, according to the state broadcaster CCTV.

South Korean cases spiked to over 760, as several countries imposed travel bans, and some airlines cancelled routes to Seoul. Afghanistan, Bahrain, Kuwait and Iraq reported their first cases – all involving people who had come from Iran.

On the bright side, the WHO team in China has concluded the virus can be contained, noting that it peaked between the end of January and the beginning of February:

  • EUR/JPY struggles to catch a bid on German IFO.
  • EUR/JPY bleeds out as EZ economy seen vulnerable to worsening coronavirus implications.
  • All eyes will be on the ECB in March and the DXY back towards 100.

EUR/JPY is trading at 120.03 having travelled between a low of 119.90 and a high of 121.07, firmly in the red by -0.86 due to a blood bath in the stock markets. The coronavirus is the culprit and the spread of contagion fears are gripping investors into a state of fear. Unless we see a sizeable repricing of China-related risk, the situation appears unlikely to change this week and bears can stay in control.

What has been interesting of late, and still worth monitoring is how the yen has decoupled from the risk-off trade. We have seen most of the flow head into the US dollar, for sound reasoning, yet the yen has been unable to cash in on risk aversion due to the grim domestic outlook – just look at the latest Gross Domestic Growth figures. In Chart Of The Week, we see a bullish bias painted on the charts following an upside test of the symmetrical triangle and note the lack of volume towards a 138.2% Fibonacci resistance and the 118 handle. The US dollar has taken a hit at the start of this week, but whether the downside is sustainable is another question – it is still the cleanest shirt in the dirty laundry basket. USD net longs pushed higher for a fourth consecutive week following on from the move in the spot market, and it will not take much for a revisit to the upside once the speculative and less committed longs have been stopped out of spot FX. The greenback is a practical store of value for many investors and US growth data this year have been better than that of many other G10 countries.

EUR to take a knock on dovish ECB in March

By contrast, both the EUR and JPY's grim domestic outlooks should keep them on the backfoot. Traditionally, the yen has been an attractive carry trade and should the coronavirus threat in Asia subside and Japan avoid an outbreak, its attractiveness at a time when repatriation flows kick in with the seasonality factor, the yen could pull in a bid over the euro, especially should we see net EUR short positions to continue to increase. However, JPY may face more troubles on Thursday, when industrial production data for January may show a worse-than-expected slump, which would add to the negatives in terms of the economic outlook for the country.

Meanwhile, EUR shorts for four consecutive weeks have been increasing which is counter to the trend established at the start of the year, so there are no extremes there yet, which gives more room to go. The economic outlook for the eurozone is dire and there is little room for the European Central Bank to go. Hopes that the German economy had turned a corner were dashed by a slew of bad data (bar today IFO readings, a pleasant surprise, albeit did little so support the currency vs the yen), yet the authorities are still reluctant to come to the rescue and add fiscal stimulus. With the coronavirus outbreak on their doorstep, (Italy's confirmed cases surging in a borderless EU bloc), the lack of monetary policy space means the ECB will be constrained when reacting to any downturn in economic growth.

Other key releases this week will be inflation numbers for eurozone countries. We have the March ECB meeting coming up and CPI will b a major focus, likely to stir up a dovish bias and lean heavily on the euro's attempt of correction against the US dollar – a likely catalyst for DXY heading back the 100 handle. The euros funding characteristics prevent it from taking full advantage of rebounding risk sentiment which may mean there is further downside in EUR/JPY once markets buy back the yen.

EUR/JPY levels

  • 10-year US Treasury bond yield erases more than 7% on Monday.
  • US Dollar Index slides toward the 99 handle.
  • Wall Street's main indexes suffer heavy losses on flight-to-safety.

The USD/JPY came under strong bearish pressure on Monday as the JPY restarted to capitalize on safe-haven flows after struggling to find demand last week. As of writing, the pair was down 1% on the day at 110.45.

Heightened worries over the coronavirus outbreak turning into a global epidemic with a number of confirmed infections rising outside of China, namely in Italy and South Korea. Reflecting the intense flight-to-safety, major Asian end European equity indexes closed sharply lower and the 10-year US Treasury bond yield, which was last down 7.5% on the day, slumped to its lowest level since July.

Furthermore, the Dow Jones Industrial Average and the Nasdaq Composite are down 3.5% and 4%, respectively, as investors show no interest in risk-sensitive assets.

Over the weekend, Bank of Japan Governor Kuroda downplayed the possible impact of the coronavirus by arguing that the economy was not expected to "slump sharply" and said that the heightened volatility in the foreign exchange markets was caused by a product of USD strength.

DXY pushes lower on Monday

In the meantime, the US Dollar Index (DXY) lost its traction amid plummeting bond yields in the second half of the day and dropped all the way down to 99.11 before recovering modestly. At the moment, the DXY is down 0.1% on the day at 99.25 and remains on track to close the second straight day in the negative territory.

In the early trading hours of the Asian session, the Coincident Index and the Leading Economic Index from Japan will be looked upon for fresh catalysts.

Technical levels to watch for

  • The S&P 500 is trading down sharply as it is on track to record its worst daily decline since August 2019.
  • Bears are eying the 2020 low near the 3200 figure.

S&P 500 daily chart

The S&P 500 Index is trading is having a strong retracement down below the 50-day simple moving average (SMA). Bulls want to keep the uptrend going and defend the 2020 low and the 3200 big figure. However, failure to do so could see the bears extending the down move towards 3100 and the 3000 figure. On the flip side, a bullish recovery could find resistance near the 3300 and 3350 levels.

Additional key levels

  • AUD/USD is consolidating losses as USD is on the back foot.
  • Resistance is seen near the 0.6630 level.

AUD/USD daily chart

The aussie is bouncing from one-decade lows while trading well below the main daily simple moving averages (SMAs). The trend is clearly to the downside, however, as USD is losing steam across the board, AUD/USD might be correcting up in the coming sessions. A break above the 0.6630 level can lead to further gains towards 0.6650 and 0.6778 levels. Support is seen near 0.6596, 0.6569 and 0.6548 levels, according to the Technical Confluences Indicator.

Resistance: 0.6630, 0.6650, 0.6678

Support: 0.6596, 0.6569, 0.6548

Additional key levels