Markets breathe sigh of relief as Biden makes a comeback and central banks save the day

After the surprise, inter-meeting 50 basis point rate cut from the Federal Reserve on Tuesday, the markets have finally decided that the time is ripe to stage a decent recovery. US stocks are up some 4% at the time of writing, while European stocks closed up approximately 1.5%, as global central banks work in unison to try and ease the panic in financial markets caused by the spreading coronavirus. Even though new cases of the virus have emerged today across Europe and in the US, stock market indices are rising led by the healthcare sector, food producers, cleaning product producers and supermarkets. 

Is the recovery here to stay? 

The question now is, will the recovery last and can central banks’ keep a lid on volatility for the long term? While the rises in stock markets across the world looks healthy on Wednesday, we are concerned that the ongoing spread of coronavirus continues to keep downside pressure on airline stocks, IAG is down a further 3% today, holiday companies, TUI is down more than 4%, banks and hotel groups. Interestingly, Rightmove, the house listings website, is also one of the biggest fallers on the FTSE 100 today, it is down more than 2%, as some investors may see the current environment, with the threat of mass quarantine if the virus continues to spread throughout the UK, as not conducive to the sale of big ticket items like houses and apartments. Other losing sectors include pubs, the fund management sector, which could experience outflows on the back of last week’s sharp losses, and the cruise operator Carnival PLC, which is down nearly 2% at Wednesday’s close. Overall, travel, money managers and retailers that rely on discretionary spending by consumers are likely to remain under pressure until the coronavirus is contained, or, even better, eradicated. Thus, any recovery in financial markets is unlikely to be broad-based, thus gains for the major global indices may be limited in the short and medium term, even with broad-based central bank support. 

What Super Tuesday means for investors 

While the coronavirus continues to dominate the news-driven market moves, we cannot forget politics. Events across the Atlantic are pushing Brexit trade negotiations into the background. The results of ‘Super Tuesday’, when Democrats in 14 states and one territory vote for the candidate that they would like to run against President Trump in the November Presidential election, were also a balm for battered US stock markets. The surprise winner from Super Tuesday was Joe Biden. Biden, the centrist candidate and former Vice President under President Obama, won 9 of the states that were voting. After a weak start to his campaign, many thought that Biden did not stand a chance against Sanders, the leftist Democratic Socialist, and it was assumed that Super Tuesday would give Sanders an insurmountable lead to win the nomination to be the Democratic candidate for the US Presidential election in November. Biden is now the front-runner, he has 453 delegate votes, with Sanders on 373 votes. If Biden can keep up this momentum, then he may be able to steal the nomination from Bernie Sanders. 

US markets are cheering this change in Joe Biden’s fortunes, as it is a sign that centrist politics could be back in the game. Bernie Sanders’ leftist political agenda struck fear into the hearts of financial market traders in Wall Street. US healthcare and energy stocks are leading the rally today, two sectors that Bernie Sanders threatened to nationalise if he were to become President. Although Joe Biden has also said that he would reverse President Trump’s corporate tax cut if he were to win the nomination, the markets are willing to overlook that at this stage, especially if it keeps a socialist out of the White House. While Biden still has a way to go to win enough votes to get to the more than 1,900 delegate votes that he will need to win the nomination, his Super Tuesday performance has given his campaign a much-needed shot of positive momentum. The Democratic Presidential nominee will, finally, be chosen at the Democratic National Convention, between 10-13thJuly, so there is still some way to go before Biden can safely say that he has won the nomination. 

Don’t forget the economics…

Yet again, economic data is playing second fiddle to the over-arching issues that are driving moves in financial markets: coronavirus, central bank action and US politics. However, it is worth keeping abreast of economic developments, as once the coronavirus is contained then the focus is likely to shift back to economic fundamentals. Overall this week, the economic data for February was not as bad as some had feared. Manufacturing PMIs were in focus at the start of the week, China saw its index slump to 40.3 – deep in contraction territory – for February, which was unsurprising since last month may have been the peak of the coronavirus outbreak for China. Europe and the UK fared better than the US, and composite PMIs for the Eurozone and the UK were 51.6 and 53.2 respectively. Although the impact of the coronavirus in Europe is likely to be felt in March, decent PMI reports for February are encouraging, and suggest that the economic fundamentals, when adjusted for the impact of the coronavirus, remain strong for both Europe and the UK. 

The US consumer to the rescue 

The non-manufacturing ISM for the US for February was stunning and is partly responsible for the strong bounce in US equities on Wednesday. It reached its highest level in a year and suggests that the US consumer remains in good shape and resilient to concerns about the coronavirus. As with Europe, the effects of coronavirus are only starting to be felt on US soil, so we shall have to see if sentiment can remain buoyant in March. Ahead this week, Non-Farm payrolls are released for February on Friday. The market is expecting a fairly mediocre reading of 175k, down from 225k in January. The NFP report has been surprising to the upside recently, added to that the extremely strong non-manufacturing ISM report, and its strong employment component, which is back up to November highs, suggests that the bias could be for another better than expected NFP report for February. We would expect that a stronger report than expected could trigger another leg higher in the risk rally that we have seen on Wednesday, and risky assets could sustain recent gains through to the end of the week. 

What’s next for FX 

The turnaround in equity sentiment in recent days has been mirrored, albeit in a more muted fashion, in the FX market. The AUD, which had been battered by recent risk aversion, has picked up from recent lows around 0.65 for AUD/USD, however, its recovery still has a long way to go and investors have been cautious so far. USD/JPY has also recovered slightly, even though FX traders are not willing to completely cut out of FX safe haven positions like the yen at this stage. The euro has been the top performer in the G10 space this week, and EUR/USD has risen some 350 pips since bottoming ahead of 1.08 on 20thFebruary. 1.12 is now a major resistance level. The EUR is benefitting from a return to a risk friendly environment, the ECB’s unwillingness to cut rates and some better than expected Eurozone PMI data. GBP/USD has also picked up from its recent lows, however, its recovery remains painfully slow, and the 100-pip gain in GBP/USD since the start of the week is not going to set pulses racing, especially compared to moves elsewhere. We continue to think that GBP/USD is range bound for the medium term, with 1.2750 – 1.3050 key parameters for this pair.