The Fed left its policy rate unchanged in a FOMC meeting last night, but Powell’s speech was widely viewed as dovish-biased as he addressed low inflation in the US.

He also mentioned that the coronavirus outbreak could affect growth. The US 10-year treasury yield drifted lower to 1.58%, hitting a three-and-half month low. The rally in treasuries was driven by both safe-haven demand and a dovish shift in the Fed’s policy guidance.

Compared to the previous FOMC policy statement, a minor change has been made on the description of household spending this time; from ‘strong’ to ‘moderate’. This suggests that more stimulus measures are perhaps needed to shore up growth, especially when taking in to consideration the negative economic impact brought on by the coronavirus outbreak to the rest of the world.

The implied probability of Fed interest rate cuts by December 2020, according to CME’s FedWatch tool, has risen to 84.1%, from 73.1% a day ago.

The S&P 500 index closed marginally lower last night, with sectorial performance diverging. Industrials (+0.55%), materials (+0.36%) and utilities (+0.30%) were leading the gains whereas energy (-1.06%), real estate (-0.63%), consumer staples (-0.52%) were among the laggers. Share price of semiconductor company Xilinx (-10.7) and AMD (-5.98%) tumbled after announcing retrenchment plans and disappointing Q1 earnings outlook respectively. 

The Forex market exhibited ‘risk-off’ pattern this morning, with AUD, NZD and NOK among the top losers and JPY, CHF outperforming other G10 currencies.

The coronavirus outbreak in China continued to dampen investment sentiment in Asia and weighed on equity trading. Chinese medical experts forecast the number of patients to peak in 1-2 weeks, and mortality rate to drop further as precaution and isolation measures are widely taken across the country. 

China’s economic growth in the first quarter of 2020 is likely to be dragged down by the epidemic, with primary, secondary and tertiary sectors suffering at different levels. This temporary slowdown, however, will be compensated by a fast recovery, especially the secondary industry (manufacturing), when the epidemic comes to an end. The tertiary industry (service) will take a longer time to recover.

At the moment, offline consumption - restaurants, hospitality, tourism, transportation, brick-and-mortar retail, entertainment, casino and gaming – are among the heavily-hurt sectors. The overall impact, however, is partially offset by a growing business of online consumption and demand for healthcare goods and services. Those include online streaming, e-commerce, food delivery, online entertainment, gaming, online education and medical consultation.

FedWatch – Probability of Fed policy rate by Dec 2020

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