Risk appetite was underpinned by hopes that new coronavirus cases were levelling off, but caution prevailed on Thursday as the number of reported China cases jumped.

Risk appetite was initially underpinned by hopes that new coronavirus cases were levelling off, but caution prevailed on Thursday as the number of reported China cases jumped.

US and Euro-zone equity markets posted fresh record highs before a limited correction on Thursday amid the more tentative risk conditions.

The Euro remained under pressure on a lack of yield support with a 33-month low against the US dollar. The dollar overall edged only slightly lower from 4-month highs. Commodity currencies were boosted by improved optimism over the global growth outlook before fading slightly.

Euro-zone industrial production declined 2.1% for December with a year-on-year decline of 4.1% which maintained underlying negative currency sentiment. There was further evidence of the Euro being used more aggressively as a global funding currency which maintained underlying downward pressure on the currency.

San Francisco Fed President Daly stated that inflation targeting over a long period makes sense while the natural rate of employment is lower than we thought coming into the expansion. Fed Chair Powell stated that there is more upside to the labour participation rate which would also suggest that central bank will be willing to let the labour market tighten further in the short term. Powell also commented that we will be able to see the impact of the coronavirus outbreak fairly soon.

The US dollar continued to draw net support from expectations that the US economy would continue to out-perform other major economies in the year ahead. EUR/USD was constrained by large option expiries around the 1.0900 area into the New York open, but the single currency declined after the New York cut. There was a dip below the 2019 low of 1.0879 which further undermined sentiment and triggered fresh selling with 33-month EUR/USD lows below 1.0870 against the US currency.

The US CDC stated that it is seeing fewer and fewer travellers from China and no new cases at US airports. This will offer some reassurance over a limited virus spread, but also suggests that economic activity could be damaged more substantially given the lack of activity. Flight cancellations have been extended which will undermine the global economy. The WHO stated that the number of cases in China has stabilised, but the virus could still go in any direction.

US Treasuries lost ground during the day with the 10-year yield close to 1.63% while US equities made further headway with the S&P 500 index trading at fresh record highs. USD/JPY was able to break above the 110.00 level, but still struggled to sustain the gains while EUR/JPY dipped below 120.00. For the first four months of fiscal 2019/20, the US budget deficit widened to $389bn from $310bn in the same period last year, maintaining underlying concerns over medium-term trends.

Risk sentiment was more fragile in Asia on Thursday following a huge increase in coronavirus cases in Hubei province as new testing procedures were put into place. Equity markets declined and USD/JPY dipped to the 109.80 area.

There were no major UK data releases during Wednesday with the UK currency still gaining some support from GDP data released the previous day. According to S&P, the coronavirus was likely to cut UK GDP growth by 0.1-0.2% this year, but there was little market impact with the UK currency gaining some support from a firm tone in global risk appetite.

The UK RICS housing survey reported a sharp increase to 17% from a revised 0% and compared with expectations of 3%. This was the highest reading since May 2017 with a rebound in London and market sentiment improved sharply. Sterling failed to make headway and GBP/USD held around 1.2950 as a more fragile risk tone dampened support.

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