WHO, The Markets New Grim Reaper


After an up and down session with trader vacillating on the economic impact, the coronavirus will have on global growth, S&P500 was more or less flat heading into the close, having spent most of the session in slightly positive territory. Most European bourses saw very modest gains, though Asia was weaker. US fixed income rallied further, however, US10Y yields down a further 3bps to 1.33%. Oil down another 2.4%.

But for risk concerns, the bearer of the truth was WHO reporting that 427 new cases of the virus were confirmed Tuesday outside China, compared with 411 in mainland China: the first time that new case numbers outside China were higher than those from within. Of course, the spread beyond China borders has been at the core of the market’s worries since the weekend news flow pointed to a potential supper spreader around the globe and saw risk U-turn lower.

Previous crisis playbooks have all revolved around buying the dip in equities, so I wonder just how much further the fire sale will go before the market at least starts to scale in again. We saw an attempt at a bounce in the New York session before the markets new Grim Reaper, the WHO, raised its ugly head again.

But based on last night’s price action, it does appear that any bounce in stocks is likely to be short-lived. And eventually, the markets could fall deeper as investors start to think what’s the point of trying to pick the bottom in the short term.

Looking further down the line in 2020, the market continues to price in more significant haircuts to large parts of the global economy. At the same time, the idea of a v-shaped recovery seems to be the new castle in the sky. Admittedly things can pivot quickly, but if you believed in the narrative, that easy monetary policy was mainly fuelling the risk rally. Then arguably, you are going to want to see definitive signs of a Fed pivot, primarily as the fundamentals are pointing the other way before feeling confident about buying equities. But on that front, the Fed messaging continues to signal “still too soon.”

On the G-20 coordinated stimulus front and for those looking for shock and awe fiscal delivery from Europe was always likely to be disappointed. News about Germany intending to pause its debt brake sparked a recovery in stocks and a sell-off in Bunds, but it was short-lived. Still, ultimately, the cumulative effect of similarly measured responses around the world might be enough to grease the wheels of the global economy.

Oil Markets 

Traders remain hyper skittish, and oil rallies short-lived as self first ask questions later will be the theme if there is still even the slightest concern over the virus outbreak becoming a pandemic. There has been another big hit to oil on renewed super spreader coronavirus fears.

And as expected, the EIA inventory data which under normal conditions would have been bullish for oil price fell through the cracks as uncertainty over coronavirus will take its toll on oil demand sentiment until its impact can be adequately quantified.

Next week’s OPEC+ meeting should be a positive catalyst, but the fear here is that the outcome might be consigned to oblivion with the market singular focused on virus spread, which has unceremoniously shown up on the doorsteps of the US market. Still, OPEC + has enough weight, and with a hefty production cut at a minimum, it should offer a backstop, and with a problem G-20 concerted stimulus effort surely the bottom can’t be too far from here. In addition, with WTI below $ 48 it could also trigger the self-correcting US supply mechanism as more shale wells go offline due to breakeven concerns.

The Straw that could break the Oil market back?

The biggest concern and the straw that could possibly break the oil markets back is the susceptibility of the US market to this insidious virus, which from a risk perspective needs to rank beyond all other. If the virus spread rapidly in the US, you can’t unscramble that egg.

The most glaring problem is that the US has only tested 426 people, while South Korea has tested 35,000. The US guidelines were only to check those who displayed respiratory symptoms and had recently traveled to China or had close contact with an infected person. The problem is that coronavirus is asymptomatic — it is contagious before the symptoms show.

China had come in for some criticism over the handling of the outbreak. However, as the virus spreads global, those “harsh” measures appear to have been the right thing to do and arguably its Europe and US efforts that could be too complacent and porous. And not surprisingly, any excuse to sell still feels like the sentiment in the market right now.

Gold Markets

It’s too early to cap gold prices as we are not in business as usual market conditions. But of course, there is no denying gold’s safe-haven credentials have been questioned in light of a gold decline as Treasury yields also fell precipitously this week, which should have been extremely positive for gold.

But since we’re only into day three of demand depletion and given the position build of late, this week’s washout still fits into the “healthy correction” category although we might revise that view on a break of $1600.

However, as profit-taking and selling to cover margin calls in the equity markets is decreasing, so the chances of gold rebounding increase propelled by ongoing COVID-19 concerns amid volatile financial conditions.

Beyond the constant stream of buying the dip analysts banter and for investors that have sizable gold positions. there are some concerns

Government spending commitments to contain the virus and e might push bond yields higher and weigh on gold appeal, especially from the fiscal side of the equation. While the Fed advocating for patience doesn’t provide a significant impulse to push gold through $1700. But with yields so low suggesting gold downside should be limited a delayed policy market response could funnel more buying of gold as the longer the Fed sits on their hand, the worse stock market conditions could get

Currency Markets 

The US Dollar

The US dollar has lost its safe-haven status with the coronavirus arriving on the US doorstep. With Fed rate cut probabilities on the rise US bond yields sliding ,fortunately for the global risk markets, the US dollar has started to weaken as reverse Yankee mania sets in.

Asia FX

Outside of the KRW and THB, which remains high beta to further jumps on coronavirus cases withing ASEAN proxies. Asia FX has remained fairly rangebound despite all the coronavirus upheaval around the globe. To no small degree, much of the sell-off Asia FX were priced into the curve ahead of the global equity market meltdown, and at the same time, the Yuan has remained tethered to the PBoC policy anchor by maintaining a stable policy fixing.

The Ringgit

Foreign investors sidestepped Fitch warning (seldom have lasting legs) and have resumed their demand for Malaysia bonds as the BNM rate cut expectations get to move forward. Its a small but positive move in these politically charged times, which continues to weigh on the Ringgit despite the succession scrim looking a bit less messy than at the start of the week. But when it comes to Malaysia politics, all bets are off.

Is Pandemic Pandemonium Setting In?

Risk-off extended further overnight. S&P500 down a further 2½% heading into the close. Selling intensified in the afternoon after the US Centers for Disease Control and Prevention indicated they expect a sustained spread of COVID-19 in the US and advised communities to prepare: “it’s more a question of when.”

Fixed income rallied again, as the preferred hedge of choice with US 10Y yields slipping a further 5bps to 1.33%; 30yrs set a fresh record low of 1.8%. Oil down an additional 2.8%, gold lower into the close. GOLD LOWER?? Are gold markets selling to cover more equity margin calls?

To suggest the market is a tad skittish over the coronavirus becoming a pandemic could very well be the understatement of the century with the virus morphing into the market’s biggest macro worry of the decade.

Given the lack of testing facilities, “As of Monday, only five US states – California, Illinois, Nebraska, Nevada, and Tennessee – can test for the virus, according to the Association of Public Health Laboratories (APHL).” ( Reuters ) it’s feared that there are far more cases than what is currently reported.

And since the containment strategy in the US is initially more penetrable owing to looser enforcement, and greater reliance on voluntary cooperation suggest a clustered super spreader virus crisis could accelerate in an exponential manner.

Every few minutes, I see another travel ban headline while corporations and government agencies are stepping up efforts to stop travel to infected or suspected countries. Supply chain disruptions are coming, and if we were struggling to determine which particular straw broke the market’s back, its the susceptibility of the US market to this insidious virus that needs to rank beyond all other. And you can’t unscramble this egg. And without question, it seems to be the bearer of the truth.

The global habitat, let alone the market is ill-prepared to deal with an epidemic of these proportions as the porous containment strategies outside China could lead to an exponential flurry in new cases reported. God helps us if, as suggested by some medical experts, 40-70% of the world’s population becomes infected over the next 12 months.

Wasn’t this supposed to be over by now??

And only a week ago, it would still have been considered scaremongering to talk of a COVID-19 in pandemic terms. But now the markets must deal with the harsh reality that the COVID-19’s global footprint is likely to grow.

Gold and cross-assets 

Renewed concerns about the depth and duration of the coronavirus impact on global growth were triggered by Apple‘s lower revenue guidance and exacerbated by US PMI data. But the outbreak of cases in the US has seen risk pricing jump to December 2018 levels.

So far, the market sell-off has been reasonably well controlled in US markets. Still, the SPX is now nearly 8% below its 19-Feb intraday high, and the VIX breached 30.

Cross-asset moves were also plentiful with the US 10-year below 1.4% for the first time since July 2016, rates markets pricing 2.5 cuts over the next year, but gold is lower?

I don’t have a particularly salient answer for that, but I’m wondering just how much of a factor a consorted shift to global fiscal stimulus shift rather than monetary impulse might be altering the market safe haven view of gold above $1700.

Modeling for gold fair value indicates the following are consistent: Treasury 10y yields plummet by 80 bps, S&P falls by 20%, inflation break-even drop to 1.35% or below, and gold rises to USD 2000/oz. Indeed we are a long way from paydirt in the fair value analysis, especially is a fiscal impulse kicks in.

I guess the big question today is with correlations pointing higher why we did have back to back daily price gaps lower in gold as surely these moves are beyond just a healthy market correction after all its raining rate cuts.

Raining rate cuts

A total of 13 EM central banks have cut rates in response to the threat of an economic slowdown so far this year with the market convinced the Fed would start cutting deep, and we are even back to discussing rate cuts in Europe. Which should be positive for gold

Equity market margin call-related sell-off?

But the back to back late NY afternoon gold liquidation has the hallmarks suggesting the sell-off could be related to equity margin calls rather than any underlying market weakness, given the overtly risk-off tone dominating the markets. So as was the case yesterday, once these margin obligations are covered, gold could rebound a touch.

The facts

As most gold traders will tell you, it’s virtually impossible to understand where the supply and demand factors will drive gold on a daily basis. But given the real possibility of pandemic pandemonium setting which will cripple the financial market, and could cause a run on the banks Similar to the toilet paper hoarding mentality in Asia, only people want to store cash under their mattress rather than toilet paper under the bathroom sink( poor analogy but you get the picture). Bullion should continue to find more support from accommodative monetary policy worldwide, a rapidly shrinking pool of risk-free assets, and lower beta of traditional risk-off currencies even without triggering worst-case pandemic fears.

Oil markets

The oil market at the best of time isn’t known for measured thinking tending to adopt the approach of “shoot first, ask questions later.” But Oil traders have called this one right from the get-go as they were never buying into the G20 view or the idea of a v-shaped recovery in China and limited impact on the rest of the world.

But for immediate concerns, the shift in focus from just an external demand shock from China to an overwhelming US economic blow could send oil prices into a faster tailspin.

The reality is that the coronavirus has not been contained and is now spreading like wildfire across the world, and you can’t put that smoke back in the wood.

Although I expect the API inventory report to fall through the cracks at least, there was one bulb working on a broken string of lights as WTI regained the $50 handle on a smaller than expected crude inventory build.

Currency Markets

I might be excused this morning; it is 5 AM in Bangkok after all, as I don’t have a blueprint prepared for a rapid spreader scenario across the US markets, which from a Federal Reserve Board perspective makes this flu situation different. We have to admit the Federal Reserve is the only Central Bank that matters. And with global supply chains grinding to a halt, what the world most desperately needs is a deluge of US dollars.

Sure the ECB and BoJ can cut further, but that is unlikely to happen, and another rate cut from a smaller central bank like RBA might prop up the domestic housing market, but what is that going to do in the bigger global scheme of things.

So, it will be up to the Federal Reserve Board to do the heavy market lifting. As such, we could be on the precipice of an emergency inter meeting rate cut as the world is in dire straits and in need of a massive helicopter drop to buttress the virus crisis.

The US dollar has lost its Teflon status as the coronavirus arriving on the US doorstep. With Rate Fat rate cut probabilities on the rise US bond yields sliding fortunately for the global risk market, the US dollar has started to weaken as reverse Yankee mania sets in. But will it be enough before risk aversion crushes commodity markets as what was perceived as a supply shock from the COVID-19 outbreak is morphing into an unknown

A negative US demand shock would represent an essential change for markets. However, before jumping into trades this morning, it might be time to catch our breath as I still think its to early to start fading the currency moves at the epicenter of the crisis wall of worry CNH and KRW as well as the G-10 China proxies AUD and NZD.


Global Stock Markets Plunge As The Virus Arrives In Europe

Global markets tanked as with the COVID 19 arriving on Europe’s doorstep; it has magnified investors’ attention to the single most significant global risk of the virus crisis, the fear of clustering cases outside of China.

Risk-off sentiment intensified Monday as the S&P500 is down around 2½% heading into the close with European equities falling almost 4% and smaller losses through Asia as Covid 19 mushrooms from an Asia centric concern to a global nightmare.

US 10Y yields fell a further 9bps to 1.38%, the lowest since July 2016, while 30-year yields set another record low of 1.84%, having fallen ~20bps in the past week.

Oil is down more than 4%, and copper fell 1.5%. Even as the number of new cases in China is declining and the WHO indicates that the virus there has peaked, the market has reacted to growing evidence of spreading infections outside China: notably Italy, Iran, and Korea.

The risk-off tone overnight has seen the US2s10s curve at its flattest since October, and as the interest rate and growth, differentials continue to support capital flows into the US.

And absent a more dovish Fed, these tenacious structural trends are showing little signs of abating as global investors seek safe harbor under the umbrella of US bond yields, creating a supercharged USD dollar. However, its the dollar strength that the Fed might not be able -even if willing – to tolerate as the strong USD both tightens financial conditions and depress oil and commodity prices sufficiently enough for the Fed to miss their inflation targets. The irony here for gold investors is that a weaker dollar could lessen the chances of a Fed rate cut.

There has been very little data flow do divert attention away from the coronavirus. Still, Fed speak, both hawk and dove didn’t sound off any rate cut alarm bells as Cleveland Fed’s Loretta Mester (voter /hawk) and Minneapolis Fed’s Neel Kashkari (voter/dove) both advocated policy prudence.

The WHO director-general called the outbreaks “deeply concerning,” though he also noted that the WHO was “encouraged by the continued decline in cases in China.

Even as the market focusses on recent outbreaks outside China, Chinese activities are starting to recover.; if the Chinese labor force activities recover quickly, then PBoC stimulus effort will start paying dividends via ramped up domestic production.

Admittedly with many unknows surrounding the impact. But there are a few knows. China is coming back on the grid while governments and global central banks aren’t about to let this insidious virus snatch defeat from the jaws of victory.

Oil markets

With the virus arriving in Europe, it has magnified the oil market’s attention to the single most colossal risk of the virus crisis, the fear of a “super spreader” outside of China.

This appears to have materialized over the weekend, with a considerable number of cases reported in South Korea and Italy.

And using China as a template, the most immediate economic impact is likely to be aggressive containment measures and travel bans. So similarly, to the primary containment measures in China, traders went into sell first ask questions later mode for fear of more evidence that the outbreak is spreading in Europe or even to the United States.

From a technical perspective, the so-called OPEC+ straddle implied price bottom between $50-50.25 is holding as the thought of a move below $50 makes a more massive OPEC + production cut response more likely.

WTI continues to respect his level, but with thoughts of “disease X “keeping investors awake at night, China teapot refinery activities need to come roaring back with a vengeance.

And with China workers appearing abler and willing to come back online, it could go a long way to stabilizing regional risk sentiment.

Gold markets

On the back of a colossal position build over the past week, gold investors found themselves a bit too far over their skies and absent a decisive shift in Fed speak, the markets insatiable demand for gold has temporarily abated as profit-taking has set in.

From a technical perspective after yesterday’s launchpad on the back of a massive parabolic rally, the failure to break $ 1700 was a touch disappointing and likely caused some technical unwinds.

However, the afternoon gold liquidation could be related to equity margin calls rather than any underlying market weakness, given the overtly risk-off tone dominating the markets The steep declines in stocks may have triggered the need to meet margin requirements by some investors and necessitate the sale of liquid assets such as gold. So, if this is indeed the case once these margin obligations are covered, gold could rebound a touch.

But with a possible recentring of risk on a more favorable Asia centric theme, the slower rate of infection in China has eased demand for hedges, so gold price action may not be as robust today.

Currency Markets

Asia FX

The turning point for the Asia FX remains less clear as global risk aversion comes to the fore as Covid19 cases are getting reported abroad, redoubling the global fear factor.

In this environment, foreign investors have gone cold on riskier assets in favor of the umbrella of US treasuries, which is creating USD demand as investors favor the USD over more China sensitivity Asia currency growth proxies.

Until we see a significant increase in people going back to work in China and the PBoC stimulus paying dividends via ramped up domestic production, Asia FX could languish.

The Malaysian Ringgit 

Political uncertainty on the back of PM Mahathir resignation and as the power struggle intensifies leaves the government in a state of gridlock at a time when policy inputs are most needed to ward off the economic tumult from a protracted USD-China trade war and the double whammy effect from the coronavirus.

The Australian Dollar

FX markets look to be moving from “Asia is the epicenter of COVID” and with the lights starting to flicker across China’s industrial heartland decent support is beginning to build around AUDUS .6600 as Asia key currency barometer the Yuan remains on an even keel on anticipation of the ramp-up in production

The Euro 

Better PMIs out of Europe at the end of last week helped to put a stop to the EUR’s slide, though in an environment where the USD still looks to be the safe haven of choice, it may be hard for the EUR to recoup too much ground. Germany’s IFO index saw both current conditions and business expectations improve slightly in February, despite market expectations of a modest decline.

With the coronavirus spreading in Europe, immediate EURUSD weakness may not be a foregone conclusion on the back of the virus crisis. The primary driver of recent euro weakness has been carry trade-related funding. If the virus were to spread across Europe, the negative growth impact could be offset by an unwind of carry trades amidst risk-aversion. What’s more, a severe economic impact is likely to see a more significant monetary policy response from the Fed rather than the ECB given available monetary policy space.

The Swiss Franc

The European outbreak of the virus should make the Swiss franc an even more popular safe haven. It is the only European currency with a negative beta to growth. As the SNB appears resigned to staying on the sidelines, funding carry trades in francs has been far less prevalent than in euros or yen.

The Japanese Yen

An epic debate is raging behind the scenes over whether or not we are witnessing a regime shift USDJPY. Is it or isn’t it losing its safe-haven status? But overnight, the JPY was clearly a safe-haven bet as the focus has shifted from China to Europe. JPY loses its haven appeal when the exogenic shock comes from China but not from global risk aversion.

With virus fear spreading in Europe, the JPY should, in theory, also benefit from the squeeze on its funding shorts.

 The World Is Getting Spooky En Route To The Risk-Off Vortex


The yield on the bellwether 30-year US Treasury hit a record low, and Wall Street posted its first weekly drop in three on Friday as renewed fears about the economic fallout of the coronavirus and as disappointing US PMI data rustled concerns about the outlook for the US economy.

As well the benchmark 10-year yield fell for the 5th straight Fridays while US equities have retreated on three of the four Fridays since the coronavirus scare kicked into overdrive late last month. Nobody wants to carry risk into a “virus weekend.”

The world is getting spooky with virus clusters breaking out all over Korea with Japan not far behind, the asymptomatic positive tests in Omaha from cruise passengers, and now an outbreak in Italy postponing a top-level football much. But of all the alarming aspects of the rapidly spreading virus out Wuhan is that it’s showing up in patients with no connection to China or the city of Wuhan, ground zero for the outbreak. Suggesting things are about to get extremely problematic, and market conditions could get exponentially worse this week.

Adding a few bricks to China’s Great Wall of Worry, consider the global economic snowballing effect of 40 % + (nearly 10 billion USD according to BBG data) of China offshore bond from stressed issuers due in 2020, it difficult to see this ending well.

That asymmetry means it’s very hard not to stay hedged if not back the truck up into more “safe havens assets.”

Gold markets

Gold remains by far the preferred ‘virus protection’ as COVID-19 concerns are galvanizing the yellow metals perpendicular velocity vector.

Gold put in a virulent rally as risk sentiment remains frighteningly nervous amid reports of more COVID-19 virus is exponentially spreading in Korea, is showing up around the globe and now even in patients with no connection to China or Wuhan.

Should worry over the virus impact rattle the financial markets further, or god forbid that coronavirus is the dreaded disease X, a placeholder name for any new unknown pathogen that could cause a pandemic, gold demand will surge.

While there is no way to trivialize the virus shock that’s dominating all other macro factors, and while Hubei + Henan GDP at ~ $1.3trilllion is a little larger than Mexico, and a little smaller than the state of New York and these fat tails need to be hedged. But if coronavirus morphs into a global pandemic (disease X), we could bear witness to the start of 80 trillion in global GDP going up in flames. Other than gold, I’m not sure what the hedge is for that scenario.

As for the surging US dollar effect, gold investors continue to look through. The strong dollar carries a significantly negative tail risk beyond impacting the Feds inflation target by depressing hard commodity and oil prices. However, that is bullish for gold in its own right. But the fact, “The King Dollar” will move through global bond markets like a wrecking ball is a massive buy gold signal. With a staggering $15trillion dollar-denominated debt floating in a sea of red. It’s putting more pressure on the Fed to cut rates, and the market is increasingly pricing in that fact, which is hugely bullish for gold.

But gold is not exclusively dependent on how the disruption of travel and global supply chains plays out alone. The COVID-19 story overshadows other developments that under different circumstances may have impacted gold positively. For example, last week, Federal Reserve Governor Lael Brainard said Fed policymakers would need to act quickly to counter future downturns.

So, to sum all this up, the prominent driver of gold upside is and will continue to be the accommodative and responsive nature of the Federal Reserve’s monetary policy stance. 

Oil markets 

Containing the virus is going to be a Herculean task. And not surprisingly, any excuse to sell still feels like the sentiment in the market right now and hedge funds predictably increased short positions by 11 % to the highest in four months during the week ended February 18, almost tripling short-bets against WTI this year.

But with reports of more travel linked cases confirmed in California and asymptomatic positive tests in Omaha, I think we are moving well past the weak Chinese recovery scenario. (Even though the market is inherently suspicious of any data coming out of China). Still, we’ve probably severely underpriced China’s economic fallout based on real-time metrics (traffic congestion, coal usage, and return to work metrics) as the PBoC tries to gloss things over with ten basis point cuts to the key lending rates which will probably provide little more than band-aid effects.

Beyond the regrettable and inconceivable human cost, we should not underestimate the economic disruption as a super spreader could trigger a massive drop-in business activity around the globe of proportions the world has never dealt with before. So far backwardation in Brent has held up, but this week we could be whistling a different tune.

Proxies like the Korean markets are signaling massive risk-off moves, which should be enough to spook oil investors out of the gates this morning. And when coupled with the exodus out of Tokyo last week as signaled by Yen outflows at a time when year-end repatriation flows are customarily expected. We could be en-route to a jarring vortex hazard or, at minimum, a significant economic air pocket.

As for the OPEC + compliance saga, it feels like things are dancing to the sound of a broken record again. Sure, Russia’s non-committal is providing poor optics. Still, eventually, they will bring something to the table in March, and if nothing but lip service, Saudi Arabia (OPEC) will again end up carrying the bulk of the weight. But with Covid-19 morphing into, the markets macro worry of the decade obviously traders will have bigger fish to fry.

Currency markets

Asia FX

On the whole, the relative performance of Asian currencies over the past month reflects the potential economic impact of the coronavirus outbreak on their respective economies (i.e., sensitivity towards China’s growth and reliance on tourism). And there have been some idiosyncratic factors like the sharp depreciation of the SGD was due to rising expectations that the MAS will ease its monetary policy in its upcoming April meeting. Similarly, the THB’s weakness is, in part, due to policymakers’ outbound capital account liberalization.

Meanwhile, the TWD‘s resilience can be partly attributed to the production and investment “reshoring” (reverse of “offshoring”) policies of the government. As for the RMB, a reduction in outbound tourism and long-term foreign portfolio inflows have partially offset the negative impact on exports for the RMB. The PBoC’s daily fixings have exerted a counter-cyclical influence. From here on, a lot would depend on how fast China can resume production and contain negative implications for supply chains and global economic growth.

The Ringgit

It’s being dubbed Malaysia’s night of the long knives and even “The Silence of the Backstabbing Lamb.” Political uncertainty is sure to weigh heavy on the Ringgit today as Datuk Seri Anwar Ibrahim succession march gets scuttled by reports that Prime Minister Tun Dr. Mahathir Mohamad, who is Bersatu chairman, was executing a plan to form a new coalition government with Anwar’s rival

As for the economic impact of a coalition government and besides the usual gridlock to get polices through. It’s a sell signal, the current situation will likely mean there will be horse-trading going on and that may be more likely to boost spending rather than fiscal prudence and, perhaps, the risk here is for more massive deficits. But the more parties involved, the more complicated the horse-trading.

G-10 FX


This is a bit tricky as traders are up to their eyeballs in the long dollar, and given the Federal Reserves policy reaction function might not be so eager to put on more high dollar risk outside of the visible China proxies that will continue to burden the brunt of China economic fallout.

The most interest feature on Friday FX trading has been the EUR has finally traded like a funder, i.e., it has strengthened versus the USD, as EM has taken a hit, not least to one of the most popular trades out there – a squeeze on the short EUR/MXN trade. The EUR funding status should offer DXY protection just shy of 100 for now.

The JPY should, in theory, also benefit from the squeeze on its funding shorts. Still, here the dynamic is different, as locals have tended to goal post ranges like 107-112 for over a year, so that should encourage top side selling in a risk-off environment.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

What to watch out for

  • Given that the virus was thought to be a sever short-term problem and expectations were for a quick recovery to what degree does the weekend news flow alter that view will be critical
  •  The convexity of global PMI data to the level of secondary cluster outbreaks and how fast China’s economy struggles to comes back online should not be underestimated.  China manufacturing PMI data will undoubtedly be weak, but how deep of a print into 40 levels will be a crucial sentiment driver. Currently, expectations are coming in around 43-45 mark.
  •  On Friday, the market received is a first wake-up call when a big sell program went through the S& P 500from 3390 to 3340 in precisely 30 minutes from s 11:00 to 11:30 am EST knocking the stuffing out of the market’s bravado. Traders were not so keen to buy the dip, and the S&P500 closed 1.1% lower and US10Y yields falling through 1.5%, closing 4bps lower at 1.47%, the lowest level since September 4 last year. The risk-off tone came with growing evidence that the coronavirus is hitting global activity: in the US, the services PMI was much weaker than expected in February, down 4pts (more on this below.
  •  The Yuan is never off the radar, but so far, the Yuan resilience stands out despite the low-spirited PBoC policy measure; the countercyclical factor is at work for sure, but its also hard to ignore the shrinking tourism deficit. Moreover, importers are not at work, so there is very little real $ demand on the mainland But with China bracing for and unavoidable economic knockdown, the weaker Yuan could offer a suitable self-correcting mechanism for the mainland regulators to lean on. However, a lower Yuan fix might not be the risk-off Yuan bomb as it was during the height of a trade war when the PBoC opened gates to further weakness, especially in light of massive sell-off on its hyperactive beta the Korean Won. EM FX risk light has already been turned off.   Markets could enter risk-off vortex this week or, at minimum, hit a large air pocket, ultimately to the degree investors can navigate through this turbulence will be the key.


Risk-off Thursday: Fade Trade or Call It a Week

It was a Risk-off Thursday, with the S&P500 down 0.5% heading into the close and Europe’s Stoxx600 closed 0.9% lower. US 10y yields slipped 5bps to 1.52%, levels not seen since early February. While the market has been prepared to look through rising coronavirus infection rates as a brief affair, news direct from US corporates about supply-chain disruptions impacting revenue has weighed. After Apple downgrade on Wednesday, Procter and Gamble warned Thursday about lower Q1 sales and earnings, citing supply chains, and reduced store traffic in China.

Still, Chinese officials indicated that new case numbers of the coronavirus dropped sharply Wednesday to 394 from 1749 a day before. Consistent with that theme, there was a better tone in Asia, with the Shanghai composite up 2.3% and modest gains for the Nikkei. Oil also rose by 1.6%.

The US stocks fell on concerns the coronavirus will exert a heavy toll on earnings, with tech leading declines.

Although some market participants were quick to dismiss the Apple warnings, clearly, it has dented the market bravado as investors aren’t nearly so eager to buy the dip, suggesting that a level of discontent, especially around earning, is starting to set in.

And now with investor’s inboxes stuffed to the brim with research reports suggesting “Covid -19 could significantly affect short term earnings: Reiterate Sell.” the market could go in a de-risking mode. And if the Teflon heavyweight tech giants of the US market start to wobble in a domino effect, things could turn ugly quickly.

It took Apple to do what the coronavirus couldn’t – make stocks feel a little queasy. While the market seemed to absorb the initial apple shock in its typically pleasant manner, but it’s the aftershocks when corporate America starts waving the warning flags in tandem that could prove to be the biggest gut check.

Traders are very much creatures of habit, and if the past few Friday’s are any indication for today, we should expect risk to trade better offered and with South Korea emerging as the new cluster hotbed with confirmed cases of COVID-19 more than tripling in two days and the outbreak spreading to non-Seoul areas it could be cause for concern especially  among locals, and thus the negative impact on the Korean economy is set to continue,

While the virus headcount stories don’t carry the same headline gravitas, it’s still a focal point while the economic data fears continue to simmer on the back burner. It will soon be the fear of the data unknowns’ that will keep investors awake at night. And while wobbly data hasn’t stopped the market from frustrating the bears this year, something tells me it could be a lot different this time around.

For the proper record, the dollar rose against every G-10 peer save the Swiss franc, with the Aussie and kiwi faring the poorest. Gold hit a seven-year high, and oil jumped. Asian equity futures are pointing lower.

Oil markets

Oil is trading on improved footing as the demand outlook betters as mainland official reports suggest that new case numbers of the coronavirus continue to fall sharply. But bolstering the recent price recovery, inventory figures showed the US crude stockpiles rose less than expected last week, tempering some of the more exaggerated fears about the impact of the coronavirus.

In early Asia trade, however, prices are well of the NY. Session highs. And as has been the case on prior Fridays since coronavirus worries hit, is that Oil prices tend to trade more tightly correlated to risk sentiment as cross-asset investors divest equity positions. They then move into gold and bonds to hedge the weekend risk.

Still, new virus hotbeds are emerging in South Korea and Japan (Colossal oil importers in their own right). So, this could keep Asia oil risk a bit more defensive than in US markets as anxiety is creeping back into play amid the spike in coronavirus infection outside of China.

Gold Markets

Views on the spread and potential economic disruption of COVID-19 have spread quickly, and gold has been in massive demand as a result. And anxiety is creeping back into play amid the spike on coronavirus infection outside of China. And since it might be premature y to fully account for the medical, let alone the economic impact of the epidemic, gold could continue to outshine all others.

While COVID-19 has been a critical reason to buy gold, there is more to the gold run than meets the eye, as news, any upcoming FOMC reformulation of the inflation target methodology may have a more significant bullish impact on gold.

Currency markets

The Yen and the GPIF

That was four standard deviations 2-day move in USDJPY. Those are rare, obviously, and there are only five unique occurrences of a 2-day, 4SD move higher. The current movement, while epic, is more complicated to explain but impossible to ignore. The tricky thing this time is that it’s not like the BOJ easing moves (2013 and 2014) or the Abe announcement of Abenomics in 2012. Yesterday the proximate trigger wasn’t clear as my memory banks failed the pique portfolio rebalancing story that has suddenly caught the market’s imagination for reasons nobody fully understood yesterday; it makes a bit more sense today after going over the data.

Capital outflows saw the Yen dislocate from risk appetite. Data overnight show Japanese funds bought JPY3trn in overseas debt last two weeks. This is the most significant jump since Sept 18 and shattered vital resistance levels as the market wasn’t ready for the furious buying frenzy with some large traders hedged long Yen has a haven and got stopped into trades.

GPIF is set to conclude its five-year asset mix review in February or March (I don’t have the exact date or even if its concluded), where they are expected to announce a higher benchmark allocation for foreign bonds. If other pension funds follow suit, which is typical for Japanese funds to pursue the GPIF lead, that could add up to more than USD 100 billion of outflows with a good chunk earmarked for the US Treasury

So, the USDJPY move could be nothing more sinister than the market getting caught off guard while Tokyo banks went on a USDJPY buying frenzy hedging GPIF foreign allocation flows.

Still, with Japan’s economy in the tank, the direction of travel makes sense.

The Ringgit

Indeed, it was a gnarly day for the Ringgit right out of the gates yesterday amid mounting economic concern from China and now with Japan about to hit the skids; the question is who’s next? While slower growth in China will have a broad-based impact on ASEAN economies as supply chain disruptions affect exports while commodity dislocations weigh on inflation. And now with Japanese teetering on the cliff edge of recession. It suggests demand for safe-havens rather than riskier ASEAN assets will likely be the name of the game over the short term, at least.

RMB had not been a significant underperformer until yesterday, as it seems like a reality check of sorts is hitting. Yuan markets had been are blissfully ignoring a lot of economic negativity, thanks to the PBoC smokescreens. Now, to assume the near-term Yuan slide is by and large over could be wishful thinking as we still have the lingering aftershocks to consider.

With the RMB trading, lower local traders were more apt to sell MYR rather than buy due to the RMB correlation factor.

The PBoC didn’t do enough on the policy front either yesterday.

Local pain trades

THB, CNY, and KRW are most heavily positioned in bond and equity market by historical standards (foreign ownership shares converted to % ranks) take the sensitivity of currencies to flows into account that would indicate the THB and KRW are most at risk from potential equity/debt outflows.


This Yen Move Is Different

The S&P 500 tracked higher throughout the N.Y. session while U.S. 10Y yields were flat at 1.56%, oil up 2.5%, gold flat. All that came after China’s Ministry of Industry and Information Technology aided factories and technology companies, and as new case numbers of the coronavirus continue to decline. However, JPY has come under intense selling pressure, falling more than 1% against the USD over the past 24 hours. A Bloomberg report notes that the number of coronavirus infections in Japan has more than doubled in the past week, but it could be much more than a case of the flu behind the outflows from  Tokyo.

The Yen woes. 

The fact that the Yen is my main view today is not necessarily a good thing!!

The USDJPY move overnight is hard to explain but impossible to ignore; however, with U.S. Treasuries trading heavy along the curve and gold ripping higher, something is amiss. Yen declines are typically associated with risk-on environments, so when the Yen started cratering this morning, it suggested the GPIF or some massive fund was selling Yen to buy U.S. assets. But the critical thing to understand is the Yen weakness is not so much “Risk on” as it is Japanese asset managers heading for the Tokyo market exit in droves.

Indeed, mounting concerns that Japan’s economy is on the precipice of a financial collapse, or at minimum slip into a recession, is causing the Yen to go in the tank. In this regard, the “cleanest dirty shirt” argument for owning U.S. assets isn’t particularly salient this morning as U.S. assets are getting driven higher by “too much money chasing too few(quality) assets overnight.

  • Europe is non-investable with negative rates and Germany in or near recession
  •  Asia is non-investible due to global manufacturing slowdown and coronavirus
  • The U.K. still battling over Brexit terms and Hard Brexit possible
  • Canada unattractive due to consumer debt bubble and reliance on oil

With nowhere to seek safe harbor Japanese asset manager are plowing into U.S. tech, Bond and Gold contracts

I’m incredibly concerned that the Yen is declining, not because Japanese portfolio managers have decided the U.S. offers such an attractive place to park cash but because they are selling Yen due to the poor economic prospects in Japan.

If the U.S. economy, which has been doing the heavy lifting for global growth the past few years, starts to sniffle from the Covid-19, the global capital market could be in a world of hurt.

Today’s Yen decline is different as I suspect a lot of those USDJPY flows are finding their way into Gold and Crypto’s

But with the USD inflow unyielding, its unclear what could stem this tide other than U.S. administration talking down the dollar before the strong dollar sows the seeds of the U.S. stock market demise.

I hope I’m 100 % flat out wrong about this!!

Covid -19

  • Newly confirmed cases outside Hubei are falling at a faster pace; current cases under treatment appear to have peaked
  •  Restarting rates are improving, but operating rates are still low due to personnel shortages and weak demand
  • Beijing has implemented more measures to alleviate businesses’ cost burdens and stabilize the job market

Things are coming back to life in China, with over 50 % of reported industrial enterprises resuming operation. However, many are still well below capacity due to personnel shortages, supply chain disruptions, and low downstream demand.

But with the daily contagion rate outside of Hubei slowing more sharply in recent day’s this will provide a significant sentiment boost to a multitude of cross assets.

Oil markets

The Covid19 contagion rate, which has been at the center of the oil market worries, has mercifully been slowing more sharply outside of Hubei and which is providing a significant sentiment boost to the markets.

Also, Oil prices continue to bound higher on follow-through position squaring from the Tuesday U.S. sanctions on Rosneft, which further hobbled Venezuela oil exports. And oil prices received an extra boost after Libyan cease-fire talks were suspended when the capital’s port was shelled by forces loyal to military commander Khalifa Haftar.

The unexpected supply shocks have come as a welcome relief to the oil industry against the backdrop of the coronavirus outbreak, which has devastated energy demand.

And on a slightly positive note, Pavel Sorokin, Russian deputy energy minister, told Reuters the ministry still expected the meeting to take place on March 6, as announced by OPEC in December. So now that Russia will be at the table let’s see if Saudi Arabia has sufficiently sweetened the pot to encourage Russia to join in with deeper supply cuts.

Gold markets

With Hubei + Henan GDP at ~ $1.3trilllion is a little larger than Mexico, and a little smaller than the state of New York, the Covid 19 disruption remains a particularly worries some event and the fat tails need to be hedged as does the scary exodus of capital from the Tokyo market.

Beyond the virus epidemic, the Fed’s policy review will be the next waypoint for gold. Not only will lower interest rates be a reaction function of global growth concerns, which should continue to support gold through 2020 but at a minimum, the Feds willingness to accept inflation overshoots suggests interest rates will be low for years to come.

But when you find your sell trying to put a square peg in a round hole while trying to decide if the market is “risk-on or risk-off. “And when USDJPY shoots to the moon while gold is reaching for the stars, there’s a regime change afoot, and with few quality assets left to hedge into, gold needs to be at the top of the list.

Currency markets

The Ringgit

It could be a gnarly day for the Ringgit amid mounting economic concern from China, and now with Japan about to hit the skids; the question is who’s next? While slower growth in China will have a broad-based impact on ASEAN economies as supply chain disruptions affect exports while commodity dislocations weigh on inflation. And now with Japanese teetering on the cliff edge of recession. It suggests demand for safe-havens rather than riskier ASEAN assets will likely be the name of the game over the short term, at least.


Asia Open : It’s Not Where It’s Been, Its Where It’s Going “Earnings Don’t Move The Overall Market; It’s The Federal Reserve Board”

 “Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity; most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” (Stanley Druckenmiller some would say the greatest money manager alive) 

It’s not where it’s been, its where it’s going! 

After returning from holiday, US markets were weaker Tuesday. The S&P500 was down 0.2%, heading into the close, and US 10Y yields fell 3bps to 1.55%. 2s5s has inverted since last Thursday and slipped further into negative territory overnight, while the 2s10s curve is at its flattest seen all year. The risk-off sentiment was widespread, but not deep, European and Asian equities fell, oil slipped, and gold lifted 0.9%. All attributed to the fact that sentiment was dented by Apple, indicating it will likely not meet revenue projections for Q1 because of supply-chain disruptions due to the coronavirus.

However, the Apple disclosure wasn’t perceived as a massive surprise, given large parts of China are in lockdown. Still, price action will be critical, given the market has shaken off virus concerns so far, especially in the tech sector. And to that note, the warning failed to move the “growth trade” in aggregate lower on Tuesday.

None the less the news provided the equity market with its first real sentiment test, and it took Apple to do what the coronavirus couldn’t – make stock markets feel very queasy.

But any market wobble this year, whether from data-driven concerns or geopolitical events, has all been a “buy the dip” opportunities for investors primarily because worst-case scenarios were a long way from being realized. However, the Apple news is getting looked at differently because they are the first high profile company to come out and warn about the impact of the coronavirus. And for some, it could signal that fundamentals are starting to reassert themselves. The absence of which has left many an investor, especially those short stocks, scratching their head.

There has been much debate about the foundation of the equity market rally with virtually everyone blaming central bank policy for the continued risk-on moves as the hunt for yield and the overall demand for riskier assets outweighed the fundamentals.

But it is all about liquidity and momentum these days. While equity desks are not precisely hovering up the dip, the NASDAQ, which everyone should be paying attention to give its tech focus, has recouped earlier losses while the S &P 500 is only marginally down into the close.

But these markets are increasingly tricky, and while I won’t go as far as saying the days of the easy trades of hammering, the reversion button is gone. But the Apple guidance has done something that trade war, an actual war, and the coronavirus has failed to do, make traders think twice before smashing the big risk-reward reversion bets.

Oil markets

It was a noisy oil market overnight as investors were en masse taking the potential demand impact of Covid-19 more seriously.

But offsetting the Covid 19 rethink button, The Trump administration has imposed sanctions on the trading arm of Rosneft. Their Swiss trading arm has been Venezuela’s primary conduit for brokering cargos, which find their way predominantly to refineries in India and China. So, throttling this Asian supply channel will provide some support for oil prices.

But ultimately, it’s not Apple earnings reports rather the PBoC stimulus efforts that will drive the manufacturing rebound in China and fortify the supply chain dynamics which should underpin oil markets.

The first wave of China stimulus has been mostly monetary so far, and instead of sending commodities flying, it mainly propped up financial assets m, which was its primary purpose. Now its time to grease the wheels of the mainland industry, and don’t think the PBoC is going to sit in idle and watch the GDP guesstimates trickle lower, it might be time to get on board or risk getting left at the gas station.

Still, WTI below $51 is a dichotomy trade; the worse things get, the higher the prospect of an OPEC+ call to action is.


A quality asset or hedge against the economic impact of the outbreak? A bit of both I would think.

Yesterday marked the 19th day in a row of gold ETF inflows. It appears that investors are continuing to seek gold as a quality asset or hedge against the economic impact of the outbreak. There is a significant appetite for this segment of the market to continue adding gold as a strategic part of the portfolio.

USD strength has probably restrained – but did not significantly impact – gold gains. Instead, bullion is finding the bulk of its support from lower equity markets. While a modest dip in yields also buttressing demand.

If it’s just an equity correlation, then gold will come off hard if the stock market does there usual buy the dip mode.

Apart from COVID-19 economic effects, Eurozone data remain weak. Still, the fear that the CDU crisis in Germany could spread across the EU has been underpinning gold support across Europe as political risk uncertainty comes back to the fore.

Also, COVID-19 will have a multi-faceted impact on growth in ASEAN this year, most immediately in the tourism and retail sectors. Policymakers are likely to respond to the virus with a mix of fiscal and monetary policy. Yesterday, South Korea, Thailand, and the Philippines central bank started signing from the same dovish song page, commenting that they are considering cutting interest rates, which is moderately bullish for gold prices.

And nudging gold along is that the December 2020 Fed Funds imply year-end Fed rates at 1.22% against 1.40% just 7 weeks ago – in other words, the market has gone to pricing 30bp from just 20bp worth of a Fed cut this year as US rate cut fever is starting to build on the back of COVID -19 concerns.

Currency Markets

The Euro 

EURUSD bounces are still very shallow, and there doesn’t seem much reason to buy it other than to defend against a possible short squeeze. German ZEW was worse than expected, while US Empire Manufacturing was stronger – so the story continues to work in favor of EURUSD bears.

Asia FX

In a classic case of getting too far over one’s skis, Asia FX trader had no choice to hit the reset button yesterday as USD dollar haven demand exploded higher versus the ASEAN basket. But probably more panic than logic as New COVID-19 cases in China continue to fall, pointing to signs of a peak in the outbreak. At the same time, Beijing’s emphasis on reaching key economic goals this year means more aggressive easing may be in store.

The Yuan

USDCNY ended up through 7 yesterday into the equity market close in China. There was a considerable outflow in equities yesterday after the market had filled the post-Chinese New Year gap.

But today is a new day, and as my mentor used to remind me decades ago, “it’s not where it’s been, son, its where it’s going.’

The Malaysian Ringgit

Risk markets appear to have stabilized, although the novel coronavirus outbreak will be a drag on growth in the near term, and economic uncertainty remains high despite a probable call to action from BNM. It is hard to say how the COVID-19 global health emergency will ultimately unfold – the situation remains fluid, which continues to complicate matters as its this specific level of uncertainty that has investors shying away for Malaysian assets and weighing on the ringgit.

Markets could remain in a risk-on risk-off mode for some time, but of immediate concerns, Korea’s 20-day exports on Feb. 21 is the first data point barometer of how the month is panning out. It will be an essential test of investors’ resolve. Still, with a good chunk of the post-coronavirus manufacturing rebound trades flushed, the ASEAN basket sell-off on a weaker than expected print might not be so fierce.


Asia Open: Does One Bad “Apple” Spoil The Whole Bunch, Girl?


US markets were closed Monday for President’s day. Still, the tone was better, likely underpinned by the PBOC’s decision Monday to lower its one-year MLF lending facility by 10bps to 3.15%, its lowest level since 2017.

Chinese measures to help support the economy in the wake of the coronavirus saw onshore Chinese equity markets outperformed yesterday. The CSI 300 was up 2.25%, and the Shenzhen composite rose 3.18%. This policy shift helped lifted offshore China proxies, the Hang Seng and China H shares, but had a minimal bearing on other markets. Investors outside of China markets continued to mildly fret about supply chains and demand contraction, two channels which are difficult to assess.

This morning’s latest Apple quarterly guidance did little to arrest those concerns, as the report suggests that due to the Covid19 knock-on effects, “that worldwide iPhone supply is temporarily constrained, though demand remains strong, production is ramping up slower than expected.”

Indeed, the market’s ability to look through these types of short-term supply chain concerns will likely guide short term momentum. Mind you, investors have shown remarkable resilience to look through just about everything that has been thrown at them of late.

Still, Apple is one of the growth leadership stocks which has been driving the markets higher in part due to the Fed repo remedies. So, the tricky question is “does” one bad “Apple” spoil the whole bunch girl.”

Mainland equities have now retraced losses, SHCOMP significant gains yesterday are taking prices back to pre-coronavirus levels, and now the aftershock remains in EUR, commodity complex, and the tourist parts of EM Asia. However, going forward, it isn’t so effortless to see a big push into the “Rest of Asia” assets unless growth very quickly surprises to the upside.
Still, this might not stop investors from trying to front-run the manufacturing rebound trade.

It’s a tricky market environment. There isn’t intemperate fear, and there isn’t unreasonable optimism. While the virus stories don’t carry the same headline gravitas, it’s still a focal point, but the economic data concerns continue to simmer on the back burner. Korea’s 20-day exports on Feb. 21 is the first data point barometer of how the month is panning out. It will be an essential test of investors’ resolve, given some positioned for a post-coronavirus manufacturing rebound.

Oil markets

News flow around Covid-19 hasn’t significantly improved, but crude markets have normalized in reacting to it, while a significant hit to demand 1Q appears priced into the scrim. That’s assuming Russia plays ball, of course, with the JTC production cut remedies.

While the long-term implication of the outbreak remains uncertain, the immediate impact on productivity is becoming apparent 1) decision to extend the CNY holiday, 2) transport restrictions, & 3) mandatory 14- day quarantine for returning workers will be an obvious impediment to crude prices. But how correctly has the market priced in these concerns is the burning question?

While its more comfortable to call oil higher, given the likely pent-up demand to lead to a recovery from Q2, it’s far too early to suggest oil market concerns have dissipated.

The US rig count showed a +2 rise in oil rigs. Still, we are not seeing the average 1Q growth we might typically expect, which is alleviating oversupply concerns a touch – but this is understandable given the pressure on E&P cash flows and the lower price.

Gold markets

Any glean of a sell-off in stock markets due to the Covid 19 knock-in effects will continue to drive gold demand higher as the bias to be hedged long gold in the current environment remains enduring. This morning Apple downgraded forward guidance due to Covid19 concerns and has provided that fillip to gold prices this morning as risk-on sentiment has soured precipitously.

While gold’s negative correlation with equities suggests that investors remain quite sensitive to fluctuations in risk sentiment, indeed, gold is very much on everyone’s radar. And this suggests bids will stay firm on dips to $ 1575-65 levels even more so as there are now more cuts priced for the Fed than any other central bank as Friday’s core US retail sales data does raise questions over core consumption in the US. And while Fed members have been quick to play up the strength of the US consumption, the trend appears to be weakening, and the markets continue to price in Fed rate cuts into the summer. Bullish for Gold.

Currency markets

Asia FX

Even although coronavirus risk premia are reducing and vols are taming, there’s a gigantic swath of economic carnage left in Covid-19 wake so even with Hubei province now reporting fewer infections with Korea’s 20-day exports on Feb. 21, the first data point barometer of how the month is panning out, Asia FX optimism could weigh on local risk today.

Still, on moves to USDCNH 7.0 and correlated proxy gaps , investors will be looking for a buying Asia FX opportunity but could remain cautious about adding more currency risk before assessing the depth of the economic fallout. But with regional policymakers taking protractive actionable measures to thwart of the legacy effects of Covid-19, this should be viewed as growth positive. But unless growth very quickly surprises to the upside, which I don’t expect, Asia FX risk is probably best expressed through Asia FX higher yielders at the moment.

The Malaysian Ringgit

With the Yuan backing up this morning suggesting investors need to get a better look into regional economic data to make sure growth carnage is not worse than expected, the Ringgit could struggle for traction today. But the biggest issue for the Ringgit very much relies on a pickup in growth expectations to recover sustainably and that growth spurt might not occur to Q2.

The Singapore Dollar

The SGX forwards market is unusually quiet ahead of today’s budget release (1500 SGT). The curve is either “bid without,” or you could drive a truck through the spread. The lack of liquidity bid side liquidity along the curve suggests that locals are cautiously optimistic about a significantly large budget delivery, which could see the 6m-1y SGD FX get smashed of that comes to fruition.

The Euro 

The EURUSD is still trading at the lows of the latest sell-off the week at the lows, struggling to recover. Price action is telling, and the consensus is more and more for a lower EURUSD; positions are accordingly. CFTC data most bearish since June 2019 and risk reversals most in favor of puts since September 2019. But with the market adequately positioned for a move lower, the risk of a short squeeze looms the longer it takes to break through 1.0800


Week Ahead: “Covid-19, And The ‘Cleanest Dirty Shirt’ Argument”

During a week when the coronavirus threatened to become a pandemic that hammers global growth, with reportedly 6 % of the world population under quarantine, and probably more as China continues to adjust the reporting goal posts. Yet the US market continues to whistle while walking through the graveyard with the S&P 500 Index advancing four out of five days, posting three records along the way. Investors took solace in robust economic data, better-than-expected earning reports and the fact a quorum of the global central banks have the markets back which we will highlight in the Asia Week Ahead section

A question that’s cropping up a lot right now is: Why are equities up and bonds up too? The S&P 500, the Nasdaq, and the Dow Jones Industrial Average are all trading around record highs while the 10-year US Treasuries yield is at 1.58%, from 1.9% at the start of the year.

The US Federal Reserve, in an attempt to avoid another meltdown in the repo market as seen in September 2019, overcooked things when it injected billions of dollars of cash into the system to push rates lower. This left banks with sufficient money, which is now being used to buy bonds and equities. Particularly growth stocks which have only been able to gain “because” Treasury yields are so low. And while growth and defensive stocks have been in favor, the S&P500 isn’t as risk-on as the index reading might appear. The leaderish is very defensive and narrow around growth names (US tech, basically), but that has not stopped the market frustrating the bears in the past and now feels no different. Depressing the returns available through the duration in risk-free government bonds creates incentives for investors to re-allocate capital to stocks even more so into the resilient US markets.

This is essentially the “cleanest dirty shirt” argument for owning US assets, which is particularly salient at the moment given the likely asymmetric growth impact of the coronavirus shock.At present, the growth impact of the virus remains expected to be more severe in China (and hence in Germany) than in the US. Which in turn is providing massive inflows into the US dollar

S&P 500 Chart

But despite the Covid19 hanging like a dark cloud over Asia and will continue to be a market focal point well into March. So far, the US economy has been immune to the flu’s nasty effects, and its thought that if there will be an impact, it will be both small and transitory. But the key to the bullish US storyline is that fundamentals are strong, and the economy continues to grow, which basically acts as the key MythBusters debunking the recessionary fear-mongering.

Coronavirus has probably caused investors to be underweight, or at least not get involved in this rally. But low rates are keeping the juice in the market led by defensives, and the harmful data that is expected is now so well-flagged that it has become irrelevant. And since stocks are as much a momentum story as anything else while getting juiced by the Fed repo remedy, investors might feel they have little choice but to get on board or risk getting left at the station.

Week Ahead

This week’s economic dockets will provide a heavy dose of Fed speak with garnishing’s that will provide insights into current-quarter housing and manufacturing activity. With respect to Fed communications, the minutes of the January 29 FOMC meeting (Wednesday) will be a focal point for traders—in particular, discussions around the Fed’s policy review.

Last week, we saw a surge in the number of new Covid-19 cases in Hubei due to the adoption of new diagnostic methods; however, outside of the province, the number of new cases continued to trend lower. In response to adverse economic effects of the outbreak throughout the ASEAN region, policymakers are putting together fiscal and credit support, while mulling over further rate cuts. On the data front, Malaysia’s Q4 growth surprised to the downside as exports deteriorate. Next week, economists are expecting no changes to Indonesia’s policy rate, while Thailand’s growth is likely to remain weak at mid-2% in Q4. Looking ahead, risks to growth and rates outlook in Q1 remain tilted to the downside amid the Covid-19 outbreak.

Proposed ASEAN stimulus packages

In addition to probable rate cut to the MLR and LPR cuts in China, the Ministry of Finance advanced RMB848bn of the local government bond quota, while local governments provided various tax and fee relief measures to local companies.

In South Korea, Finance Minister Hong and BoK, Governor Lee held a joint meeting. Without giving details, they pledged emergency measures to minimize economic fallout from the Covid-19 outbreak,

Taiwan is seeking a special budget worth NTD60bn (USD2bn) to support profoundly affected sectors like F&B, tourism, transportation, and agriculture

The Thailand Convention and Exhibition Bureau (TCEB) plans to spend THB200m to support affected sectors, in partnership with the Thai Chamber of Commerce (TCC) and SET-listed companies – with more stimulus measures to follow.

Malaysia to announce a stimulus package early next month, to support growth, which is likely to include targeted spending for affected sectors, including tourism and manufacturing.

Singapore is likely to announce a series of stimulus measures in response to the Covid-19 outbreak, included in the 2020 budget due out on Tuesday.

Key Asset Classes

Currency Markets

With the coronavirus hitting and uncertainty mounting, the U.S. dollar indexes have steadily strengthened, but that is not the entire story. Advanced economy currencies’ weakness is driving much of the dollar strength. Most of the indexes used to measure “the dollar” are really indexes that measure the euro with a few other currencies in there for good measure. Meanwhile, emerging market currencies are holding up well.

The relatively indifferent Asia FX reaction to the Hubei news suggests that investors continue to continue to look through the economic impact.

The USD has been enduringly bid d, although FX vols are only slightly higher. The downtrend in USDCNH since September 2019 remains intact, 12-month forward points narrowed further, and an ongoing sell-off in risk reversals over the past week suggests a more limited demand for protection against a CNH sell-off as the PBoC is offering up a convincing backstop.

Overall the somewhat muted reaction may be attributable to the fact that the number of new cases outside China has failed to rise. However, investors’ sanguine response to the economic fallout from the coronavirus will be tested in the coming weeks, so at this stage of the game, Asia FX investors don’t want to run to far ahead of the economic realities. Hence, they remain cautious about adding more currency risk before assessing the depth of the economic fallout.

Perhaps a bit of this phenomenon along with the US long weekend effect.

There are three main channels for this fallout.

One is the tourism channel. The impact is easily quantifiable, and the initial reaction of the markets has been most punitive for the more vulnerable economies on this metric – THB and SGD. What’s harder to assess is the damage via the other two channels – supply chains and demand contraction, and for this, we need to see the empirical data. For that impulse, the release of Korea 20-day exports (Feb 21) is essential

The Euro

Interest rate level differentials between the US and NIRP( EURO) economies remain quite broad in a historical context, and these wide differentials continue to attract capital flows into US assets as is evident from persistent strength in the general dollar

Investors also, to s large degree, continue to ‘look through’ the economic impact of coronavirus, ostensibly driving EUR weakness via long carry positions.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for yield carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

Again, it’s the “lose-lose” situation for the Euro that we suggested at the start of the year.

But does the Euro have legs to run? the market got paid out of a fair bit of puts in the past few sessions. The risk reversals are going better bid for puts.1month 25-delta risk reversal is 0.25 vol bid for puts – it was 0.5 bid for calls a week ago. Positions are not stretched vs. 2015 peak of 84% open interest


In the battle of the weekend, hedges vs. Covid-19 data surprise, secondary transmission clusters, or if you think China reporting transparency is questionable. The one clear winner was gold as the yellow metal continues to shrug off an enduringly influential USD buoyed by ongoing investor concerns over COVID-19. It appears that investors are continuing to seek gold as a quality asset or hedge against the economic impact of the outbreak. And with US markets closed on Monday in observance of Presidents Day. This will leave Asian and European markets, which appear more sensitive to COVID-19, in control of the gold market. So with little chance to buy a dip on Friday after a consensus headline retail sales print. US Covid-19 hedgers we forced to chase gold higher due to the US long weekend effect which was probably commensurately more bullish for gold than would otherwise be the case

But putting a broader spin on gold’s appeal beyond the current Covid-19 narrative, which will likely be a transitory event and might have a muted impact on central bank policy outside of Asia, I focus on Friday’s US retail sales data.

Listening to commentary surrounding the consumer, it always seems to be on the edge of doomsday even beyond the armageddon quacks on twitter. So, with investors very hypersensitive to any measurable negative US consumer data point regardless of how small, it’s likely going to drive an overreaction of sorts.

The three-month moving average of US core retail sales has been flat for two months now (0%), and negative for the two months before that. This suggests a trend loss in core consumption is a cause concern. And while Cherry-picked data points can back-up nearly any position, but the 3-month moving average detail is the primary driver of the US Treasury rally on Friday , and likely the catalyst behind the demand gold into the weekend, after all, virus transmission outside of Hubei is falling?

So far, the Fed has been sticking to its consumer-spending-driven growth narrative, so last week’s soft retail control figure introduces some doubt into that picture. While it is early in the quarter and retail sales are often revised, the next retail sales release on March 17 takes on added significance as it has the potential to impact the Fed’s current policy narrative.

While Gold appears to be stuck in no man’s land for now mired in the 1560-1590 range, with trading volumes somewhat depressed since the beginning of the year, but clearly, gold is still very much on everyone’s tracking systems. But if I saw no reason to chase it on Friday at 1575, I certainly don’t see a reason to pursue it now while arguing that it remains prudent to either wait for fresh catalysts and/or more attractive levels to reengage for short term trader. But for long term retails traders who should be averaging in with small clips, price sensitivity gives way to the steady trend higher. But when it comes to gold investing /trading, it’s all about your investment time horizon.

Given the expanse of the coronavirus in China, gold physical demand is likely to suffer while other regional gold hubs like Hong Kong, Singapore, and Bangkok, whose economies have been ravaged by the tourist impact, physical demand is also likely to hurt .So the current bullish impulse could be thwarted by the lack of physical demand

But a Fed Policy review screams buy gold

January 29 FOMC meeting (Wednesday) will be a focal point for gold traders —in particular, discussions around the Fed’s policy review. As Chair Powell noted in his post-meeting press conference, the FOMC unanimously agreed that the current stance of policy is appropriate as long as the data are broadly in line with their outlook. However, when queried about average inflation targeting, Powell suggested that under a different framework, it may lead to a different approach to policy.

Interest rate level differentials between the US and NIRP( EURO) economies remain quite extensive in a historical context, and these wide differentials continue to attract capital flows into US assets as is evident from persistent strength in the broad dollar.But gold institutional traders know the stronger USD is a problem for the FED who may unintentionally walk onto steadily thinner ice. Excessive dollar strength threatens to upend commodities and ultimately cause the Fed to miss inflation targets. Cutting rates will fiend of further dollar strength and will make target inflation more achievable.

In addition, given Chair Powell’s discussion of the coronavirus at the press conference, there very well may be information in the minutes about the Board staff’s insight into the economic impact of the virus.

The OIS market is currently pricing a 25% chance of a rate cut by the April FOMC Meeting and a 50% chance of a cut for the June meeting. With the coronavirus still a significant source of risk for the markets,but most investors believe market impact from the virus is still several months away and for the most part leaving other factors unchanged. The issue at hand for the Fed is that inflation is below target, and if it goes unchecked, dollar strength will make this worse.

But with bond and gold markets singing from the same song sheet, even if the Fed delays cutting rates and it could exacerbate downside risk for inflation, so absent a dovish pivot by the Fed ,the curve inversion could possibly intensify and will untimely drive gold prices higher. Thus in my view inversion is signaling mounting risks for lower inflation and inflation expectations, not imminent recession

But ultimately, it will take a more aggressive improvement in risk sentiment to chip away at long gold positioning. And with the Fed possibly moving to cut interest rates to defend their inflation targets, gold could be given bigger wings to fly.

Oil Market: will they or won’t they

Oil markets bounced around in relatively tight range on Friday as investors fretted about the Covid-19 demand devastation effect while receiving some encouragement that Saudi Arabia is rally OPEC and friends to reschedule and emergency meeting. Of course, lip service is more comfortable to deliver than actually to get Russia to sit at the table. Still, if prices fall more profoundly below $ 50.00 WTI, it will probably trigger a meeting, so there remains a psychological floor in place which markets have been bouncing off.

Into weeks end prices remain supported by speculation that the spread of the coronavirus has slowed and as the market continues to focus on advancing towards OPEC+ reaction to the Covid-19 linked demand slow-down, which was confirmed again in the IEA’s OMR that cut its projection for 2020 demand by 0.5Mbd with a cut to 1Q20 of 1.3Mbd.

But ultimately, it’s all about the waiting game as traders sit on their hands hoping for Russia to play ball before taking on more oil risk

However, as I was discussing with my network of oil traders over the weekend, OPEC+ is but a band-aid to stop the bleeding, not necessarily a bullish impulse unless they cut 1 million barrels of daily production out of the equation. Oil market needs China back online , which made for a good read of Bloomberg’s Chinese Refiners Go on Buying Spree as Oil Too Cheap to Ignore Friday article but should not be confused with a recovery in China crude demand as run rates remain depressed. But it’s much better to have Teapots buying rather than selling stockpiles.

Asia Economic Calendar

Twitter Follow

Finally, after 8 years, I’m starting to get more active on Twitter, where I’m sharing interbank views from an assortment of Top tier global banks, I’m in contact with, so follow me, and I will be sure to follow you back and drop me a message to say hello.


Weekly Twitter follower suggestions

One of the larger accounts I recently started to follow (which I seldom follow) is Tracy Alloway from Bloomberg. I’ve been interviewed by Tracy a number of times on Bloomberg TV, and she is just flat out smart witty and tinged with humor that makes for a good twitter follow.



Asia Open: The Schitts Creek Scenario




The Schitt’s Creek scenario

“Schitt’s Creek” is a Canadian TV comedy series about a wealthy video-store magnate Johnny Rose (Eugene Levy) and his family suddenly find themselves broke, and they are forced to leave their pampered lives to regroup in Schitt’s Creek. If you haven’t seen it give it a try

Stock Markets 

The US market is closed for Presidents Day, so in the absence of an unexpected headline shock action could be a bit muted as it typically is during a US holiday weekend

The growth over value theme continues to play out, and, as with the last few Fridays, there was little appetite to add to risk into the weekend.  still, the US market managed to post gains

The bad news is that on Sunday; authorities reported 2,009 new cases and 142 more deaths nationwide; the good news is, however, it represents a drop in new cases from the coronavirus outbreak for a third consecutive day.

This will be good news for the market to run with this morning and we should see the usually predictable unwinding of weekend defensive hedges out of the gates and the SPX should continue to plow higher on the “cleanest dirty shirt” argument for owning US assets, which is particularly salient at the moment given the likely asymmetric growth impact of the coronavirus shock. At present, the growth impact of the virus remains expected to be more severe in China (and hence in Germany) than in the US.

Fund flows continue to be supportive of the general risk-on theme. EPFR data showed $23.6bn flowed into fixed-income funds in the week ending Wednesday, the most significant inflow since 2001. I am surprised that fund flows into equities were not higher given the ongoing move. For now, equity markets remain in look through mode.

However, it’s not hard to be skeptical about just how much looking through investors will be willing to bare the cost of for the next few weeks, especially if China’s high-frequency data comes out worse than expected. Although, to be frank, I’m not really sure what to expect from the data, but if it comes out bad enough for confidence to plummet, investors could quickly find themselves up the creek ( Schitt’s Creek)without a paddle. Let’s face it, financial markets are not known for their rational thinking lately and given the 500 million or so mainlanders affected by the Covid19 quarantine, and it’s also not hard to come up with more downside risks than upside ones right now.

This is a tricky market environment. There isn’t intemperate fear, and there isn’t unreasonable optimism. The easy trades of reverting overextended markets are gone, which has turned traders very wary of taking on big wagers. While the virus stories don’t carry the same headline gravitas, it’s still a focal point while the economic data fears continue to simmer on the back burner. It will soon be the fear of the data unknowns’ that will keep investors awake at night. But that has not stopped the market frustrating the bears in the past and now feels no different. Depressing the returns available through the duration in risk-free government bonds creates incentives for investors to re-allocate capital to stocks even more so into the resilient US markets.

Oil markets

The oil price action continues to be swayed backward and forwards by news flow around the Covid-19 infection/death rates and the prospects of OPEC+ agreeing a quota cut to balance off the demand slowdown. However, with a reality check about to set in when the China high-frequency data start to roll in, and in the absence of the Russian compliance commitment, any excuse to sell still feels like the sentiment in the market right now. And while the worst is probably priced into the China equation, the convexity of global economic data to how much of the China economy comes back on-line should not be underestimated, especially with a reported 500 million Chinese lives touched by the quarantine. That over 1.5 times the US population!!

On Friday, oil market investors took solace after the US energy secretary noted only “slight reductions in production” from the coronavirus and that the agency is “not yet concerned about its ultimate impact. “After markets closed, the office of the US Trade Representative announced it would lift tariffs on aircraft imports from the EU, from 10 to 15% effective March 18, though it stopped short of raising higher tariffs on other goods.

Gold Markets

There’s more to the recent gold move that meets the eye. While retail sentiment seems to be now moving purely on the end of coronavirus headlines, long term strategic buyers are starting to take notice of a soft underlying read for US retail sales. The headline for January was in line, but the bit that matters for GDP – retail control – was weaker, recording a flat outturn against expectations of a 0.3%mom rise and with a sizeable downward revision for December. The recent trend has been weak: 3m annualized is only up 0.22% and the 6m annualized is down -0.12%, only the second negative reading since the GFC (the other was during the collapse in December 2018).While it is early in the quarter and retail sales are often revised, the next retail sales release on March 17 takes on added significance as it has the potential to impact the Fed’s current policy narrative.

And while analyst has been focusing on ASEAN central bank policy measures. It’s the Fed who is now wearing the yellow jersey in the rate cut peloton as there are far more cuts priced for the Fed than the other central banks. From the time coronavirus cases started to pick up in mid-January, the Fed went from being middle of the pack to now leading the pack at 36bp of cuts being priced. This is a bullish swing in the gold narrative

Also, the convexity of global economic data to how much of the China economy comes back on-line should not be underestimated, especially with a reported 500 million Chinese impacted by the quarantine.

With the US stock markets trading at record highs, and downside risks outnumbering upside one’s by a count of 2:1 according to my watch list. It’s not hard to figure out why Gold markets are bid.

With bond yields falling on coronavirus concerns and as the effects of existing tariffs make there way through the US economy .But when factoring in geopolitical tensions such as the recent standoff between the United States and Iran, a potential technological divergence between Washington and Beijing, and the possibility of a U.S.-EU trade war, gold should be on everyone’s radar

Stock market liquidity?

Liquidity on driving equity? That’s not what the chart below shows. The Fed’s balance sheet is pretty much unchanged so far this year and shrank over the latter stages of January. Same for reserves balances. Yes, both rose steeply in Q4 last year, but they haven’t made further progress this year.

Well, the markets will soon get to test the liquidity theory as The New York Fed reported it would lower its 14-day repo offerings by $5 bn, down to $25 bn through March 3, and then down to $20 bn from March 3 onward. The overnights will drop $20 bn to $100 bn maximum. On Thursday, the Fed provided $30 bn in 14d and $48.85 bn in overnight.

Still, its bill purchases hold at $60 bn/month, so perhaps the idea is to get back to a more conventional balance sheet management sooner rather than later.

Currency Markets

Asia FX

Mainland authorities have leaned mostly on targeted measures like individual re-lending facilities, with the macro policy response more fiscal (additional pre-financing quota for local governments) than monetary (net OMO injection of the only 140bn in the last two weeks), and USDCNY fix mostly been in line with the model, after the initial lowballing adjustment post-LNY. With RMB1.2tn of OMOs maturing early next week, the focus will be on whether PBoC rolls them using MLF, and at a cheaper price point (ahead of LPR reset on the 20th). The emphasis in rest of the region is on Singapore Budget (18th), Bank Indonesia MPC (20th), and BOK (27th)

Even although coronavirus risk premia are reducing and vols are taming there a gigantic swath of economic carnage left in Covid-19 wake so even with Hubei province not reporting fewer infections from the day before, its full steam ahead for the region’s economic stimulus plans

If the past week is any indication, investors are will be looking for a buying Asia FX opportunity but could remain cautious about adding more currency risk before assessing the depth of the economic fallout. But with regional policymakers taking protractive actionable measures to thwart of the legacy effects of Covid-19, this should be viewed as growth positive. But the market appears to lack a catalyst for a real trend, and I expect consolidation to continue until bluer skies look likely.

The Yuan

USDCNH slipped from the high of 6.9917 and traded at 6.9830-80 last Friday Asia morning but back up again in the NY time zone. There was no demand for long USD gamma, however. Instead with the curve pointing south implying that traders seemed to have priced in a potential RRR cut Friday, so when it didn’t come, forward points reverse higher and dragged spot along for the ride. The drop in the daily virus headcount is a positive for regional risk as the curve now refocuses on PBoC policy measures which should be bullish for the Yuan

The Ringgit

For the Ringgit, which is a mid-level carry currency, it very much relies on a pickup in growth expectations to recover sustainably. And with another rate cut looks largely priced into swap markets and out to 10Y on the bond curve and with 10Y MGS trading this week with yields through 3.0% to all-time lows, it might be up to equity flows to do much of the heavy lifting this week as perhaps offshore blond flows could turn more neutral from here after significant inflows in the past three months. Look for the Ringgit to take it’s lead from the Yuan today

The Thai Baht

The USDTHB continues to hold well above the 31.00 level as currency trader to a tee the negative tail to the Covid-19 outbreak is best expressed at this stage via being long USD vs. THB.

Singapore Dollar 

FX and rates curves in Singapore are mostly already pricing in a shift by MAS to neutral. While the reduction in new flu cases, ex-Hubei has already helped Asian FX consolidate. But if the response to SARS were any indication, it might take a ‘positive announcement shock’ like a lifting of the travel ban to get the Singapore dollar moving in the other direction.

G-10 Currency markets

The Yen

Why isn’t the Yen working? Don’t even get me going? Besides the fact, Covid -19 poses a significant near-term downside risk to Japan’s economy, negative rates, and a magnetic attraction to the 110 level have made it an expensive proposition to purchase in a panic and then sit on.

The Euro 

Any concerns about your short Euro position? You bet. Besides President Trump’s twitter feed set to exposed if the EURUSD breaches 108, the ECB’s strategic review has a hawkish bias, particularly given the current euro weakness. I think this supports the euro if this is the case G10 traders will take their cue for the rates markets as this should create a measurable bounce in near term EU interest rate yields. Still given the dismal economic outlook in Germany, given my current view, look to sell on rallies to the 1.09 handle, not before. While downside optionality volumes are exploding, cash remains a bit neutral at this point suggesting the market looks to well-positioned for a downside move, and in this low vol environment short term positioning looks a bit extreme at the moment

The Australian Dollar

The Aussie, which continues to trade super beta to China risk is punching higher this morning on improving regional risk sentiment as China reported a drop in new cases from the coronavirus outbreak for a third consecutive day.


Market Resilience Reigns Supreme

Market resilience to coronavirus developments has been tested over the past 24 hours as reported cases of the virus in Hubei spiked almost 50% after the provincial government there began counting cases confirmed by imaging scans in addition to the existing test kit methodology. Even with that, the market impact was little more than a pause in the general bullish upward trend rather than risk-off.

The critical question today will be whether the near 10-fold spike in new virus cases reported yesterday proves to be a one-off. And while there remain some concerns about Chinas transparency with regards to the methodology for counting people with infections. But there is ample evidence to calm markets that the jump is merely a fossil of the reporting — not a sign that the outbreak is spreading faster or farther. All of this suggests that the market base case remains unchanged that the Covid-19 will be primarily contained by end-March, though occasional outbreaks may continue to be reported in April.

And confirming the market recovery Oil prices, which are a crucial bellwether for Covid-19 investor risk sentimentalso managed to lift 0.5% despite the International Energy Agency suggesting oil demand is likely to grow at the weakest pace since 2011 this year due to the coronavirus. Indeed, the IEA expects to see an outright decline in demand in Q1-20, the first “in more than ten years”.

US jobless claims fell more than expected. And given this high-frequency data series is one of the best real-time indicators of recessionary pressure, the key here is the data is not sending any worrying signals about the health of the US economy and labor market.

Markets have shrugged off a surge in the number of coronavirus cases in Hubei, and investors are back in stock buying frame of mind. It seems there’s a definite thematic playing out. Coronavirus has caused investors to be underweight, or at least not get involved in this rally. But low rates are keeping the juice in the market led by defensives, and the harmful data that is expected is now so well-flagged that it has become irrelevant.

Sure, there’s a lot of “hee and haw” that leadership is very defensive and narrow around US tech. But countering this closed-minded view is that earnings have been hitting expectations across the board; US data remains exceptional, so there is a strong rationale to stay long beyond the easy money argument.

Oil markets

Oil put in a positive performance for the day, reinforcing the view that oil markets have already priced in much of the coronavirus-driven lousy news. Barring an acceleration of new infections, the markets should remain relatively supported until we get the “first look data” surrounding supply chains and demand contraction knock-on effect in China as a result of the virus transmission

But keeping the lid on prices, OPEC had hoped to announce additional production cuts of 600,000 BPD. Still, with Russia’s refusal to participate, no action is anticipated before OPEC’s next meeting in March. And of course, the stream of gloomy revised demand outlook by key market monitoring agencies does little to help the oil markets bullish cause.

Gold Markets

Gold benefitted from a resurgence in investor risk aversion. The catalyst remains COVID-19 headlines.

Although gold rallied on fresh COVID-19 concerns, risk appetite lately tends to rebound quickly. So, unless there is new negative news to prompt a renewed deterioration in risk-on equity demand, this could limit gold’s top side ambitions.

For now, policymakers have been content to cite the downside risks to growth from COVID-19, but have argued it is too early to say what the scale of the impact might be and is not providing enough dovish impulse to push gold to the vital $1600 /oz, But the strong USD and a distinct air that risk-on investor sentiment will increase are enough to put a cap on gold.

Investors’ sanguine reaction to the economic fallout from the coronavirus will be tested in the coming weeks. If the economic data comes out weaker than expected, you will be happy to have included gold as a quality asset class in your portfolio. In these uncertain times, gold should remain prime quality asset purchases as a hedge against a stock market correction.

Currency Markets

USD Dollar 

US Retail Sales is going to be essential for the FX market, and while intraday ranges have been relatively tight, they could even be narrower today as the market might sit on their hands. But if there a trade to be had, it could be through short-term tactical plays vs. a weaker Retail sales print. Although I don’t have an absolute reason to fade the core number +0.3%, some may view the estimated headline print a bit optimistic, given global growth uncreates. But one thing that I have learned after decades in the FX game is never to speculate against the resilience of the US consumer even through hell or high water.

Asia FX

The relatively indifferent FX reaction to the Hubei news suggests that investors continue to continue to look through the economic impact.

The USD has been enduringly bid d, although FX vols are only slightly higher. The downtrend in USDCNH since September 2019 remains intact, 12-month forward points narrowed further, and an ongoing sell-off in risk reversals over the past week suggests a more limited demand for protection against a CNH sell-off as the PBoC is offering up a convincing backstop.

Overall the somewhat muted reaction may be attributable to the fact that the number of new cases outside China has failed to rise. However, investors’ sanguine response to the economic fallout from the coronavirus will be tested in the coming weeks, so at this stage of the game, Asia FX investors don’t want to run to far ahead of the economic realities. Hence, they remain cautious about adding more currency risk before assessing the depth of the economic fallout.

There are three main channels for this fallout. 

One is the tourism channel. The impact is easily quantifiable, and the initial reaction of the markets has been most punitive for the more vulnerable economies on this metric – THB and SGD. What’s harder to assess is the damage via the other two channels – supply chains and demand contraction, and for this, we need to see the empirical data. For that impulse, the release of Korea 20-day exports (Feb 21) is essential.

The Malaysian Ringgit 

The US equity markets are getting encouraged by easy money around the Fed repo remedies, and the S&P 500 bounces as not driven by growth rebound. Hence, without an impressive rebound in China data and or global growth, there is no positive risk knock-on effect from US markets as Asia currencies remain out of favor given the gloomy local economic outlook. Eventually, buying into a post-coronavirus manufacturing rebound will make sense. Still, it’s a bit early to start front running that trade versus the strong USD, so the Ringgit continues to trade defensively.

G-10 Currency 

The Euro 

Investors continue to ‘look through’ the economic impact of coronavirus, ostensibly driving EUR weakness via long carry positions.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

Again, it’s the “lose-lose” situation for the Euro that we suggested at the start of the year.

The Pound 

Following news of UK Finance Minister Sajid Javid’s resignation, as reported by The Sun newspaper, judging by press reports, it would seem that the UK prime minister wants complete integration of Downing Street and the Treasury.

The pound is rallying as closer integration between “No 10, “and the Treasury would almost certainly mean a loosening of fiscal rules and higher budgetary spending than under Sajid Javid.


Ho Hum, Another Day Another Stock Market High Water Mark. US Markets Close At Record Highs As Coronavirus Fear Ebb.

Revised market open 

China Hubei Coronavirus update Feb 12th: 14,840 additional cases (under revised standards) v 1,638 prior; Daily death toll 242 v 94 prior

Revised standards have started to include cases diagnosed under new method – Notes it started involving cases diagnosed with the new process among confirmed cases from Thursday (Feb 13th) –

This certainly doesn’t sound good, and if I’m reading this headline correctly as on the first glean, there could be a severe case under-reporting going on.

Stay calm and buy the dip?

The Hubei Coronavirus update headline has initially hit like a ton of bricks given this is one of the market’s biggest fears.

So, traders have jumped into sell first, ask questions later mode. But is it time to stay calm and buy the dip?

The headline on the sharp jump in Covvid-19 cases looks gnarly on the surface. Still, it is essential to note that in Hubei, the epicenter of the outbreak, there has been a severe shortage of testing kits reported over the past few weeks. Many people who had symptoms (and even positive affirmation of things like pneumonia) were unable to be confirmed as virus carriers due to the testing kit shortage, and some were sent home to self-quarantine. The government made a push this weekend to clear the backlog of tests, and this big jump in confirmed cases could be a result of this.

And while there could be a knock-on effect where the Rest of China has been under-reporting. Still, I don’t think its a threat to the virus cluster beyond Hubei at this stage as other countries are certainly adhering to strict reporting protocol, and the cluster effect outside of China is receding.

On a more market-friendly note, the PBoC will continue to intervene perhaps now even more aggressively either with RRR or deeper interest rate cuts.

But Asia market rather than a global market and of course, demand sensitive to China commodities like Oil will be more re prone to the sell-off. Still, for ASEAN currency risk, its unlikely to weaken off to significantly as Yuan is doubtful to weaken through 7.0 USDCNH given the PBoC policy backstop.

Ho Hum, another day another stock market high water mark.US markets close at record highs as coronavirus fear ebb.

US equities post another day of gains WednesdayS&P500 up 0.5% heading into the close, US 10-year treasury yields rose 3bps to 1.63% and the 2s5s curve – which inverted earlier in the week – has turned positive again. Asia equity futures are trading in the green pre cash market open with the China proxies looking to open up well, while oil lifted 2.6%

Investors’ sentiment was boosted by the fact that China reported the lowest number of new virus cases since the end of January, while a senior medical adviser suggested the outbreak could be over by April.

Central bankers continue to remind that it is too early to gauge the economic impact from the virus fully; the RBNZ and Riksbank the latest to acknowledge downside risks. Still, the market looks increasingly willing to look through virus headlines. And with market flush with cash providing the juice in the market and given the negative data impact is so well flagged, in no small degree the growth downgrades have become somewhat irrelevant.

With risk positive momentum building and stocks and commodities both singing from the same song page, it appears the markets are finally letting go of the coronavirus fears.

Although “The Street” is downgrading growth forecasts, for now, the market has decided enough is enough. And the source of funds for the latest asset price move is the PBoC policy bazooka bolstering Asia sentiment the Fed’s repo remedies which have left banks awash with cash.

The coronavirus impact is probably just a near term demand shock that has been mitigated by central bank liquidity. Still, given that stocks are purely a momentum story at the moment, investors have little choice but to get on board or risk getting left at the station.

S&P 500 3400 level sure sounds like a beautiful Valentine’s day gift, especially if you own equities.

Oil markets

Oil is up as OPEC awaits an official response from Russia regarding proposed production cuts. This despite a hefty inventory build reported by the EIA.

Oil markets posted its most significant daily gain in six-week after reports of coronavirus cases in mainland China appear to be leveling off, according to the latest data from the Johns Hopkins Centre For Systems Science and Engineering.

So, despite the sizeable inventory swell, the EIA report fell through the cracks given the mounting evidence the coronavirus transmission is slowing. At the same time, oil demand sentiment is getting further boosted by stories that Foxconn hopes to resume 50% of its production in China by the end of the month and be at 80% capacity by the end of March.

But not wanting to sound like a killjoy, the markets have a sizeable glut to deal with, and the EIA report did little to alleviate those oversupplied concerns, bringing market attention full circle back to the elephant in the room, Russia agreeing to the JTC production compliance.

But Russia may find it easier to stomach temporary production cuts given relief is just around. And their market share won’t necessarily be compromised by US production, which would also be less willing to absorb the start-up cost to ramp up production immediately Which could be hugely bullish for oil markets

But clearly, the big story for prompt oil concerns is coronavirus fears are lifting as the virus transmission eases and which should send more shorts running for cover, While those shorts that remain at the risk-on party won’t be dancing to far from the exits as China demand could return with a vengeance.

Gold markets

Gold demand was tempered by the strong US dollar and rising risk appetite and while the underlying support remains there, but the upside looks limited over the near term.

Gold has been range-bound of late but supported given the headwinds it faces. Two factors continue to offer support One is that global monetary policy remains soft, and interest rates are low. The other is that geopolitical risks beyond the coronavirus are bullish. But with ETFs, and Comex net long positions high and if anything, a little bit stretched. When flagged against a firm USD, stock market gains, and the bounce higher in US bond yields, it suggests fast money traders who have been driving the bulk of action these days would probably be more inclined to trade gold from the short side limiting gains.

Chair Powell’s comments to the congress were bullish for gold longer-term but neutral in the immediate to short term. Without an immediate dovish Fed impulse, there is limited upside for gold currently, but the US election cycle risk should support gold. The race now moves to Nevada with a caucus on 22 February with an essential debate before that on 19 February, but it is still unclear if Michael Bloomberg, who would pose a real threat to Trump, will meet the polling criteria to make it to the debate stage.

Asia FX

The Yuan 

The PBoC continues to stabilize the markets has limited RMB weakness via fixing USD/CNY lower than the market’s expectation while introducing various countercyclical measures to encourage portfolio inflows. As the market gradually pivots out of the virus haze and begins to see some light at the end of the tunnel and coupled with the mainland macro measures designed to ramp up production, Asia FX traders could start to front-run the China rebound trade more aggressively.

According to Deutsche Bank MTD, net equity inflows are at ~$2bn, slightly more than in January and well above the 2019 average, while bond flows in January showed ~ $2.1bn of inflows.

So, if the PBoC continues to limit RMB weakness, and with Bond market rallying, portfolio inflows should continue to remain active, especially given the ongoing bond index inclusion, such as to the GBI-EM, which will include China starting from the 28 February. Hence the healthy Hedge Fund appetite for all things RMB.

The Ringgit

While the Ringgit weakened on the worse than expected GDP print, which then brought forward rate cut prediction. Improving regional risk sentiment as coronavirus cases in mainland China appears to be leveling off, and rising oil prices should provide some immediate support for the Ringgit.

The Tourism basket

While the Thai Bhat has recovered from the peak coronavirus fear levels, the Singapore dollar continues to struggle for traction. But unlike regional currencies like the MYR that should benefit from the local rebound trade on the back of China pent up production demand coming back online. There has been a sizable chunk of tourism revenue in Thailand that has been lost, and you can’t replace that. So, any further gains in the THB might not be so immediately forthcoming, given that it’s impossible to make up that lost revenue. Still, the Thai market is in a much better place than it was only 48 hours ago.

Secondary virus cluster fears continue to weigh on Singapore, so traders remain very defensive knowing the MAS could eventually cut interest rates to support the flagging Singapore economy.

G-10 Currencies

The Japanese Yen

The main G10 flow over the past 24 hours has been USDJPY, with the pair back above the 110 handles as risk continues to trade well supported. And with risk sentiment well supported as virus fears turn benign, it seems pointless to fight it. While +110 has proven to tricky level to go long recently, gains could be a bit of a grind today unless the stock market momentum takes a run at the S&P 500 3400 levels.

The Euro

In EURUSD, the constant supply over the past 24 hours taking its toll. The pair is trading below Tuesday’s lows, but still holding just below the October lows, at least for now. And now with the Euro as the go-to currency trade funder via EM FX kicking in, offers will likely remain thick over the near term. The markets at a critical level, so the next move could be key.

Canadian Dollar 

More positive signs for the Loonie is that more topside strikes north of 1.3500 is getting offered through the brokers as the spot price weakens, given the recovery in oil prices.


Bubbles do Funny Things To Bank Traders.

US equities were a touch stronger Tuesday but trading well off intraday peaks with S&P500 up 0.1% heading towards the close. US treasury yields rose, — ten-years up 2bps to 1.59%. With gains in European equities and most of Asia as well, the market looks increasingly willing to look through concerns about coronavirus, newly named Covid-19 overnight by the WHO. In his Congressional testimony, Fed Chair Powell noted the Fed is “closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.” However, it was too early to make a full assessment. BoE Governor Mark Carney was similarly cautious but noted the virus had not led to any tightening of financial conditions for UK banks.

But it could be the degree to which investors are willing to look past weak China high-frequency data in the coming weeks will that help determine whether the risk rally has the legs to run.

I was relieved this morning to see the markets hadn’t gone stark raving bonkers and taken the S&P 500 closer to 3400. However, risk parity bubbles do funny things to bank traders who appear to be borrowing a page out of George Soros playbook “when I see a bubble forming; I rush in to buy it. “Six weeks into 2020 and already the S&P 500 has hit the mean of strategists forecasts for the year-end of 3355 points. On a further 7% gain, the SPX will be above the most bullish of all predictions recorded by Bloomberg of 3600.

But the markets are probably not quite as risk-on as the record-setting pace might suggest. Growth or defensive stocks have outperformed value by 25% so far this year. Equities are indeed reigning supreme, but it’s driven by the mega-momentum stocks (tech) rather than the economically-sensitive cyclical stocks. Suggesting that even if the consensus view for a sharp “V” economic reaction to coronavirus is wrong and the recovery period takes on a hockey stick shape, institution equity ownership is still pretty cautious by design. So provided the Federal Reserve has the markets back, the bulk of US stock market positioning should remain relatively immune to the current market worries at this stage. So, if you’re looking for a contrarian storyline, you might want to skip the next few paragraphs.

There is quite a bit of ink being spilled to say that markets are not taking nCoV seriously. But with 10-year yields falling to sub-1.6% and the Fed hinting that its reaction function includes Covid-19 and the PBoC already flooding markets awash with cash, papers over that cautious scenario. Such easy financial conditions with the potential for even more comfortable conditions as global central banks dovish reaction function to a temporary global growth shock has investors champing at the bit.

Why are equities up and bonds up too? 

The S&P 500, the Nasdaq, and the Dow Jones Industrial Average are all trading around record highs while the 10-year US Treasuries yield is at 1.58%, from 1.9% at the start of the year. For that, everyone can blame the central banks, who have succeeded in dampening volatility by guiding markets successfully in the direction they want them to go.

The US Federal Reserve, in its bid to avoid another repo market meltdown reminiscent of September 2019, had probably overflooded things when it injected billions of dollars of cash into the system to push rates lower. This monetary policy overcooked state of things left banks with heaps of money, which they are putting to work buying bonds. And as such, equities, particularly growth stocks, are reveling in the afterglow of the Fed easy money have only been able to gain “because” Treasury yields are low.

And with everyone thinking the Fed is either on hold or cutting with a rate hike a long way off as such traders continue to look for optimal bullish risk-reward and continue to shrug off the likely economic impact of the Covid-19.

Are things stretched too far? 

Possibly but at this time, there is absolutely no stopping equity market momentum. So far this year, investors have shrugged off patchy earnings, increased tensions between the US and Iran, and the nCoV outbreak. There isn’t much else you can throw at them right now. With that in mind, it seems pretty lame to think the outcome of the Democratic presidential primary is going to have much impact. Perhaps the biggest threat to the market is the consensus view that the effect of the coronavirus will be a V-shaped recovery.

Oil markets

With OPEC and friends paralyzed thanks to Russia DEC CL 20 vs. 21 in contango BrentWTI <$4 suggesting globalized Covid-19 effect runs deep. Any thought to what breaks this daily descending channel??

Although prices bounced back from a one-year low, the thought that OPEC could sit on their hands until March has brought the bears back out on mass. OPEC + failure for now to follow the Joint technical Committee’s recommendation to cut an additional 600kb/d of production has allowed sentiment to turn cumulatively more negative.

The anticipation of an early February emergency meeting of the OPEC+ group had supported oil prices. Still, a near term meeting seems to be a view supported on little more than a wing and a prayer at this stage. And now, it appears OPEC wants to quantify the demand implication before acting. Still, with the cartel failing to act swiftly on the JTC recommendation, this has allowed the narrative to fester and create divisions within the group.

But surely, it’s tough for OPEC and Russia to ignore the forward curve that continues to move deeper into contango. And traders probably wouldn’t be surprised to see an emergency meeting called if WTI moves much lower.

We’re at a significant inflection point for the Oil markets. If China fails to contain the virus domestically within a few weeks and or virus clusters expand around the globe, it’s a whole new kettle of fish as tail risks get incredibly fatter for oil markets.

Gold markets

There has been very little interest in gold in the past few days as the stronger USD continues to sap gold momentum, plus the bulk of buying on the back of virus fears went through early last week.

With the majority of hedge positions in place, as nCoV risk turns benign and investors continue to shrug off the economic impacts from Covid-19, gold speculators and fast money accounts will generally start to trade the ranges in gold from the short side — effectively keeping a lid on price action which then ultimately triggers some profit-taking from weaker gold longs.

With markets awash with cash, the fear of creating an equity market asset bubble alone should keep the Fed parked on the sidelines, not necessarily bullish for gold. But instead, it’s US fiscal policy, which remains long term price friendly.

So far, global financial markets have soaked up the growth in US debt. The yield on the critical 10-year has stayed well below 2% and is close to 1.5%. Interest repayments, as a share of GDP, are only half the level of the early 1990s, which puts less pressure on government coffers. That is despite the growth in debt. But this is a knock-on effect of investors’ demand for safe assets, which include gold.

While Fed policy certainty is probably lessening the demand for gold, but should investors’ appetite for US debt start to fade, gold is likely to be one of the few beneficiaries as investors seek gold as quality assets. This may not happen any time soon, but it’s a good enough reason to hold gold as a prime quality asset in your portfolio.

In the meantime, look for gold to trade in the well-trodden territory as a stack of quality assets like US bond and the dollar battle it out for your safe-haven flows.

Currency markets

I get it that we’re a bit more cautious in Asia, especially given that we are closer to the epicenter of all the Covid-19 fears. Still, should Asia traders be 250 pips overly cautions given the broader collapse in USD-Asia (USDCNH) that transpired after handing the book over to London yesterday?

Still, I think running Asia currency risk based on global stock market performance, which is absent a bump in economic Asia sensitive cyclical stocks, doesn’t appear to make much sense given that local currency tail risk remains pretty fat. And while it makes sense to unwind some overextended long Asia weekend gamma hedges (or in my case getting stopped out on long USDCNH hedges at breakeven) given the typically robust convexity of regional currency sentiment to PBoC stimulus. However, views are immaterial to what price action suggests, and that is what we should trade on, not opinions.

Singapore dollar

Could the Sing dollar be the regional voice of reason as, despite the overnight collapse in the broader USD-Asia complex, the USDSGD remains bid around 1.3870 on local support?

Today Asia FX view 

As we enter the land of currency confusion, Asia FX markets continue to beat to a familiar drum. USDAsia remains better offered on the back of improved risk sentiment. This seems to be taking hold as hopes build that China will soon reopen for business, the Zhong Nanshan scenario holds, and as the PBoC policy guides us to risk parity nirvana. Time will tell if that view is correct.

As for G-10

Forty-eight hours is the typical duration for G-10 trends these days. When it comes to painting a dominant currency view, it feels that I’m confined to an empty windswept desert. Forget trend following, home run swings or break out trades, these types of market reward patience where bunts singles, doubles and mean reversion remain the trade calls of the day. I defer to my FX reversion algorithm, which doesn’t need a currency view for a trade of the day.


 A Camel Is A Horse Designed By Committee.

US equities were stronger Monday, S&P500 up 0.5% heading towards the close. Fixed income was less upbeat, US ten-year treasury yields fell 3bps to 1.55%, and the 2s5s curve has inverted again. With no new US data to guide sentiment, the market was left balancing last week’s good -weather friend that boosted US jobs in January and capped-off a surprisingly good month of US data. Against the plethora of economic as well as virus transmission unknowns around the nCoV.

On the latter, the number of cases on a cruise ship docked in Japan has doubled, while the number of globally confirmed cases has increased above 40,000. The WHO Director-General noted some “concerning instances” of the virus spreading “from people with no travel history to China.” Equities outside of the US were mixed. Oil fell 1.5%.

For now, US growth trackers are holding up well.

However, questions around the timing and to the extent the China nCoV slowdown is unknown, and it will likely remain so for a while. And while how the economic knock-on contagion effect from nCoV hits, the US might be significant. Thus far, it has not been much of a factor for the US data.

But to that end, this weeks US data deluge, including industrial production, retail sales, and UMich surveys. However, it’s the forward-looking outlook for industrial production (and supply chain disruptions), that will drive the narrative.

Since there is relatively little known about nCoV and its effect on the global economy, it’s difficult to speculate about

. And while the implications are going to be hugely detrimental for the Chinese economy. But how negative remains the million-dollar question. It is most likely to be short-lived and transitory. Still, there is always a chance it could have a more prolonged, demand damaging effect.

One of the enormous dilemmas for investors is whether the impact of the coronavirus will be enough to derail the global economy and usher in another round of Fed + easing. Until concerns around the virus surfaced, global growth was improving, and Asia was showing ongoing signs of acceleration. If the fears subside, the debate will quickly turn to how fast the recovery will come.

But in the meantime, investors are left with the unenviable task of weeding through increased yet conflicting web traffic around nCoV with the headline generators working overtime. Indeed, a camel is a horse designed by committee.

US exceptionalism is coming to the fore, and it’s not hard to see why. The US economy, especially the new 2020 data, was – quite simply – outstanding. From the job report to the manufacturing data, it is difficult to point to something and say it was a harbinger of negativity. But more telling for US stock markets is that of the 317 companies in the S&P 500 have reported so far, 76% of them beat estimates. By this measure, we are witnessing the second most positively active Q4 season since 2010. Indeed, US exceptionalism is in part driving capital and supporting the US dollar as the DXY is back touching August -September level.

At the moment, the data is pointing to the US entering the nCoV slowdown with quite a bit of strength, which is a huge plus. And while nCoV is undoubtedly a negative for the overall growth in the economy. Still, markets seem to think it is not going to be the “worst-case” with little demand destruction outside of commodity markets. Sure, it could be wishful thinking, but that is what markets appear to believe. A shock to growth, not smashing it to smithereens.

Oil markets

The markets have gone well beyond weakened risk sentiment as its clear as a bell, that demand is not sufficiently responsive enough to lower prices. And now oil-price weakness in an oversupplied market has the December Red’s bellwether Brent spreads bearishly moving into contango.

OPEC ministers seem to have abandoned the push for an emergency meeting to finalize a supply response to the coronavirus likely stymied by Russia, indicating it needed more time to assess the situation – after the technical panel had recommended a further quota cut of 600kbd.

Adding to oversupply concerns is the UN-led talks aimed at ending the ongoing Libyan conflict. And Libyan production could ramp up quickly, which has fallen from close to 1.2mb/d to a 9-year low of 180kb/d. as a result of port blockades during a period of escalating tensions between rival Libyan factions. The possible return of Libyan production during this exceptionally supply sensitive period could be the proverbial straw that broke the camels back for the lack of a better analogy.

And while OPEC and friends dither, a bearish awareness continued to unfold concerning the absolute demand damage that the shut-down of the swathes of the Chinese economy is going to do to oil demand is now seeing prices sinking again after the initial fall and then rebound.

Gold markets

Gold initially moved higher despite a strong USD, and prices were further bolstered on the back of political developments in Europe Gold rallied on modest-quality asset buying as a ‘risk-off’ mood persisted in European and Asian markets. But gold prices veered lower in US markets as S&P 500 rallied to record highs supported by strong corporate earnings while US growth trackers are holding up well.

The announcement that Annegret KrampKarrenbauer, leader of the ruling center-right Christian Democratic Union, intends to resign, opening up the race to succeed Angela Merkel as Chancellor of Germany, triggered gold demand across Germany yesterday.

But bond yields continue to edge lower and are reflecting investors fear about the rapid spread of the virus. Ultimately long Bond and Gold positions are similar to “stimulus trades/hedges. “The PBoC has already turned on the policy taps while there’s the assumption that if the economic contagion effects from the virus hit the US economy, Powell will have the markets back.

The nCoV adds to a growing list of economic growth concerns that could see the Fed shift into dovish gears later in 2020. Gold traders always take their cues from US bond markets, so with another dip in US yields, it’s perceived supportive for gold. But ultimately, for gold, its how the Fed policy unfolds in 2020.

Currency markets 

The US dollar 

US exceptionalism is in part driving capital and supporting the US dollar as the DXY is back touching August -September level. Just as was the case throughout 2019, when the US dollar weakens currency traders look at themselves and ask why they are selling the dollar when US equities continue to make record highs.

The Yuan

The RMB markets have been remarkably orderly thanks to the PBoC, who continue to lay stimulus on thick and heavy. And despite the 6 billion + in equity outflows, the Yuan remains supported by policy guidance.

The Malaysia Ringgit

The market remains extremely concerned about an escalation of cases outside of China, which could continue to hold back risk until there’s a definitive sign the coronavirus transmission has slowed. And uncertainty about renewed/secondary outbreaks becomes obsolete.

China starts to return to work after the extended Lunar New Year holiday. How quickly production resumes signals how much global supply chains are likely to be damaged, and this will be a key metric.

But there appears to be considerable reluctance from foreigners o buy into the Ringgit and KLCI stocks at this stage. So, until it becomes clear what the economic fallout from disruption to supply chains and Chinese demand. sentiment could remain on the offs

The Singapore Dollar

Most of the market focus has fallen on the Singapore dollar and why the MAS verbally intervened on the band as opposed to lowering rates. MAS likely believe the virus effects will be transitory, preferring to keep policy powder dry in case there is significant deterioration to the economy beyond tourism.

The Australian Dollar

Concerns about the coronavirus outbreak kept vols elevated as there is plenty of fear around Australia’s export outlook of late. And as far as that goes, nothing comes close to iron ore. It’s easily Australia’s biggest export, accounting for 4% of GDP. And 80% of it goes to China. So, until the full extent of China’s economic damage is known, the virus that’s the most significant present and future risk to Australian trade and the AUD.

And while traders don’t want to get caught on the other end of PBoC infrastructure deluge, for now, the path of least resistance based on current trade metrics looks south for the Aussie.

The Euro 

Besides US exceptionalism, the Euro is trading weaker on German political uncertainty after Annegret KrampKarrenbauer, leader of the ruling center-right Christian Democratic Union, intends to resign, opening up the race to succeed Angela Merkel as Chancellor of Germany.


Asia Open: Stage 3, timing a potential turning point is “easier said than done.”

The first stage of the market fallout from the virus outbreak was about positioning adjustment. The second stage, which is the reaction to policy guidance, has been underway since last Monday when the PBoC began turning the stimulus taps on. The third step, timing a potential turning point for Asia macro, however, remains less clear, pending clarity on peak virus outbreak, and broader appraisal of the economic fallout above and beyond just tourism. So, with the thought that global central banks are more than willing to cover the markets’ back, the extent to which investors look through weak China data in the coming weeks will help determine whether a rebound trade has the legs to run.

China returns from the holidays with global equity markets trading on the back foot. But the decline in comprehensive economic data concerning the extent China’s economy comes back on-line should not be underestimated. On the one hand, coronavirus cases and deaths have stabilized. In contrast, some companies (e.g., Toyota, Foxconn) have announced they will remain shut even after the end of the lunar year-end holiday.

US equities were weaker Friday, as a robust   US payrolls report was unable to deflect renewed concerns around the coronavirus. Traders moved into sell first, ask question later mode when Singapore raised its alert level after three cases of the virus were confirmed. At the same time, in the US, four passengers from a cruise ship docked in New Jersey were hospitalized on coronavirus concerns, which continues to raise fast-spread virus concerns beyond China borders.

While a more fundamental issue is one about how much the market can believe the data. But knowing that the damage is done in China, and the virus data seems to be peaking, so the numbers that the market is apt to take most at face value are the infections outside China, and in particular, the relatively low mortality rates. Which should be viewed positively

On Sunday, data was released, indicating there is a downward trend in newly reported coronavirus cases in China. If the numbers are accurate, and the Zhong Nanshan scenario holds implying peak virus would hit last week, that would be tremendously useful news fore regional health concerns and then, of course, for local markets. This could see some long USDASIA gamma flush this morning and provide some relief to China proxies

However, commodities remain laggards with some Chinese importers even starting to declare force majeure. And  China growth-proxy currencies like the AUD closed at its lowest level since March 2009 on Friday after RBA Governor Lowe cited a higher risk to growth from the coronavirus compared to SARS.

Beyond the China narrative, there has been an increased demand for TWSE index protection. In Japan, price action was heavily skewed lower led by internet, financials, electrical appliances. And Australian, “macro sensitive” mining stocks went on offer.

While outside of equities, Iron Ore bulls reduced longs, and fast money sold copper and bought Silver.

This week will be a bit of gut-check time for those playing the Asia macro rebound trade. But while a plethora of uncertainties remains, one sure thing is that the mother of all stimulus measures will get laid down by the PBoC, but will it be enough remains the question as no one appears in much of a rush to put risk back on out of the gates this morning.

Oil markets

One might be wrong to think that there is no more downside for oil, now that Brent has reached the lower 50’s. The market is struggling with yesterday’s proposal from OPEC’s Joint Technical Committee for an additional 600kb/d cut from the OPEC+ alliance that would run at least through mid-year. Which has failed to alleviate the pressure on oil, in part because the proposal has yet to be formally discussed by OPEC ministers and because Russia continues to push back against further cuts? And if the cartel fails to reach an agreement, there will be more pain to come in oil downside.

There is a clear fundamental cause of why oil prices may settle lower. Demand is not sufficiently responsive enough to lower prices, and outside of OPEC, only US tight oil stands as the most quickly responsive supply to prices. In order to make a dent in global oil supplies , US drilling activities need to fall. In this scenario, WTI prices may need to drop below USD 47/bbl for a lengthy period. And the demand devastation of gigantic proportions like what’s happening in China could set the stage for a shift in oil prices towards those critical break evens before relief sets in.

But what continues to be absent in the Oil narrative these days is bearish for oil case is that OPEC’s total share of the oil market has fallen to 35%, they no longer have a monopoly on oil prices suggesting even with OPEC production cut those non-OPEC nations with low break-evens could still pump and monetize barrels.

And while there is a rationale for “nyet,” as Russia break evens are much lower. As Alexander Novak, who threw cold water on hopes for a short-term OPEC cut, even a “dah” response still might not be sufficient enough compliance response.

Let’s not try to sugar coat things here, with a chunk of China’s industrial complex have been shuttered for an extended beyond LNY; we’re headed for one of the worst Q1 economic growth periods on record. With a significant haircut yet to be completely factored into the equation, so for the finely tuned global oil supply balances, it could be devastating if the data comes in worse than expected.

Gold markets

Investors should continue to favor more defensive fixed income and, therefore, long gold positions until the impact of nCoV on growth becomes apparent. But its what brings the Fed into play is the real question for gold bulls, and it’s probably not going to be the coronavirus.

Currency Markets

Asia FX 

The Malaysian Ringgit

The Malaysia Ringgit remained under pressure on general Asia de-risking. But after the rate cut last month, the market is pricing the BNM, delivering another reduction in H1, mainly as the virus weighs on growth via tourism, consumption, as well as to defend against the potential disruption in the supply chain linkages with China.

The Thai Baht

There are a number of reasons why the Thai currency is vulnerable, the most apparent being coronavirus’s drag on tourism – a significant contributor to Thailand’s GDP. But there are others; a deterioration in domestic banks’ credit, drought, and currency outflows via a potential Tesco supermarket deal, to name a few.

The Basket 

Asia currency markets have been remarkably orderly thanks to the PBoC, who continue to lay monetary policy and verbal intervention on thick and heavy. Last People’s Bank of China’s Deputy Governor Pan says they will boost counter-cyclical adjustments and keep markets stable while hinting at addition MLF and LPR cut in February.

Still, there was a surprising degree of risk complacency — at least, that was the case until Friday, when gamma caught a bid tone across the board in G10 and USDAsia as investors don’t want to be caught out in the event of any escalation of the coronavirus outbreak over the weekend. Cross currency traders bid up both USDCNH and USDKRW as the primary currency hedge against coronavirus risk. The market seems keen on owning low-yielder Asia gamma as those pairs have shown higher beta to virus news rather than the higher-yielding USDINR, USDIDR, and USD PHP.

G-10 Markets

The Australian dollar

AUDUSD vols and risk reversals jumped higher Friday as spot head lower (closely tracking USDCNH). But with the policy PBoC policy stimulus pump about to hose down the market and with Eurozone getting ready to spend more to boost the flagging economy, commodities could get a little bit perky. But it remains challenging being the only person in the room supporting that trade this morning as the focus remains on coronavirus fear.

The Euro 

The Euro continues to languish through the Risk on-risk off (RoRo) cycle. There is no haven appetite as Europe has the developed world’s lowest real yields. But when risk appetite turns on, because of those low yields, the Euro becomes the world’s best funder as everyone short trades the Euro to fund those EM carry trades. It’s a continuous cycle of “lose-lose” for the Euro in a “RoRo” environment.

Carry Trades

Besides, the RoRo real yields are a significant driver of currencies at the moment. In a “risk parity,” world currencies with high real yields (high rates, low inflation) are a desirable destination for bond inflows and might stay healthy (Indonesia, Mexico). Those currencies with meager returns become engaging funders and could weaken. (SGD and the Euro)

China Tariff Cut Was The Eureka Moment But It’s a pre-NFP Friday And The Situation In Hubei Still Looks Challenging


It was another good day for global equities, which saw the S&P500 up 0.2% to notch a fresh record high. European stocks again saw similar gains. US 10-year treasury yields slipped 1bp to 1.64%. The eureka moment came on the back of China’s pledged tariff cuts, which has captured the imagination of analysts and bullish investors alike. And with indications that the coronavirus outbreak is plateauing outside of China, it too provided an open invitation to strap on risk as investors appear increasingly prepared to shrug off concerns about the viruses enduring impact on growth.

Provided the US reciprocates the Chinese tariff cut with one of its own, the trade calm will be viewed in a very trade-friendly light and well beyond the immediate fiscal benefits. The sweetener is a fantastic pacesetter for Phase 2 of the trade negotiations. Still, the frontrunning commitment is also very reassuring after the legacy of delays to Phase One while also eases some coronavirus growth concerns.

Why market could pare risk today

Beyond the usual pre NFP moves which typically sees traders jockeying for a position amid their regular Friday housekeeping duties

While the outbreak appears to be stabilizing outside Hubei Province, but the situation in Wuhan and Hubei may still be challenging, and the disruption to China’s economy will likely continue in the short term. This may give cause for pause or at minimum investors coming up for air as the street feels a wee bit long after aggressively front running both the reflation and Wuhan transitory trade this week.

And the possible equity market correction when the full economic impact of the virus is realized in the next series of ASEAN data releases is supporting the gold market diversification hedge.

Outlook for next week

With the thought that global central banks are more than willing to cover the markets back, the extent to which investors look through” weak China data in the coming weeks will help determine whether this week’s risk rally has the legs to run.

Remember, its an election year, and a timely roll back in a chunk of US tariffs could trigger a move in the S&P500 to 3500 all but assuring a Trump victory.

Gold markets

Gold suffered quite a capitulation this week, yet demand endures.

  • The gold seasonality effect is ebbing.
  •  The Wuhan shock and awe fear are receding.
  •  US exceptionalism inflows are punching both SPX and USD tickets higher.
  • US 10-year yields have begun to move off their post-coronavirus lows, and less easing is being priced in, yet gold endures.

Why is gold so strong? Wednesday’s strong ADP payroll result has put the USD back atop the king of the hill, and the US currency looks firm. Equities have been surging, with new highs hit in the US and European markets, and bond yields have been nudging higher. All this implies lower gold prices. Not to mention weak EM physical demand, where the bulk of the world’s gold bullion is purchased. Yet gold still remains firm.

Ultimately in this Risk on Risk off (RoRo) environment, gold is perceived as a fantastic asset to hold if equities correct. Investors do not have, in many cases, better alternatives with the bulk of government bond yields globally are still negatively yielding. So, gold remains bought for portfolio diversification and as a quality asset, which seems to have room to outperform other safe havens regardless of whether risk sentiment deteriorates further given its strong inverse correlation to lower short term interest rates.

In short, gold offers an excellent hedge with the market possible, returning its focus to US-China trade headlines while US election risk comes into focus.

Oil markets

PEC+ technical meeting results in a recommendation for a 600kb/d production cut. This will need to be discussed at a ministerial meeting at a date that has yet to be agreed upon. This cut would be above the low end of the range recently mentioned in press reports, but well below the high end (1mb/d+), and price action is enough to tell you the market is disappointed

But the bigger fly in the ointment is Russia as the remain a reluctant cutter given their breakeven are much lower, so we’re starting to see the U-turn in prices I alluded to yesterday if Russia doesn’t play ball. Still, we’ve seen this all before, and at this time, there is little reason for the market to suspect Russia will break from the usual pattern of flip-flopping until the last minute but ultimately agreeing to cut.

Regardless of Russia’s motivations, the 600kb/d may only provide little more than a band-aid on a broken leg as more oil price downgrades are expected to come down the pipe due to ruinous demand effect the virus is having on Chinese consumption. For instance, the more pronounced the virus effect is on China, the more significant the oil demand devastation as estimates are now getting nudged higher to 3.2Mbd + (~25% of China demand and ~3% of the global market) amid the extended period of industrial and consumption gridlock in the Chinese economy.

But with the market preparing for (black) swan dive, its critical that OPEC + compliance comes through to put a floor on oil prices.

Currency markets

Asia FX

To the extent that currency traders are willing to front-run both the global reflation and Wuhan transitory trade in the absence of quantifiable economic data will dictate the pace of play in Asia FX.

The Ringgit is trading to the top end of my weekly range. Possibly due to  Malaysia’s export sensitivity to a weaker China economy, and now with local traders are adjusting risk tolerances for a possible BNM proactive interest rate cut, we could see a bit more weakness into the weekend. Indeed, this could be a case of short-term pain long term gain, but look for 4.15 to hold; however, as bond inflows should pick up with a rate cut in the offing.

With a litany of ASEAN central bank cutting interest in the face of weaker economic growth, ASIA China sensitive FX may not be the best place to hold currency balances with the US dollar holding firm. Let alone leveraged foreign exchange risk over the short term, given the market risk on risk-off (RoRo) proclivities around the key bellwether USDCNH.

While the Wuhan rebound trade could be a home run this year, traders may feel more comfortable getting the widely expected doomy China’s high-frequency data and regional export numbers, which are going to be weak, out of the way before entering the rebound trade.

Currencies that are most sensitive to the China/Asia growth cycle and commodity demand took a hit during this growth scare. The Won and Aud stand out the most. While currencies with high real yields have performed surprising well like the IDR, as the Indonesian bond market remains extremely attractive for real money investors


The Eur continues to languish through the Risk on-risk off RoRo cycle. There is no haven appetite as Europe has the developed world’s lowest real yields. But when risk appetite turns on, because of those low yields, the Euro becomes the world’s best funder as everyone short trades the Euro to fund those EM carry trades. It’s a continuous cycle of ” lose-lose ” for the Euro in a “RoRo” environment.


Markets Are Not Only Holding Up, But They’re Going Up!!

In breaking news and of little surprise to anyone, the US senate has acquitted President Trump on impeachment change, but the markets don’t care.

The markets are not only holding up, but they’re going up!!! And to suggest risk appetite continues to “creep” back in favor, might be the biggest understatement of the week as equity markets just burst higher.

It was another positive day in US equities Wednesday, S&P up a little over 1% heading towards the close, and again with European stocks up a similar amount. US treasury yields have lifted another 5bps to 1.65%. China’s Shanghai composite raised 1.1%. Most notably, the oil market – previously more reluctant than others to shrug off coronavirus concerns – saw prices lift 2.3%. Sentiment had been supported by reports in Chinese media that a cure for the coronavirus might soon be developed. That news was later played down by the WHO.

But any progress on treatment may also be a comfort to investors that the longer-term secondary effects of the outbreak are contained.

Time to focus on the data 

Data has been of secondary importance to markets recently, but as non-farm payroll approaches, perhaps that will change.

Last night’s US ADP employment report was stronger than expected, rising 291,000 in January, supported by a “significant boost” from mild winter weather and is the strongest since May 2015.

While the non-manufacturing ISM also beat expectations, with the headline outcome the best since August and suggests the underlying trend in US growth had been excellent at least before worries about the impact of coronavirus began to set.

But it’s the super-strong US January ADP print serves as a sturdy reminder that as much as the coronavirus is impacting the real economies in Asia, the US is relatively insulated.

Oil Markets

Oil markets have been in the spotlight hit by concerns over a slowdown in demand from the coronavirus. While discussion over whether OPEC make further production, cuts have provided support to prices

OPEC + emergency meeting

Oil markets are rebounding from the 5-day slide as investors turn optimistic that OPEC+ officials will deliver an appropriate response to alleviate current concerns stemming from the spread of the coronavirus. Saudi Arabia is pushing OPEC+ hard for cuts of at least 500kb/d, with some reports suggesting a reduction of double that level is also being considered. Most of OPEC seems to be on board, but there are conflicting reports in the press about Russian support for additional cuts. But we’ve seen this all before, and at this time, there is little reason for the market to suspect Russia will break from the usual pattern of flip-flopping until the last minute but ultimately agreeing to cut.

However, markets are trading well off the intraday highs as more oil price downgrades are expected to come down the pipe due to ruinous demand effect the virus is having on Chinese consumption. As such, for a more exaggerated positive price extension to happen, and to make a more significant dent in this year’s eye-catching 20 % price decline, a deeper than consensus OPEC + production cut would likely be needed as a 500kb/d my just paper of the cracks amid the markets broader appetite to run with the bearish interpretation of the coronavirus knock-on demand effects.

In the unlikely event that Russia doesn’t play ball, the recovering sentiment would take a wicked U-turn.

US DOE inventory report  

Crude inventory build above consensus but below API, 5-year average
Crude stocks rose by 3.4Mb, bearish vs. consensus for a 2.8Mb build, but bullish vs. the 4.2Mb draw reported by the API yesterday and the 5-year average of +6.2Mb. However, the key for the sentiment was the build was similar in magnitude to last weeks with underlying drivers little changed.

US economic data 

While the main event of the week will be the US employment report (Friday), oil investors took solace in a Super-strong US January ADP Employment. The robust jobs data not only suggests that US consumer consumption will remain sturdy in the is the world’s biggest oil consumer, but most importantly, the US market has been relatively insulated from the coronavirus impact.

Gold markets

Gold is showing its resilience after the latest sell-off despite robust jobs data, and as equity and USD rallies; may remain supported as other risks resurface, and the full economic impact of the virus is realized in the next series of ASEAN data releases.

Supported yes but cause to put on the rally caps? NO 

The USD gained further on the release of the ADP national jobs report, which showed that US private sector employment increased by 291,000 jobs in January, its highest rate since May 2015. Gold demand sucked up this news even as the US equity markets soared to record highs. A positive for gold was the 4% jump in oil prices, which is stoking reflationary concerns.

More detriment to the gold price outlook has been the latest round of Fed speak, and as the Fed’s more optimistic view than the current “Wall street” outlook continues to get confirmed by robust US economic data.

While there was a slight dovish tilt to the Fed meeting last week, it’s not been backed up by speakers since. Both Bostic and Clarida have expressed some reluctance to cut rates further in recent sessions. While Mary Daly, in a CNBC interview, says that she doesn’t see a material impact from the coronavirus in the US. This is consistent with the January sentiment survey releases as well as the relatively limited amount of coronavirus cases in the US. All of which confirms the market’s current lean that the coronavirus will leave a relatively small footprint globally. So, assuming implications from the Coronavirus shock prove temporary, the Fed’s steady rates narrative should hold, which is supportive but not necessarily bullish for gold.

Gold remains precariously perched several dollars above the $1550 level heading into tomorrow, possibly make or break day for near term sentiment with the critical US jobs report on tap. And given the list of risk on inferences, the skew could remain lower as investors jockey for position ahead of tomorrow data.

G-10 FX

The EUR weakened against the USD. ECB economist Philip Lane said inflation looks set to move back towards target. In an interview with the Financial Times, he made the case that wage growth and a tightening labor market would push inflation up. E

The USD gained further on the release of the ADP national jobs report, which showed that US private sector employment increased by 291,000 jobs in January, its highest rate since May 2015. And with US equities bursting higher, US exceptionalism comes back to the fore

GBPUSD went sharply lower overnight after a Bloomberg headline indicating the EU has aimed at the City of London with a post-Brexit MIFID rewrite. As the prospect of regulatory gridlock continues to weigh on financial centers

Asia FX (The Ringgit)

Robust US economic data lessens the likely hood of a Fed cut and supporting the Greenback, which is harmful to ASIA FX.

None the fewer markets continue to work in non-parallel universes.

While Asia economists continue to discuss the gloom ridden impact the virus will have on China GDP, global equity markets do precisely what they have done for the last year. Which is shrug, ignore the fundamentals while investors race to put money to work.

But it’s a bit different back here at home( South East Asia), While it’s hard to ignore that that global risk markets are starting to prices in peak virus fear, however, economies and their currencies and stock markets with keen trade linkages into China like Malaysia ( Ringgit & KLCI) may continue to struggle through the early part of the year as the doomy knock-on effect from the China economic slow down hit home.

Short term pain for long term gain?? 

The Ringgit should more than makeup for lost ground when China’s pent up demand post virus economic recovery kicks in. So I don’t think we will have a repeat of August 2019 when the Ringgit weakened above 4.20, but I think its too soon in the game to say the Ringgit it out of the wood just yet as we should expect a reality check to set in when the end of month economic data rolls in which should capture the local effects the virus has had on export. Circle February 21, as the critical global bellwether South Korea, 20-day export data is released.


Asia Open:The PBoC Policy Bazookas


Global markets have advanced on the back of the better tone from yesterday’s Asian session. The main staging post was unquestionably the Chinese equities that managed to claw back some of Monday’s steep losses. The CSI 300 finished the day up 2.64% after a 7.88% drop. Other Asian markets, however, weren’t initially so passionate. Still, in the absence of hard data to quantifiably guide risk, the diminishing fear factor around the virus, along with the PBoC policy bazooka, has boosted sentiment.

In turn, there has been a significant bounce in Chinese equity ETFs overnight. The FTSE China A50 (XUA) is leading the charge, which makes sense if you believe the   FT article about a so-called “national team.” Who are saddled up and ready to defend the PBoC’s equivalent of Maginot line? (I hope that analogy resonates on some level) And clearly, the broader markets believe these proxies offer a better steer as its been a great day in the macro markets with a multitude of crossovers (SPX & USDJPY) ripping higher.

Just as has been seen in stocks, the virus panic is starting to come out of bonds. But if your holding bonds amid this disinflationary shock of the coronavirus in the pipeline, you may want to take heed. The coming deluge of stimulus could have an astonishingly inflationary impact.

I’m probably the market’s worst stock picker, but I’m always quick to own up to my mistakes. And while I have been quick to suggest of late, that the US equity market doesn’t provide the best pilot for risk, that view is entirely wrong. With the falls in the commodity market clouding my better judgment and pushing the markets fear index through the roof, the SPX has been unyielding in its propensity to consume virtually everything the market can throw at it, including the kitchen sink. If war, the mutant black plague, or even with half of China going underground hasn’t knocked the S&P 500 off its high-horse, I’m not sure anything will.

There has to be some particular reason beyond tarot card readings why the market is on the ups, and while the economic impact is starting to surface, there is still a lot of number crunching to be had.

However, here is what I’m thinking based on a less fuzzy look through the Wuhan virus lens,

1) The coronavirus outbreak appears to be slowing outside the Hubei Province.

2) The PBoC policy responses are lining up

3) expect more fiscal measures to follow

4)the WHO falling short of labeling the Coronavirus outbreak a pandemic. Instead, WHO sees an epidemic with multiple locations, with cases outside of Hubei described as “spillover cases.”

5) reasonably dismissive commentary from central bankers about the long-term impact (Bostic in the US and the RBA’s post-meeting statement),

So, markets look to be shrugging off Coronavirus concerns. At least for now.

Oil markets

Crude tried to rebound on Tuesday, as OPEC and its allies convened what amounts to an emergency meeting in Vienna to conduct an “urgent” assessment of how the coronavirus outbreak is likely to impact demand for crude, which plunged 16% last month in the worst start to a year since 1991.

And while OPEC + is apparently on the same page and speaking from one voice, the market is replying with an even louder unified voice as Oil traders continued to give their sell button a good work out overnight.

Additional OPEC+ cuts are necessary to put a floor on oil prices and the thought that they are unlikely to sit on their hands, even prompted a decent short-covering rally. But to no avail, as the market looks to be building up for yet another (black) swan dive. WTI settled below the critical $50 mark for the first time in over a year as Chinese refineries are stuck trying to give oil away. So, unless OPEC can discover a way to put oil back in the ground, the path of least resistance could be lower.

Oil continues to be driven by growing concerns about the demand impact of the coronavirus and the potential offsetting impact of a possible OPEC+ supply response.

But let’s not try to sugar coat things here, with nearly 50 % of China industrial complex shuttered we’re headed for one of the worst Q1 economic growth periods on record. With a significant haircut yet to be completely factored into the equation, for the finely tuned global oil supply balances, it will be like the equivalent of mixing oil and vinegar; they don’t mix.

Honestly, every time I read an OPEC headline, I have thoughts of The Little Dutch Boy putting his thumb in the dike.

The oil market is falling sharply, which is pretty alarming given OPEC is considering an emergency cut. But the implied near-term conservative fall in demand from China could create a supply/demand imbalance of >1Mbd in 1Q. The magnitude of this of implicit demand-driven inventory swell is of epic proportions and closely correlates with a historical sell off’s towards near term cash cost levels (break evens). So, once the reality of the data demise sets in, we should expect a lot of Q1 oil price revision coming down the pipe. Even more so, after looking at my inbox this morning, which is brimming with “Impact of the coronavirus on global growth” conference call invitations.

Gold markets

I got up early to write my gold commentary, and I have spent two agonizing hours trying to formulate a view with some level of sensitivity. Even more so, after looking at the latest EFT gold holding data, I would imagine a lot of investors are taking it on the chin today.

The gold market hit the skids as global equity markets rebounded on receding Wuhan virus fears. Still, arguably the move may be overdone and possibly attributed to positioning length as many investors got stopped out of positions as momentum continued to cascade lower.

The recovery in investor risk-on appetite, as corroborated by equity market rallies across the globe, incontrovertibly undercut the demand for gold. For now, China’s liquidity measures have more than offset the market fears about coronavirus concerns.

With Nasdaq hitting a record high and attracting USD inflows, which has seen $Index holding above 97.80, this also dented oil demand.

Bond yields also rose, which is typically negative for gold, but it was the rebounding equity market that did the most damage.

And then to rub salt in the gold market, wound positive US economic data undercut prices. December factory orders rose the most in 18 months in December.

Currency markets

I’m not sure if it’s still too early to repurchase a blue ticket back to AsiaFX, but the PBoC policy bazooka and currency guidance are certainly offering up an inviting springboard. While its also a bit early to suggest outhouse to the penthouse, the PBoC’s backstopped knock-on effect should ultimately attract regional inflows, especially if the Yuan continues to travel on a positive tangent. . And with the Ringgit turning overly bearish in quick order on China risk as local equity outflows raced higher given Malaysia’s export to China sensitivity. The PBoC stimulus effort could provide a boost to both Malaysia’s manufacturing and commodity export sectors and as quickly reverse the tide.


With that said, the bias remains to buy USDCNH for a defense against a fix above 7.0 USDCNY if economic concerns in China deteriorate quickly. In turn, a bearish for EMFX fix above 7 USDCNY, will provide the next staging post for a significant Asia FX risk wobble, which could then open the door for a Yuan correlated MYR selloff reminiscent of August -September 2019 lows.

The same goes for the rest of EMFX Asia.

CDC In A Heightened State Of Readiness


Risk sentiment remains on the offs after guidance from the CDC, saying they are preparing as if the coronavirus is the next epidemic, which is similar to the warnings on the street in ASEAN countries that are closer to the outbreak epicenter. But I view this through a more positive lens that the world is in a heightened state of preparedness to better ringfence this nasty and stealthy flu.

But for the risk markets, the mere mention of the word pandemic these days raises the fear factor higher by multiples.

There are two separate but not mutually inconsistent dynamics evolving around the coronavirus: panic/fear and the hit to the real economy.

The market is still, for the most part, in the fear mode, but as traders consume more economic data fall out, the hit to the real economy should become more apparent. Then the market will get steered by data, not opinions, or the herd mentality.

Travel bans and other such containment measures should reduce the spread to other countries beyond China and therefore lessen the panic; at the same time, the global economic fall out to the real economy will be much more pronounced than the SARS outbreak in 2003 and should, therefore, linger longer.

The economic effects on the real economy are more eye-catching via commodity markets than anywhere else. But if you use global equity markets as your key risk barometer, you will think they are co-existing in non-parallel universes. At the same time, the ASEAN markets tank as the US market appears impervious to the knock-on effects of the heightened level of economic devastation to the world’s most prominent player in the global supply chain, China.

For now, US investors remain mostly upbeat as US ISM manufacturing data beat on both headlines while the throttle bending Philly Fed and Richmond Fed numbers occurred mainly in isolation and discounted by the weak Chicago PMI.

I’m not a very good stock picker, so I will defer my view on China today but leave you with this thought. Chinese authorities limit shares to 10% drops on the day. With more than half of the CSI 300 down 9.95% (or more) yesterday before a rebound set in, it seems too orchestrated for my liking.

Oil markets

Oil markets remain under duress following news yesterday that Chinese demand has fallen 30% or 3million /mbd because of the coronavirus, which paints an incredibly dire picture. And while we can take some solace that the fatality rates are below the SARS epidemic, but travel bans and quarantines affecting some 50 million people are significantly impacting consumer behavior.

The situation is so dire that even Russia supports the proposed emergency OPEC+ meeting.

However, China’s inventories are swelling as teapots run rates fall precipitously, adding to the global oversupply concerns as Brent crude oil front-month time-spread flips into contango for the first time since July 2019. But oil-price weakness in an oversupplied market only peaks when the whole curve goes contango. Suggesting we could see Brent contract follow WTI below $ 50 since the global economic fall out to the real economy will be much sharper than the SARS outbreak in 2003 and should, therefore, linger longer. At present, there is little hard data to support this view, but investors are proving very cautious.

Gold markets

Gold is trading a bit weaker as the risk-off move tentatively dissipates with relief that China market has reopened with a hefty backstop from the PBoC. Still, gold has much more room to outperform other traditional safe haven’s regardless of the current state of affairs, even if the virus spread peaks.

Travel bans and quarantines will eventually reduce the spread to other countries beyond China and therefore lessen the panic. Still, the real economic impact will be broader than that of the SARS outbreak in 2003 and will persist for longer, forcing ASEAN banks to cut interest rates. Still, the April FOMC meeting will capture any Fed reaction that emerges from a broader economic hit. And with the market moving to price in a Fed reactionary rate cut this spring, gold should remain well supported on dips gathering steam for a possible test of $ 1600 in the not so distant future.

Currency Markets


With month-end rebalancing out of the way and with China back after a week-long holiday, the Euro is finding more support from EUR/Asia carry trade unwinds. But arguably, it has been a quiet start to the week.

But at some point, the currency markets will have no option but to turn to focus on the Sanders surge despite the school of thought that the higher the probability of Sanders becoming the Democrat Presidential candidate, the higher the likelihood of a Trump re-election. None the less, the head to head polling numbers is where the balance of USD risk will be so it could get bumpy.

The Ringgit

The coronavirus outbreak and the economic and trade uncertainties that it carries bring pressure on the local currencies none more so than the Ringgit due to Malaysia’s close trade ties with China. All this is happening on the back of evidence that the coronavirus outbreak is significantly impacting the global economy, with China, the worst-hit, local ASEAN currencies are predictably feeling the most pressure and local commodity exporters especially.


If History Repeats

If history repeats

No one can tell what’s going to happen in the market, not you, not I, and indeed not Wall Street; hence it’s essential to listen to the messages the market tells you daily.

The market is so finely tuned that, in a matter of 5 trading days, its self-correcting mechanism takes hold without the need for central bank policy. One of the more undervalued market mechanisms is how quickly financial conditions loosen. From Friday a week past highs to peak fear last Friday, the bond markets shaved off a whopping 30 basis points on ten-year US yields, which sent the dollar reeling, and it provides looser financial conditions in the US market.
Also, we know the Fed is a reactionary committee, and history reminds us of the disinflationary shock from SARS that pushed the Fed into a final insurance cut in 2003. And with the Fed struggling to ignite the inflation fires, a rate cut this spring or summer is becoming the base case in quick order

Monday Open

The markets continue to view the Wuhan virus through the lens of the SARS epidemic of 2002-03. Still, given the importance of China in the global supply chain 2020 vs. 2003, the risk might be that the market might not be alarmist enough. And by the looks of Friday’s New York session price action, where traders unanimously voted with their feet preferring to hold long volatility positions ahead of the Monday’s China post-Lunar New Year market open. The thinking is that there’s a chance Chinese “dà mà” traders hit the panic button out of the gates before the expected PBoC policy measures or the markets mean reversion algorithms kick in.

As far as China risk, it’s hard to predict if the catch-up trade trap door gap lower at the open will extend Monday, typically it does during big meltdowns. Still, history reminds us that we should be reasonably confident the Financial Stability and Development Commission, part of the People’s Bank of China, will offer support. Their new light-touch attitude, when it comes to the market’s intervention, will probably give way to the old guard heavy-handed approach, as well they will possibly instruct the so-called “national team “to hold the line of support on equity markets to ensure an orderly open.

At the time of writing, the PBoC has preannounced $170 billion in added liquidity for the Monday open. This is well beyond the band-aid fix, and if this deluge doesn’t hold risk-off at bay, we are in for a colossal beat down. In addition, the PBoC will likely intervene on the currency market, so I would expect them to layer the soothing market tiger balm on thick and heavy.

The Chinese government established the so-called “national team” of financial institutions to buy stocks with public funds directly. It also started a campaign to hunt down “financial crocodiles,” whose trading practices were blamed for numerous mainland market crashes.

So, try to ignore initial headlines around price fall at the open in China since the markets have been closed for a week as the drop is only reflecting a catching up with the broader proxy moves from last week. It’s not the earthquake at the open but rather the aftershocks that will drive risk sentiment on Monday

But and this is a big but.

It doesn’t seem like there is much rational thinking going on given the mortality rate remains low, while comparisons and extrapolations to SARS seem questionable. However, this is a market that appears to be reasonably fragile when it comes to confidence. And without the usual stock market rally to help paper over the cracks, I suspect investors will take few chances when it comes to running risk on Monday. And they’re probably only a step away from moving into sell first ask question later mode.


The biggest threat to the global economy is not just because the disease spreads quickly across countries through networks related to global travel. But also, because any economic shock to China’s colossal industrial and consumption engines will spread rapidly to other countries through the increased trade and financial linkages associated with globalization.

However, two reasons the coronavirus outbreak may hit the financial market harder than SARS did in 2003 are 1) consumption is now a more substantial part of China’s GDP and 2) China’s overall growth trajectory. In 2002, retail sales for 34% of nominal GDP; this share is now over 40%

While comparisons between the SARS and coronavirus are beyond tricky, for those looking to play the big rebound play, keep in mind that in 2003 the entire backdrop was completely different as most risky assets were already at the lows, not highs, after the tech bubble blow up and US recession. So, looking at the stream of rebound comparison is invalid on so many levels.

Wuhan Virus Toolbox

It’s injudicious for anyone in the market to offer any strong views on how this virus will play out. But instead, you need to come up with a reactive game plan, which I’ve tried to simplify below to get you thinking in the correct direction.
Remain focused on the daily flow of confirmed cases and when they peak  

             2019-nCoV Global Cases by Johns Hopkins CSEE
In the unfortunate event that the virus’s spread is not contained, the impact on the global economy will likely be much more severe than it was during the time of SARS. China’s share in the global economy and in global trade is colossally more significant by multiples than what it was 17 years ago.


The ‘starting points’ on global GDP and trade growth are much weaker. Although China has policy room to accommodate a short term shock, its ability to do so is limited by structural deficiencies that prevent policy markers getting the money into the hands of those that need it the most and are probably more limited now than at the time of the previous health scares, such as SARS


Market positioning could be a concern, but I don’t want to be the alarmist. Still, according to most metrics, up until last week’s equity futures long positioning had continued to rise to new records, call volumes have surged to the highest since October 2018, and sentiment indicators are at the top of their historical band. Over the last three months, equity funds have also seen inflows of $75bn, the strongest since early 2018, with cyclical sectors being big beneficiaries, especially Tech, Financials, and Industrials. Indeed, the market’s fear factor has given way to greed, which could leave current positions precariously perched. Pullbacks of 3-5% in the S&P 500 have been typical every 2 to 3 months historically, but now we’ve stretched to about 3.5 months since October market knockdown. If a significant “Wu-Flu “risk wobble occurs, we could see more profound positioning unwinds as a pandemic panic ensues. That situation has become a real possibility.

IMM Data


There is nowhere that China’s economic influence is more on display than in Asia. The key driver of ASEAN’s steady growth over the past decade has been the rapid growth in bilateral trade with China. China has been ASEAN’s largest trading partner in the past ten years, with two-way trade reaching $292 billion in the first half of 2019. And thus, makes the rest of Asia extremely vulnerable to a China economic slowdown.


At some point this week, the market may begin to focus on a few rebound trades; however, ASEAN traders will also look at risk from two different perspectives. Economies that are tourist and service providing to China and that will not recoup lost spending – i.e., Thailand and Singapore. Both could continue to struggle for months ahead l. Whereas manufacturing and commodity exporters that could see pent-up demand rebound later in the year will probably see much of the initial rebound flow if virus fears deescalate and the transitory trade sets in

Currency Markets 

The greenback was under pressure across G10 into month-end rebalancing. USDJPY got hit the hardest, and it struggled to get back above 108.50 even on the short squeeze mini bounce into the weekend. Rebalancing isn’t solely to blame for this move – it’s a bit of a catch-up move with USTs and risk in general. Downside levels are at 107.90/107.65.

The weakest ASEAN links in the basket are the most obvious (THB and SGD), so despite paring back USD longs vs G-10 on Friday, interbank traders were flocking to those paths of least resistance.   ( buying USD vs THB and SGD)

If history repeats itself as was the case in 2003, Singapore MAS could let the doves fly while the Bank of Thailand will most certainly bring forward a rate cut to ward off the damaging effects on the tourism sector. Both of which could significantly weaken those two currencies.

On the IMM data, and after a short five weeks being short the US Dollar, the tape indicated investors flipping aggressively back into dollar longs, as a safe-haven hedge. At the same time, total open interest declined to a 2-1/2 year low. Investors increased EUR and AUD shorts while also reducing GBP, CAD, and MXN length.

USD long position shift on the IMM

IMM data

Oil markets

The Oil market has caught more than a case of the sniffles. China’s larger oil market footprint (5.7 MMB/d in 2003 vs. 13.9 MMB/d today) raises the potential for enormous demand devastation given Chinas current oil demand profile in comparison to the SARS epidemic era.

According to Deutsche Bank, “Early estimates of the impact on oil demand growth are around 100 kb/d, raising this year’s oversupply to 1 MMB/d. This assumes the disruption is limited to the first quarter and suggests Brent prices may remain USD 60/bbl. below.”

Although oil bulls are hoping on a wing and a prayer that an early OPEC meeting (February instead of 5 March) raises the prospect of greater supply discipline, but this is by no means certain given OPEC’s current low level of output and the general consensus among OPEC ministers who believe the market impact will be smaller than the current level of market fear priced into the equation.

Regardless of the outcome of the 2019-nCoV epidemic, oil prices may have further to fall and will generally remain under downside pressure due to the toxic combination of extreme demand destruction and excess non-OPEC supply.

Gold markets

Gold gains on massive demand as a hedge against coronavirus concerns; in a position build-up that is now expected to challenge USD1,600/oz near term. Gold continues to benefit from the need for risk-off positioning as investor sentiment tanks and the economic devastation reality check sets in as equity market traders have pivoted from buying the dip to selling the fact.

Gold propped up as US equities weakened, and yields fell, with the yield on the US 10-year Treasury easing to 1.502%. But just as significant of short term traders, as was the case for the disinflationary shock from SARS, that pushed the Fed to a final “insurance” cut in 2003, with the Fed struggling to ignite the inflationary flame, a rate cut this spring is quickly becoming the market base case and extremely bullish for gold.

For now, the weaker US dollar is factoring positively into the equation as the market brings forward a Fed interest rate cut, which should weaken the US dollar and provide a positive knock-on fillip for gold prices.

Gold has clearly benefited from the turmoil emanating from the coronavirus and the Iran conflict earlier in the month. However, if both tails fade gold positioning could be a bit of a problem, and with physical demand remaining weak, traders will need to be extremely alert to plateaus in virus headcount or mortality rates on a daily basis.

Gold positioning in ounce terms (ETF, Net Managed Money, Tocom non-commercial)

The week ahead

The other risk here is that all the bandwidth is being taken up by the virus, while there are plenty of other issues to consider.

A new NBC/WSJ poll puts Bernie Sanders in the lead, the first time he has been at the top of a national survey (even if statistically tied). Sanders leads on 27%, Joe Biden is on 26%, Elizabeth Warren is on 15%, and Michael Bloomberg has crept up into the fourth spot with 9%. This should be a significant risk for both the USD and US equities if this trend continues and Trump’s popularity wanes in the head to head polls with Sanders.

Buckle up for a US economic data deluge 

This week’s economic docket includes the granddaddy of data releases, the January employment report (Friday), which will take on a heightened level of importance given the at the markets are now in the process of pricing in Fed rates cuts sooner than later. As well, we have the January manufacturing ISM (49.8 vs. 47.8) along with Wednesday’s non-manufacturing ISM (55.5 vs. 54.9) and ADP employment survey (150k vs. 201k) will set the tone going into Friday’s employment report.

The anatomy of market sell-off through the lens of a trader

S&P 500 daily return, past 7 days, which is a very typical risk-off progression but nothing too crazy on the downside yet.

Friday 3:30 AM SGT (Yes real traders wake up at 3 AM when things look gnarly) Hmm WHO put there stamp of approval on China containment efforts. Traders quickly move to reduce over hedged USDCNH and Gold longs and buy back a chunk of those Oil shorts as WHO opposes restrictions on travel to China or trade with it. Everyone seems to agree, although they know things are going to get worse before better. It’s the herd mentality that also influences trading momentum when uncertainty is rampant.

Friday 9:20 AM SGT Social media goes frantic when close to 10,000 total confirmed cases of the virus were reported, which means its spreading at a faster pace than during SARS. (however, during SARS, the data was arguably underreported, partly as it coincided with the war in Iraq.) The market pared risk, but the WHO decree was too fresh in trader minds to trigger a more prominent sell-off.

Friday Asia Noon SGT: Now traders think its time to square the books and add some defensives hedges against a possible Monday market meltdown. Still, no significant market moves as big Asia traders are mostly hedged via proxy or in cash now looking for the transitory reversion play this week.

Friday London opens Asia is hedged but probably not over hedged, which begets a more prominent tail risk on Monday, none the less the London market continues to de-risk and gingerly buys more bonds underscoring the bid for gold. However, the big guns in London were somewhat complacent to the downside, which could contribute to a more significant Monday open tail risk.

Friday New York: Proprietary and discretionary traders get into the office early after following the proceedings in Asia the night before. And are now thinking that they need some defensive hedge as the markets are looking a bit ugly.

Friday New York Opening Bell: Splat!! Cross asset traders unanimously move in to buy more US bonds and to sell the Spooz. On the currency market, FX traders cover USD longs as rates markets are starting to price in a summer Fed rate cut and opt for the path of least resistance and buy USD vs. (SGD, THB, and CNH) to hedge weekend risk and probably add a bit of over hedge for a punt against the China Monday open

Friday New York 2:00 PM: Now traders think they are too short as the market has only sold off <2 %, so they now think it’s wise to cover some of that over hedged risk and the usual 2 PM to 4 PM EST short squeeze ensues.

Saturday: Everyone reads the Armageddon prophecies, the worst-case scenarios, and just how bad Fridays beat down was. But more importantly, the fear factor sets in due to a deluge of insane amounts of negative coverage.

A New Week Dawns

Monday Open: Market gap lower as expected selling initially builds, and then it would usually cascade into Europe and then New York. This is what typically happens but not sure how much of a force the “national team ” will be and how effective the PBoC massive liquidity injection remains the question mark. But its a lot of cash and could keep the market on an even keel.

Monday New York: Normally the lows would hit around 1- 4 PM EST, and then markets start to revert

Tuesday Asia: Yup another Turnaround Tuesday and the shorts get painfully squeezed

Wednesday: The teeter tooter battle of the bulls and the bears

Thursday: Unless there a slow down in the virus spread, traders get nervous again and put on the hedges they took off the day before.

Friday: Rinse and Repeat

Twitter Follow

Finally, after 8 years, I’m starting to get more active on Twitter, where I’m sharing interbank views from an assortment of Top tier global banks I’m in contact with , so follow me and I will be sure to follow you back.

Also, I will provide a weekly follow recommendation. This week it’s a heads up to Kevin Muir, who runs his own fund out of Toronto Canada . Also, in a former life and like me, he cut his trading chops on Bay Street Toronto Canada, where he was an equity derivates trader for Royal Banks of Canada. Kevin offeres up excellent market insights and great retweets.