I’m reading this via Yicai (Chinese via google translation) of reports that a pharmaceutical company has announced it has an antibody for the Wuhan coronavirus, and gold markets have been very reactive already unwinding much of this morning’s buys.
Equity markets moved into risk-off mode overnight with E-mini S&P futures down 40bp, and Europe is expected to open the same. Asian weakness was led primarily by the spread of the coronavirus in China, which comes on top of a downgrade of global growth forecasts from the International Monetary Fund, and Moody’s cut the credit rating of Hong Kong.
Fears over the spread of SARS-like viral pneumonia in China have been bubbling away in the background since the start of the year, but with another fatality reported this morning, it provided enough evidence that the virus is spreading ahead of the Chinese New Year holiday. Also, Moody’s downgrade of Hong Kong’s rating to Aa3, although the latter is hardly a surprise, the septic combination seems to have provided enough reasons for those investors looking for a short-term exit point to head for the hills after seven straight weekly advances.
The Coronavirus outbreak can cause a massive demand shock, particularly to the consumption of services, especially travel. So, traders are hedging the tail risk. However, barring further outbreaks, the economic impact could be relatively short-lived. But having this outbreak occur in an environment of an already subdued global economy due to the US-China trade war, investor’s sentiment and reactions are perhaps getting magnified when being viewed through the trade war lens. And I would caution that generally, the market and especially the US have looked through these types of events in the past. So, we could see aggrieve unwind in Europe and the US markets given the there was possibly a more outsized reaction in Asia as those economies are at the epicenter of the breakout.
But on the macro side and something not so quickly sidestepped as it adds a thicker layer of skepticism about the green shoots of the global recovery. The sharp decline in Korea’s 20-day exports to China and the US has raised concerns about the health of the global growth recovery even more so in the wake of the IMF modestly reducing its global growth forecast.
The only real positive in the last 24 hours were reports that the US-France may be near a truce over their Digital Tax fight.
Germany’s ZEW survey is due at 1000 GMT. It looks set to show a slight improvement in January, rising to 13 from 10.7 in December, according to a Bloomberg survey. This print is enormous for the buy Europe argument as the naked truth will be evidenced in ZEW. Likely the highlight of the week for European markets
After predictably unwinding the Libya supply disruption premium, Oil markets have remained under pressure since the sharp decline in Korea’s 20-day exports to China and the US, which has cast a dark shadow over the global growth recovery. At least in the oversupplied oil sector, traders remain skeptical about just how much of an impact the early stages of global growth recovery will positively impact the prompt contracts.
Yuan (ASEAN basket)
The risk-off sentiment sent the USDCNH above 6.90. Large outflows from onshore led to cash returning to the CNH market, pressing the front-end of the curve lower, while lower rates due to risk-off sentiment also weighed on the back end. The Yuan weakness has caused a rippling effect across the ASEAN currency basket, which is trading weaker following the contagion scare.
The Yen has been in demand attracting safe-haven flows, although I’m not so sure how safe Japan would be if an epidemic spread especially ahead of the economic boosting 2020 Olympics
This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader