Asian shares in disarray over SARS-like virus, yen rallies
Shares in China and Hong Kong fell amid fears over the
spread of the coronavirus just as the new year holidays begin. The worry is
this is another SARS, an outbreak that saw thousands infected and led to
hundreds of deaths. It also led to billions of dollars of losses and hit
Chinese GDP growth by up to one percentage point. If that happened again the
IMF’s latest forecasts would not stand up, and we’d see a sharp contraction in
many leading indicators of the global economy.
We don’t know how bad this will be, but with authorities
confirming the disease can spread between humans, it’s wise to be on guard for
this outbreak to get worse before it gets better. And there is a real fear that
as millions of people travel long distances for the holidays the disease could
spread far and wide. Markets are worried about this spreading to more cities.
Australia has quarantined a man returning from the city of Wuhan, who is
believed to carry the disease.
Hong Kong could be a real problem if it reaches there – the
SARS outbreak led to sharp declines on the Hang Seng in the Jan-Apr 2003
Shanghai fell almost 2%, while Hong Kong dipped close to 3%
lower. A downgrade by Moody’s of Hong Kong on Monday hasn’t helped.
US markets will reopen after the holiday. Futures
were in water-treading mode after Friday’s rally capped a strong week for the
major indices. Netflix Q4 numbers are on tap later – with EPS seen at
$0.5 on revenues of $5.45bn, and net subscriber additions of 7.6m, with 7m,
from RoW and 0.6m from the US. The key question is to what extent competition
is starting to bite – either in the Q4 numbers themselves or in the guidance
(see Netflix preview: Content to be primus inter pares?)
Europe was flabby without the US liquidity with the DAX
the only bright spot, eking out a gain of 0.17% to 13,548. Bulls continue to
target all-time highs at 13,600 but the consistency with which this level has
proved too strong to overcome is a concern. If it blows I’d expect momentum to
grind out more record highs. The FTSE 100 retreated to 7,651.
European shares are catching a bit of a cold from Asia, but I’d anticipate very limited contagion as long as the coronavirus remains a purely Asian problem. DAX dipped to 13,470, with the FTSE moving under 7600 before paring losses. France and the US have agreed a truce over the planned digital tax, but risks remain.
The risk-off contagion spread to other markets with a
notable divergence in FX, as the yen rose and the yuan fell. USDJPY has
slipped its 110 berth to at 109.950, but remains supported above the 200-week
moving average at 109.70. USDCNH jumped through 6.9. As we’ve noted
before, there may be side effects on the US-China trade pact if the yuan takes
a 7 handle.
Overnight the Bank of Japan offered no surprise as it
left rates unchanged, and improved its growth outlook. Better growth prospects,
the signing of the US-China trade deal and a weaker yen means the central bank
need not rush into more stimulus. The BOJ kept its short-term interest rate
target at -0.1% and a pledge to guide 10-year government bond yields around 0%.
Elsewhere, we’re looking to UK wage data today as
another possible guide to what the Bank of England might do on Jan 30th.
Earnings are seen up 3.4% in the three months through Nov, with unemployment is
forecast at 3.8%.
there may be lots of arguments against a cut, the coordinated dovish commentary
from half the MPC in the last fortnight is no accident. Data has turned notably
softer and the BoE doesn’t want to risk allowing weakness to become
entrenched. As noted in last week’s note on this, BoE: Stitch in time
saves 9, there is a sense the Bank doesn’t want
to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still
teeing up the cut. It would be following the Fed’s playbook in cutting early in
order to prevent a downturn. This is the key thing to remember – the Bank
does not want to let a weaker economy fester. And whilst there is no trade deal with the EU, the MPC has
been largely released from the shackles of Brexit uncertainty following the
Conservative victory last month. Political risk has hobbled the MPC but
this has diminished greatly and now is the window – before a possible clash
with the EU in the spring that would make policy changes more political in
nature – to get a cut in the bag to juice the economy.
GBPUSD is holding 1.30 again having traded weaker
yesterday. This level is the magnet until either the Bank decision next week or
the gilt market moves early and gives a clear signal about what’s coming.
EURUSD is little changed at a little below 1.11.
Gold was also a touch higher at $1566, catching some
mild bid on the risk-off moves and as the yield on US 10s slipped below 1.8%.
Crude oil closed the gap within a few hours of
trading yesterday, having spiked higher due to production outages in Libya and
Iraq it failed the test at the 50-day moving average. At send time WTI was just
holding on to $58, aiming to recover the 50% Fib level of the rally from the
Oct low to the recent high around $58.30.