Equities rocking as coronavirus cases jump
We see some relief early doors for Europe but global
equity markets are still rocking, with boards lit up red as investors manage
risk in the face of China’s coronavirus outbreak. There are no signs of this
letting up – but at least market expectations have shifted markedly since the
middle of last week to better reflect the risk of a rapid rise in confirmed
cases. The problem is investors have very limited visibility of the current
situation in China, have virtually zero knowledge of epidemiology and virology,
and have no clue how bad it will get or lasting the impact will be. Risk models
are not geared for this situation.
Nevertheless, futures today indicate a very mild rebound
in Europe and the US, with the DAX seen up at 13280 and the FTSE 100
at 7444 on the open. US futures point to gains too today. But we are not
convinced this will hold – as explained in yesterday’s note, buying the dips is
alive and well – I would anticipate dips to be buying opportunities for many in
the market. But one feels equities face headwinds still as the peak of this
health crisis has some way off still.
Those Asian markets that are open have posted steep
declines on Tuesday – Singapore, Sydney and Seoul all slipping 2-3% after we
saw a day of heavy selling in Europe and the US on Monday. Hong Kong markets
will trade as normal tomorrow – this will be the best gauge of how much risk
sentiment has been affected.
Cases of the virus are rising fast – up to more 4,500
confirmed in China now from 2,800 a day ago. The death toll has hit triple
Authorities are tightening restrictions on foreign travel
and on things like when workers will be allowed back to their posts after the
new year holiday. For example, Shanghai is reportedly banning companies from
restarting operations until Feb 9th. Foreign carmakers are pulling staff out.
We know there will be an impact on consumption, but if
factories are kept shut we will also see a downturn in output in Q1. The risk
for the Chinese- and by implication the global economy – is that the lockdown
across much of China persists for a longer time than currently anticipated,
crippling output as well as consumption.
On Monday, the S&P 500 fell 50 points, or
1.57%, while the Dow fell by the same margin, shedding over 450 points. These
were the biggest one-day declines since Oct 2nd. It was a brutal session in
Europe too, with the DAX down 2.75% and the FTSE 100 losing 2.3%. Airlines,
miners and luxury retailers suffered most.
Risk-off flows further supported government bond prices,
with the yield on US 10yr debt moving back to 1.6%. Bunds are near -0.4% again.
Could have further to run, particularly if markets think that slacker global
growth as a result of this virus spurs central banks to be more accommodative.
Likewise gold is holding gains with lower yields supportive of the bugs
– steady around $1580.
Oil – ahead of their March meeting, reports
suggest OPEC and her allies are examining all options – including extending and
deepening production curbs – in an effort to control the slide in oil prices.
For now traders are betting on weaker China growth in GDP and slacker tourism
numbers in Asia to drive down demand. Libyan output remains sharply curtailed,
by about 1m bpd, but this so far is providing little respite. WTI has firmed
off its lows to $53.20 – bulls looking to quickly close the gap to $54 or we
could get further weakness and retest of $50.
In FX, the yen has held gains but finding it harder to
make much more headway. USDJPY was hovering around 109, having sunk as
low as 108.7920. Key 200-day moving average support at 108.460 is yet to be
tested, with the 100-day line at 108.60 also unscathed for now. The 50-day line
around 109.20 is now resistance.
EURUSD is looking brittle having shed its Dec
gains. A retest of 1.10 is on the cards particularly as coronavirus fears stoke
bid for the relative safety of USD. Next up looks to
be the key horizontal support at 1.0990, a level well-trodden in recent months.
GBPUSD is a little weaker at 1.3030, having shed the 50-day line at
1.30640 which is now forming a resistance point. Sterling is likely to be well
anchored around this 1.30 level until the Bank of England decision. Ahead of
that is the Fed decision tomorrow night – no change expected but there could be
some interesting nuggets from Powell in the presser.