CDC Rings In A Level Two Alert Watch “ Practice Enhanced Precautions.”
As expected, there has been a markdown in China exposure and luxury – as positioning had been very consensus in the latter into the Lunar New Year festivities. But there are no real alarm bells just yet. And while the outbreak is getting top billing and its lions share of attention, it’s not a massive risk-off driver. Even more so in the US markets given its Teflon persona amid the tendency to relentlessly grind higher of late, while looking through any negative that stands in the way.
Broad positioning aside, the majority of the US market risk is concentrated in stocks not directly exposed to current market worries. So, US investors likely feel more confident buying the S&P 500 dip.
But the timing for this outbreak, although an antibody has reportedly been discovered, couldn’t have been worse for mainland investors as the ASEAN region enters peak commerce and travel week with Chinese around the world celebrating the Lunar New Year. As well, Chinese investors may shy away from their typical bargain-hunting mode as they could be reluctant to hold stock market risk over the long holiday shut down on the Shanghai Stock Exchange.
Oil markets
The oil market, somewhat predictably, took its cue from the price action after the Abqaiq attack in September and quickly unwound the Libya supply disruption risk. And this will likely be the blueprint for the future unplanned disruptions that remain within the magnitude of the Saudi Armco facility supply outage. The massive non-OPEC supplies have entirely revolutionized the way traders reprice middle east supply risk, and now these supply interruptions turn into a fader’s paradise.
And while the well-documented supply glut continues to hang like a dark cloud over markets. But just as oil prices were clawing back some gains after Germany’s ZEW survey beat expectations and as US risk markets were stabilizing and trending higher. Reports that the Coronavirus has made its way stateside sent prices lower again.
My view is that oil prices could remain supported into the March and possibly the June contract reflecting a price premium on crude oil from recent geopolitical events and OPEC supply compliance. However, the outlook gets incredibly dreary beyond that point, as market fundamentals will probably drive the crude oil price forecast.
Global economic data is tentatively stabilizing, but the recovery remains sluggish, suggesting the permafrost stagnation fallout from the trade war will be a more prolonged thaw than currently in the price.
There are growing concerns about China’s ability to meet its high commitment to purchase US energy, and there are already mounting concerns about the potential difficulty of progressing to a Phase 2 deal. So, with several contentious issues yet to be resolved, risks to the existing agreement could also weigh on the oil price.
Gold markets
A growing focus on the outbreak of the Coronavirus contributed to pronounced equity market weakness across Asia yesterday which spooked Far East investors who then dove into the Gold market. Usually, equity market weakness and lower US Treasury yields – both of which occurred in Asia, should boost gold, but that didn’t play out as expected. Global gold players viewed the market reaction though a more Asia centric lens and faded Asia bounce throughout the London session and into the opening bell in New York
Still, the market bounced back convincingly after a stop-loss frenzy below $1550/oz overnight as strategic players bought the dip.
Gold investors appear willing to increase gold allocation on dips ahead of “Super Tuesday ” US election risk. And as a hedge against trade tensions reigniting, but broadly speaking, they haven’t brought out the big guns just yet.
The problem with formulating an excessively bullish view in this environment, besides no dovish impulse for the Fed, is the lack of institutional buying from the broader demand profile. Hedge funds remain on the sidelines, and sovereign accounts that were active at the start of the year seem to be absent.
And at the same time, physical demand into the Chinese lunar new year is weak, and India appears to have ample inventories. I don’t think we should look through the erosion of underlying physical demand, principally in Asia, where the bulk of physical gold is purchased.
Currency markets
The Yuan
The Yuan weakness is leaving a massive footprint across not only the EM market but G-10 also, as the dollar bulls have donned the rally cap with the safe-haven and USD carry appeal standing out like a beacon against the backdrop of Asia’s pandemic fears. The market was ill-prepared and underestimated the potential of the flu spreading, until yesterday that is, as the market was caught very long and wrong the ASEAN basket.
The Ringgit
Coat tailing the Yuan weakness, the Ringgit has backed up on concerns about the viral pneumonia outbreak in China, which threatens to derail the regional growth spurt. The sentiment was also dampened, to a lesser degree mind you, by yesterday’s downgrade of Hong Kong’s rating by Moody. Of course, Malaysia has had their runs in’s with rating agencies in the past.
The Euro
Once again, EURUSD price action has been disappointing despite robust European data. Germany’s ZEW expectations of economic growth were at the highest level since 2015, and the pair managed to rally 30 points in the aftermath. The lack of enthusiasm for the Euro is a bit of a puzzle. The fundamental reasons for being long were starting to gain momentum this week, with reports of a French/US détente on digital tax. And now with the massive German ZEW beat implying that Friday’s PMI is due for a significant jump. A pickup in the reflation theme will be vital to EUR higher, given the low vol/high USD carry FX morass.
This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader
This article was originally posted on FX Empire
