The United States reported its first case of the Wuhan coronavirus overnight, an America First development that neither President Trump, nor U.S. financial markets wanted. With Asia on the back foot over the coronavirus implications yesterday, SARS still fresh in its minds even from 2003, U.S. stocks wilted as the news emerged. The negative tone was not helped by Boeing (NYSE:BA) temporarily halting trading of its shares as it announced, what everyone probably already knew; that the 737 MAX would remain the 737 DUD for seven-plus months more, at least.
Davos remained the center of attention for many, with its emphasis on climate change and sustainability. Steak sizes are limited to 120 grams, allegedly according to catering guidelines, reducing pressure on the Amazon jungle, I guess. A Berlin airlift sized fleet of bio-jet fueled private jets is parked sustainably at Zurich Airport, presumably to fly the world’s elite to the nearest steakhouse at the conclusion of the Davos forum.
Hong Kong leader, Carrie Lam, has lifted a page out of Australian Prime Minister Scott Morrison’s leadership playbook, and flown to Davos. Stating from the snow and canapes that Beijing wasn’t trying to exert more control over Hong Kong, and nor would she be acceding to any of the protesters’ demands anytime soon. It is said distance makes the heart grow fonder; I’m not so sure, though.
President Trump spoke at Davos yesterday. The speech was, as usual, long on hyperbole and short on detailed facts. On the subject of climate change, his response to detractors was along the lines of take a chill pill. One notable mention though was the eagerness at his end for a tremendous trade deal with United Kingdom and America. That gave a boost to sterling, coming after strong UK employment data earlier in the day.
South Korean data continued its improving trend this morning, with Q4 Advanced GDP Growth YoY jumping to 2.20%, well ahead of expectations. The MoM number also posted an impressive 1.20% increase against an expected print at 0.80%. This continues a noticeable trend of improving data in Asia over the past few months, which does imply a recovery is underway.
With equities globally at galactic valuations though, the soft underbelly of event risk could still undo the easy money good work of the world’s central banks in 2019. Yesterday’s coronavirus induced sell-off in Asia suggests that the concrete is not yet dry on the foundations of a global recovery.
Thailand’s Balance of Trade is released today and is expected to grow to $0.80 billion. Gains in either Thailand equities or the Thai baht will be tempered by the coronavirus situation. Thailand’s enormous tourism sector is acutely vulnerable to an escalation of the virus spread, with the resulting cancellation of travel plans.
Malaysia’s Bank Negara announces its latest rate decision today as well. We expect BNM to remain unchanged at 3.0%, with the central bank comfortable with the ringitt’s recent appreciation, preferring to see if the U.S.-China trade agreement positively impacts Malaysia’s trade data before pulling the easing trigger.
Equities
Wall Street took fright at the arrival of coronavirus in America and followed Asia’s lead to end the day yesterday in the red. The S&P 500 fell 0.26%, the NASDAQ fell 0.19%, and the Dow Jones fell 0.52%, led by Boeing (NYSE:BA).
Asia has had a mixed start to the day though most regional indices are now higher. The Nikkei and KOSPI are 0.70% higher, led by a small rise in S&P mini futures and buoyed by strong South Korean data this morning. Jakarta and Kuala Lumpur are both slightly higher while Singapore’s Straits Times is flat.
Mainland China continues to struggle though, coronavirus fears pushing the Shanghai Composite lower by 0.45% and the CSI 300 by 1.25%. The Shanghai SE 50 Large Cap Index is down 1.10%. Hong Kong has climbed 0.60% this morning though, as profit takers reappeared following yesterday’s massive 3.0% sell-off.
The clear implication is that China is far more vulnerable to the spread of coronavirus—ahead of a mass movement of people this week for Chinese New Year—than the rest of Asia. The divergence in Asian markets, though will only last as long as few cases of the virus are reported outside of the mainland.
An acceleration in cases within China will also inevitably weigh down on regional markets. Therefore, today’s rally ex-China should be treated with caution until the entire picture becomes much clearer.
Currencies
China’s offshore yuan has stabilized along with its onshore brother this morning. The USD/CNH being unchanged at 6.9035. The coronavirus induced sell-off yesterday spooking markets and spilling into other regional Asian currencies. Ahead of Chinese New Year this Friday, it is unlikely the PBOC will want a sudden drop in the yuan, or to see a spike in volatility. Thus, we can expect to see any sudden moves in the yuan, either way, this week, to meet an equally sudden brick wall from the central bank or its proxies.
Elsewhere, the U.S. dollar continues to benefit from haven-based flows heading into the U.S. Treasury market. The exception being sterling, which climbed to 1.3050 on strong data and an apparent Trump keenness for a “tremendous” trade deal with the US. Ahead of the start of UK trade talks with the EU in February, it is hard to see the GBP going momentum to carry it past the 1.3200 level anytime soon.
Oil
Oil fell in Asia yesterday on concerns that coronavirus would impact global growth, and that theme continued into North America. Brent crude fell 1.0% to $64.60 a barrel, and WTI fell 0.50% to $58.30 a barrel.
Those same concerns are weighing on oil again this morning with Brent crude falling another 25 cents to $64.35 a barrel, and WTI edging 20 cents lower to $58.15 a barrel. The world is extremely well supplied with oil, and thus, OPEC+ while able to easily cover production shortfalls, is poorly equipped to deal with sudden drops in demand.
It is too soon to say the coronavirus is SARS 2.0, but the outlook for oil is quite negative should that situation escalate seriously, both domestically in China and also internationally. Oil appears to be marking time at these levels, more on hope than fact, and one suspects another downward correction to the longer-term rally will happen sooner rather than later.
Gold
Gold spiked to just shy of $1570.00 an ounce overnight, as haven buyers flocked to the yellow metal. Once the initial rush of haven buyers had passed though, gold quickly gave up its gains and finished unchanged at $1559.00 an ounce.
Gold is slightly lower this morning at $1558.70 with little evidence that the haven buyers of yesterday are strongly in evidence today. The inability to hold its gains is disappointing for gold and implies that the rally to these levels is entirely based now on uncertainty, and not fundamentals. Gold has resistance at $1570.00 an ounce with support at $1550.00 and $1545 an ounce.
Although Asia will no doubt see risk-hedging buyers this week ahead of Chinese New Year, an easing of coronavirus fears and a lack of topside momentum mean that gold could be due for a deeper downward correction.