- Worries that new virus is turning into an epidemic push yen and gold higher
- Stocks fall alongside oil prices as investors reassess potential economic hit
- Question now is how long this havoc will last, and whether it gets worse from here
Risk sentiment takes a hit as virus death toll soars
Risk aversion is the name of the game in global markets on Monday, as investors grapple with concerns about how rapidly the deadly coronavirus is spreading and its potential impact on economic activity. The number of confirmed cases virtually tripled over the weekend, as did the number of casualties, compounding fears that the outbreak is spiraling out of control faster than Chinese authorities can cope with.
To make matters worse, the number of infections in countries like the US and Japan has also been rising, pouring cold water on hopes that the epidemic would be contained after China put several cities on lockdown and cancelled Lunar New Year festivities. For investors, the implication is that this will – at the very least – shave a few decimals off Chinese GDP growth for Q1, with the risk being a much sharper and more prolonged slowdown if such worries dampen spending beyond the holiday period.
Yen firms, stocks reel as contagion fears spread
In the FX arena, the defensive Japanese yen shined bright as traders piled into safer assets, while commodity-linked currencies like the aussie and the kiwi sold off as the outlook for global demand darkened. Stock markets in Asia were a sea of red, while Wall Street futures point to a ~1% lower open for the major US indices today after similar losses on Friday. Crude prices plummeted amid the renewed growth concerns, even despite reports of a missile attack on the US embassy in Iraq, dragging the oil-sensitive Canadian dollar down with them.
Looking ahead, virus fears are likely to keep markets on edge for a few more days, given the mounting signs that investors had underestimated the breadth of this disease, and the lack of any other major themes right now.
In the bigger picture though, it’s still doubtful whether the situation is dire enough to justify a lengthy period of risk aversion globally, especially when financial markets are flush with liquidity thanks to the Fed’s expanding balance sheet. At some point it will be time to ‘buy’ again, so the real question may be how long this havoc will last.
Having said that, for sentiment to start turning around, investors likely need to see some signs that the spread of the virus is slowing down and since we aren’t there yet, this could get uglier before it gets better.
Dollar advances ahead of Fed meeting
The greenback is the second-best performing major currency today, behind the yen, as investors seem to be taking refuge in the US Treasury market amid the coronavirus concerns.
Besides the risk aversion, the dollar is also capitalizing on weakness in the euro and the pound, after PMIs from the Eurozone and the UK failed to impress on Friday. Markets currently view the prospect of a Bank of England (BoE) rate cut on Thursday as a coin toss, so it will be a volatile week for the pound, one way or another.
Elsewhere, euro/franc fell to a multi-year low today as safe haven flows boost the Swiss currency, generating the question of whether the infamous SNB will intervene soon to stem this appreciation, despite US political pressure not to do so.
