The curious case of Corona
Risk sentiment is clearly struggling to pick a side, having erased a majority of yesterday’s gains in a broad equities sell-off during Asia. It’s understandable that cynicism runs high around the lasting impact of a potential 2003 SARS repeat given such dire circumstances have historically come and gone quite quick, but for markets to devalue what seems to be a growing number of cases and fatalities is becoming increasingly difficult.
The fact that Macau has cancelled Chinese New Year festivities, not dissimilar in magnitude to cancelling Christmas, and up to 600 cases and 17 fatalities have been confirmed, is a stark reminder of just how serious the situation is. Therefore, markets might be able to temporarily sweep the issue under the rug as the calendar rolls through central bank meetings and reporting season, but ultimately, will have to decide whether it presents a significant longer-term tail risk.
The ASX raced to a 0.63% loss, as China – faced with the complete lockdown of Wuhan, a city populated by a staggering ~11 million people – saw CSI 300 plunge 3.5%. According to futures, FTSE is poised for a soft open to the tune of 10pts, while DAX having managed to hit record highs yesterday looks set to trek lower in the range of 60pts at time of writing.
Earnings watch
S&P 500 and Nasdaq futures point lower in Asia, but will first have to answer to an influx of quarterly earnings reports in Southwest Airlines, American Airlines, Intel and Comcast.
Should earnings print better than expected, it’s difficult to say whether markets will be able to quell the pessimistic outlook surrounding airlines, given the current extent of the Coronavirus crisis and 737 Max grounding dramas. As share prices of both Southwest Airlines and American Airlines have evidently languished in the last couple of years, it goes to show just how perennially challenged the industry is and that investors are better off parking their money elsewhere.
FX draws interest in the past 24hours
While FX markets are marginally USD bid through Asia, idiosyncratic risks across AUDUSD, GBPUSD and USDCAD overnight have clearly stolen the show.
A better than expected headline employment print of 28.9k vs 15k expected, saw AUDUSD immediately spike 0.4% before partially fading the move. On surface, it was clearly a solid print, but upon closer inspection, there could be disappointment in the details. Full-time employment failed to keep up with prior month’s 4.2k which suggests a lot of the hiring was likely due to holidays. Bear flattening in the curve now means an RBA Feb. 4 rate cut is only pricing in a ~20% chance, with banks on Main Street shifting RBA rate-cut calls to May.
BoC more dovish than expected
USDCAD spiked ~70pips through 1.31 to hit January highs following an eventful BoC meeting, and despite an in-line Dec. CPI print. Poloz’s slight change to forward guidance emphasised the bank “will be watching closely to see if the recent slowdown in growth is more persistent than forecast”, and thus, be of greater data-dependency.
More neutral than expected communications had us believing the BoC were firmly on hold. But it looks like the combination of choppy data from October and a higher degree of uncertainty sees dovish risks come back into the fold. We maintain long CAD bias and think opportunity presents itself to get short EURCAD.
Sterling bounces on optimistic survey
GBPUSD cracked 1.31 overnight following a strong manufacturing CBI survey that lessened bets that the BoE cut rates on Jan. 30. The survey which captures manufacturing sentiment saw business optimism turn positive, jumping to +23. But interestingly, only had the level of total order books tick marginally higher to -22 from -28 (Dec.).
While this could be an overbought move in the short-term, especially with markets waiting to digest UK PMIs tomorrow. Ultimately, it falls in line with our longer-term 2020 thesis that GBPUSD could see greater portfolio inflows having been structurally underweight on Brexit risks.
ECB preview
Little risk here of any rate change given Lagarde’s recent appointment. Instead, markets will be looking to soundbites around the start of the ECB’s Strategic Review and what’s entailed.
As Lagarde rebuilds consensus among members and identifies the efficacy of negative rates, the dovish risks around ECB policy should start to become more muted. Especially when you mix in improved sentiment seen over the past few PMI prints. With 5bps of tightening also priced-in till the end of 2021, it’s unlikely markets catch a significant hawkish surprise.
Ultimately, it’s probably best to stay neutral trading EURUSD through ECB given Friday’s PMIs are more pressing, and low option implied vol. suggests trader convictions wait to digest the details of the ECB Strategic Review, and receive a more pronounced assessment of forward risks.
