The sense of serious concern about the economic effects of the Wuhan virus – evident on Wall Street Friday – has turned into something approaching panic in Asia this morning. China has taken the unprecedented step of extending the Chinese New Year holiday until February 2nd as it ramps up efforts to control the spread of the virus. Although confirmed cases have popped up all over the globe, the vast majority still remain confined to the Chinese Mainland.
Price action across Asia thus far today has had a look of panic about it. S&P 500 futures down 1.0%, the Nikkei 225 down 1.80%, gold up 8.0 dollars, and WTI futures have also fallen after being crushed on Friday. Meanwhile, the USD/CNH has risen 250 points to 6.9500 and China proxy, the Australian Dollar, has eased 20 points to 0.6810.
It is very important to note, though, that Japan is the only major Asian market open today. Mainland China, Hong Kong, Singapore, South Korea and Australia are all closed for various holidays. Liquidity is, therefore, much reduced and at a premium across all asset classes. Thus, any moves, especially on Monday morning, can be exaggerated. Bitter experience has taught me that strong directional moves in the early hours on Monday are often the wrong ones on the day.
The Wuhan virus will off course hang like a shadow over financial markets this week. With asset markets pumped up on hopes of a global post-trade deal recovery and cheap central bank money, an unexpected growth shock leaves them particularly vulnerable to a potentially strong downward correction. The world’s central banks, having slashed rates to the bone in 2019, have a severe ammunition shortage on the monetary policy front to offset a growth shock. Fortunately for the world, two central banks that do are the two most important, the US Federal Reserve and China’s PBOC.
Wuhan virus aside, the week will not be without drama in other corners of the financial markets. The Federal Reserve has its first FOMC decision of the year on Wednesday evening, and the Bank of England announces its latest rate decision ahead on Thursday. We expect the FOMC to hold unchanged with US data and US company earnings all tracking in the Fed’s goldilocks zone. A response to the Wuhan virus, if required, will be a story for later meetings. The Bank of England was probably poised to ease this week, but recent UK data has been unexpectedly strong. The odds for a 25-basis point cut are probably now only 50/50 at best as the UK formally exits Europe this week.
Trade continues to be a concern that hasn’t died; it just took a vacation. Europe’s proposed digital taxes and carbon taxes have put it on a collision course with President Trump’s America First White House. Threats have emanated from Washington DC of reprisals along with veiled warnings to Britain if Huawei is allowed even a nibble of the UK’s proposed 5G networks. Readers may recall that after President Trump had finished with China, the tariff guns would swivel towards Europe, which also enjoys a massive surplus with the US. In a US election year, none of this is likely to subside with America’s negotiating approach very much shoot first and not bother asking questions later.
US earnings reach their peak this week, with big tech reporting amongst others. We expect earnings to remain strong although fears of a Wuhan virus-induced global slowdown will probably drown out the celebrations.
Equities
The Nikkei 225, being the only major index open in Asia today, has borne the brunt of the Wuhan virus rush to safety, falling 1.80% this morning. China stock futures, traded on the SGX, are also lower by 5.0%. Without the underlying indices open, though, the extremity of the move is driven by a lack of liquidity and panic.
The extension of the Chinese New Year holiday in China by the government until February 2nd will add to concerns about just how serious the government is taking the Wuhan virus. With 40 million people in lock-down and the unprecedented extension to the holiday, equity markets in Europe and the United States are likely to continue lower, following the sell-off on Wall Street on Friday. Major indices there falling nearly one per cent and S&P mini futures lower by the same this morning in electronic trading.
It is said that when America sneezes, the rest of the world catches a cold. The ascendance of China in the world’s economy means that now, if either the US or China sneeze, the rest of the world may well catch a cold. That worry will likely drown out any other data points this week.
Currencies
Unsurprisingly, the usual suspects are the centre of attention in a holiday-thinned Asia this morning. The off-shore Yuan has been clubbed on the head, with USD/CNH rising 0.50% to 6.9620. The haven Japanese Yen has strengthened against the US Dollar, USD/JPY falling 0.30% to 108.95. China proxies, the Australian and New Zealand Dollars, have also suffered. AUD/USD falling o.25% to 0.6890 and NZD/USD falling 0.40% to 0.6575.
USD/CNH aside, forex moves have been reasonably orderly this morning despite the much-reduced liquidity due to pan-APAC holidays. We would expect Asian regional currencies to also come under pressure today as China growth worries spread. Fortunately, those same markets have seen a strong appreciation of their currencies over the past two months. A one or two-day sell-off, will not be too much of a concern to the region’s central banks.
Heading into Europe this afternoon, we would expect the US dollar and haven currencies to continue to out-perform.
Oil
Both Brent crude and WTI have gapped lower by over 2.0 % this morning in Asia, continuing Friday’s strong sell-off. With ample supply around the world, oil is more vulnerable than most markets to a shock economic growth slow down.
Brent crude fell by 2.0% on Friday to $60.50 a barrel and has opened below the key $60.00 a barrel level at 59.20 this morning. WTI also fell by 2.0% on Friday to $54.50 a barrel and gapped lower to $53.00 a barrel this morning.
Brent crude’s crash through $60.00 gives OPEC+ a headache as the pricing benchmark internationally for crude. The only mitigating factor for the falls this morning is that almost all of Asia is on holiday and liquidity is exceedingly thin. That does leave room for bargain hunters and profit takers to emerge in Europe to steady prices. That though is a big if and the concerns about the Wuhan virus likely mean, that any rallies will be met by a wall of sellers. Oil is unlikely to find many friends until signs of concrete progress have been made, on the control of the spread of the coronavirus.
Gold
Gold rallied on Friday as haven assets saw heavy demand in New York, rallying 0.55% to $1571.50 an ounce. The escalation of growth fears from the Wuhan virus saw gold gap higher this morning on thin liquidity, jumping 0.60% to $1584.25 an ounce.
Gold’s rally has undeniably, been driven by classical safe-haven flows. The technical picture though shows that gold has tested $1550.00 an ounce every day over the last seven trading days and held solidly. The $1550.00 region has, therefore, become the critical daily pivot region for gold and its technical picture is constructive if that holds.
The continuation of the gold rally will rely on developments for good, or for ill, of the Wuhan virus situation. From a resistance point of view, the next level to watch is $1600.00 an ounce, followed by the January 8th highs at $1611.50 an ounce.
