Asia Open: Coronavirus on the Regional Risk Radar

Market Analysis /
Stephen Innes / 21 Jan 2020

The Chinese city of Wuhan reports 4th death from pulmonary coronavirus 

I don't want to sound like the boy who cried wolf, but the latest developments in the Chinese coronavirus crisis occurring in the central Chinese city of Wuhan is a building concern.

The cost to the global economy can be quite staggering in negative GDP terms if an outbreak reaches epidemic proportions as, until this week, the market was underestimating the potential of the flu spreading. But it's an essential enough development that the market will continue to monitor the risk radar because, if things turn critical, it could provide a massive blow to the airline industry and a knockout punch to local tourism. 

As such, the markets are opening up in Asia on a cautionary tone. I guess that’s what happens when WHO calls an emergency meeting and brings attention to epidemic concerns. 


US stock markets were little changed after global markets dipped on Monday as stock pickers sit tight and await a fresh bundle of corporate earnings reports. 

The US holiday negatively impacted trading volumes around the globe, while the absence of any macro or headline volatility also compounded matters. 

The S&P500 is already up +5.3% for the year, adding more pressure on active managers to produce returns. Indeed, you don't want to risk falling too far behind the benchmark this early in the year and I think there’s probably an element of that driving investor's sentiment and market momentum.

The IMF has made an adjustment to its 2020 growth forecast (3.3% vs. 3.4%) and notes that while downside risks are still prominent, they’re less skewed towards adverse outcomes. On the plus side, it says there are signs of the global manufacturing slump and that trade is bottoming out. The work also showed the impact of global central bank policies, suggesting growth would be 0.5pp lower in 2019 and 2020 without stimulus.

Oil markets

Reform driven protests in Iraq continue to escalate. The bullish risk is "if " the widespread unrest sets sights on oil production fields and effectively interrupts the flow of oil in one of OPEC's most prominent producers. 

Oil traders were quick to sidestep the Middle East supply disruption and refocus on the bearish oversupplied market conditions after the IEA just last week projected a "solid base" of oil inventories. At the same time, the deluge of US shale oil production would help offset any unplanned oil supply outages.

Traders then started to factor a big build in the US rig count, reported Friday, into the inventory calculus; in the absence of any significant US macro data release, the inventory reports could set the pace of play for this week's oil market. 

Gold markets

Gold remained somewhat constructive overnight, stabilising around the $1560 level as the yellow metal continues to find support from January seasonality, which has tended to be a positively active month for gold prices over the past decade.

Given that the USD is up since late December and equity markets are at record levels, gold has held up well. 

A key question for market participants is how to position for what happens at the Iowa caucuses (Feb 3) and New Hampshire primaries (Feb 11), and if the markets take a shift to the left before 'Super-Tuesday,' how big of a change are they willing to price? If Sanders lives up to recent polling and does very well in Iowa and New Hampshire, the market will likely sell risk assets and dive into gold. 

Also, Fox News has indefatigably reported on White House plans for an election year fiscal stimulus. The reported options being discussed include cutting corporate and individual tax rates and increasing a subsidy for lower-income workers with families. It's never clear cut how the FX and Bond market will react, but with the Fed about to deliver a new monetary policy framework, it's unlikely the Fed would be quick to raise interest rates this time around. In the context of a Fed on hold narrative, the likelihood of higher debt and deficits is on balance bullish for gold.

Asia currency markets

In an attempt to curb the Thai Bhat appreciation and leading by example, Thailand's Government Pension Fund will increase its international investments to 40% if the Finance Ministry approves expansion of the current 30% ceiling. If other local funds follow the lead, it could provide a solution to the BoT currency conundrum.

A media report says PM Mahathir will not take any retaliatory actions against India over the boycott of palm oil purchases which, for the time being, diffuses growing tensions and could allow cooler heads to prevail and come to a mutual understanding.

Investors still like the cyclical rebound stories in Asia, which will continue to help the Ringgit. Overnight the Ringgit weakened as some concerns over the India tension, and the spread of the coronavirus in China, are raising some health worries in the region.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.



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