WHO: the market’s new Grim Reaper
After an up and down session with traders vacillating on the economic impact the coronavirus will have on global growth, S&P500 was more or less flat heading into the close, having spent most of the session in slightly positive territory. Most European bourses saw very modest gains, though Asia was weaker. US fixed income rallied further, however, with US10Y yields down a further 3bps to 1.33% and oil down another 2.4%.
But, for risk concerns, the bearer of the truth was the WHO reporting that 427 new cases of the virus were confirmed on Tuesday outside China, compared with 411 in mainland China: the first time that new case numbers outside China were higher than those from within. Of course, the spread beyond Chinese borders has been at the core of the market's worries since the weekend news flow pointed to a potential super spreader around the globe and saw risk U-turn lower.
Previous crisis playbooks have all revolved around buying the dip in equities, so I wonder just how much further the fire sale will go before the market at least starts to scale in again. We saw an attempt at a bounce in the New York session before the market’s new Grim Reaper, the WHO, raised its ugly head again.
But, based on last night's price action, it does appear that any bounce in stocks is likely to be short-lived and, eventually, the markets could fall deeper as investors start to wonder what the point is of trying to pick the bottom in the short term.
Looking further down the line in 2020, the market continues to price in more significant haircuts to large parts of the global economy. At the same time, the idea of a v-shaped recovery seems to be the new castle in the sky. Admittedly things can pivot quickly, but if you believed in the narrative that easy monetary policy was mainly fuelling the risk rally, then arguably you’re going to want to see definitive signs of a Fed pivot – primarily as the fundamentals are pointing the other way – before feeling confident about buying equities. But on that front the Fed messaging continues to signal "still too soon".
On the G-20 coordinated stimulus front, and for those looking for shock and awe fiscal delivery from Europe, it was always likely to be disappointment. News about Germany intending to pause its debt brake sparked a recovery in stocks and a sell-off in Bunds, but it was short-lived. Still, ultimately, the cumulative effect of similarly measured responses around the world might be enough to grease the wheels of the global economy.
Traders remain hyper skittish and oil rallies short-lived as “sell first, ask questions later” will be the theme if there’s still even the slightest concern over the virus outbreak becoming a pandemic. There has been another big hit to oil on renewed super spreader coronavirus fears.
And, as expected, the EIA inventory data – which under normal conditions would have been bullish for oil price – fell through the cracks as uncertainty over coronavirus will take its toll on oil demand sentiment until its impact can be adequately quantified.
Next week's OPEC+ meeting should be a positive catalyst, but the fear here is that the outcome might be consigned to oblivion with the market singularly focused on virus spread, which has unceremoniously shown up on the doorsteps of the US market.
Still, OPEC + has enough weight, and with a hefty production cut at a minimum it should offer a backstop – and with a probable G-20 concerted stimulus effort surely the bottom can't be too far from here. In addition, with WTI below $48 it could also trigger the self-correcting US supply mechanism as more shale wells go offline due to breakeven concerns.
The Straw that could break the oil market’s back?
The biggest concern – and the straw that could possibly break the oil market’s back – is the susceptibility of the US market to this insidious virus, which from a risk perspective needs to rank beyond all other. If the virus spreads rapidly in the US, you can't unscramble that egg.
The most glaring problem is that the US has only tested 426 people, while South Korea has tested 35,000. The US guidelines were only to check those who displayed respiratory symptoms and had recently traveled to China or had close contact with an infected person. The problem is that coronavirus is asymptomatic – it’s contagious before the symptoms show.
China had come in for some criticism over the handling of the outbreak. However, as the virus spreads global those "harsh" measures appear to have been the right thing to do and arguably it’s Europe and US efforts that could be too complacent and porous. And, not surprisingly, any excuse to sell still feels like the sentiment in the market right now.
It's too early to cap gold prices as we’re not in business as usual market conditions. But, of course, there’s no denying gold's safe-haven credentials have been questioned in light of a gold decline as Treasury yields also fell precipitously this week, which should have been extremely positive for gold.
But since we're only into day three of demand depletion and given the position build of late, this week's washout still fits into the "healthy correction" category, although we might revise that view on a break of $1,600.
However, as profit-taking and selling to cover margin calls in the equity markets is decreasing, the chances of gold rebounding increase, propelled by ongoing COVID-19 concerns amid volatile financial conditions.
Beyond the constant stream of buying the dip analysts banter, and for investors that have sizable gold positions, there are some concerns.
Government spending commitments to contain the virus might push bond yields higher and weigh on gold’s appeal, especially from the fiscal side of the equation. While the Fed advocating for patience doesn't provide a significant impulse to push gold through $1,700, with yields so low – suggesting gold downside should be limited – a delayed policy market response could funnel more buying of gold as the longer the Fed sits on their hand, the worse stock market conditions could get.
The US Dollar
The US dollar has lost its safe-haven status with the coronavirus arriving on the US doorstep. With Fed rate cut probabilities on the rise and US bond yields sliding, fortunately for the global risk markets the US dollar has started to weaken as reverse Yankee mania sets in.
Outside of the KRW and THB, which remains high beta to further jumps on coronavirus cases withing ASEAN proxies, Asia FX has remained fairly rangebound despite all the coronavirus upheaval around the globe. To no small degree, much of the sell-off Asia FX were priced into the curve ahead of the global equity market meltdown and, at the same time, the Yuan has remained tethered to the PBoC policy anchor by maintaining a stable policy fixing.
Foreign investors sidestepped the Fitch warning (seldom have lasting legs) and have resumed their demand for Malaysia bonds as the BNM rate cut expectations get to move forward. It’s a small but positive move in these politically charged times, which continues to weigh on the Ringgit despite the succession scrim looking a bit less messy than at the start of the week. But when it comes to Malaysia politics, all bets are off.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies