The travel, auto and resources sectors have all been hit hard vs. staples, and healthcare was outperforming amid concern over coronavirus. The dollar is strong, CNY is weak and bonds are bid. So far, US equity markets have continued to react at the sector level and not at the broader index level. This is probably due to the bulk of the market risk concentrated in stocks not directly exposed to current market worries. If the virus outbreak does spread, then the defensive macro allocation game plans will probably kick in with full force.
In the meantime, traders are weighing the anticipated China growth fallout against the backdrop of the current global growth recovery. While the calculus is not coming up roses, it's far from a state of global market panic. Still, if risk aversion starts to spread beyond China’s borders and starts to affect more than the usual suspect's luxury, travel and tourism, we’ll likely see a more significant dive in broader global indices.
My head is still spinning this morning after Chinese equity markets got hammered due to concerns over the coronavirus, with the CSI 300 down 3.1%. Of course, it's hard to say fears are overblown, especially when people are dying. However, the mortality rate is around 3%, compared to SARs, which was 15%, and Ebola was 70%, so it's hard not to argue that the Chinese sell-off was a complete overreaction due to the Lunar New Year effect. As such, price action throughout the rest of Asia should be the better proxy to gauge risk.
The oil market’s virulent sell-off on the back of the Wuhan flu scare was mollified by a timely decline in US crude inventories as the prompt contract recovered some lost ground after falling some 3.5% amid demand devastation fears. But is it enough to limit the carnage into the weekend? That will very much depend on the stream of outbreak headlines.
But it was a pretty vicious sell-off and, at some stage, profit taking will likely set in – even more so as traders start to contemplate if the China market sell-off was overblown.
Gold prices remain supported by defensive positioning due to the unknowns around the coronavirus.
If the virus continues to spread, and at a faster pace in the coming months, it will represent another significant headwind to growth. Given the changing economic dynamics and how early we are in the newfound growth cycle, more policy easing will be needed to support growth, which could be viewed as bullish for gold.
Also, gold investors appear willing to increase gold allocation on dips ahead of "Super Tuesday" U.S. election risk. As a hedge against trade tensions reigniting, broadly speaking, they haven't brought out the big guns just yet.
But these strategies, along with the January seasonality support, might be worth reassessing on a clean break of $ 1540/oz.
The BNM’s pre-emptive rate cut has triggered strong demand for the bond market duration and those market inflows have been supportive of the Ringgit.
Consumption and household spending had been slowing, so the interest cut should provide a decent economic boost where it's most needed and could prove suitable for equity market risk if the stimulus efforts prevent growth from falling below 4 %.
The unemployment rate headlined stronger overnight at 5.1% (expected 5.2%) and the market drove the Aussie higher. The initial assumption was that RBA would now hold back on easing during the next meeting on February 4 and expectations for a cut came off from 50% to 30%. However, at a closer look, the data is no cause for celebration. The entire employment gain came from the addition of low skilled part-time jobs.
With Yuan proxy risk-taking hold, there was a relatively deep dive lower overnight before some semblance of risk appetite returned as the market started to factor in China’s market sell-off overshoot.
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