Revised market open
China Hubei Coronavirus update Feb 12th: 14,840 additional cases (under revised standards) v 1,638 prior; Daily death toll 242 v 94 prior
Revised standards have started to include cases diagnosed under new method - Notes it started involving cases diagnosed with the new process among confirmed cases from Thursday (Feb 13th) -
This certainly doesn't sound good, and if I'm reading this headline correctly as on the first glean, there could be a severe case under-reporting going on.
Stay calm and buy the dip?
The Hubei Coronavirus update headline has initially hit like a ton of bricks given this is one of the market's biggest fears.
So, traders have jumped into sell first, ask questions later mode. But is it time to stay calm and buy the dip?
The headline on the sharp jump in Covvid-19 cases looks gnarly on the surface. Still, it is essential to note that in Hubei, the epicenter of the outbreak, there has been a severe shortage of testing kits reported over the past few weeks. Many people who had symptoms (and even positive affirmation of things like pneumonia) were unable to be confirmed as virus carriers due to the testing kit shortage, and some were sent home to self-quarantine. The government made a push this weekend to clear the backlog of tests, and this big jump in confirmed cases could be a result of this.
And while there could be a knock-on effect where the Rest of China has been under-reporting. Still, I don't think its a threat to the virus cluster beyond Hubei at this stage as other countries are certainly adhering to strict reporting protocol, and the cluster effect outside of China is receding.
On a more market-friendly note, the PBoC will continue to intervene perhaps now even more aggressively either with RRR or deeper interest rate cuts.
But Asia market rather than a global market and of course, demand sensitive to China commodities like Oil will be more re prone to the sell-off. Still, for ASEAN currency risk, its unlikely to weaken off to significantly as Yuan is doubtful to weaken through 7.0 USDCNH given the PBoC policy backstop.
Ho-hum, another day, another stock market high water mark...US markets close at record highs as coronavirus fear ebb.
US equities posted another day of gains Wednesday; S&P500 up 0.5% heading into the close, US 10-year treasury yields rising 3bps to 1.63% and the 2s5s curve – which inverted earlier in the week – has turned positive again. Asia equity futures are trading in the green pre cash market open with the China proxies looking to open up well, while oil lifted 2.6%.
Investors' sentiment was boosted by the fact that China reported the lowest number of new virus cases since the end of January, while a senior medical adviser suggested the outbreak could be over by April.
Central bankers continue to remind us that it’s too early to gauge the economic impact from the virus fully; the RBNZ and Riksbank are the latest to acknowledge downside risks. Still, the market looks increasingly willing to look through virus headlines. And with the market flush with cash to provide the juice, and given the negative data impact is so well flagged, in no small degree the growth downgrades have become somewhat irrelevant.
With risk positive momentum building and stocks and commodities both singing from the same song sheet, it appears the markets are finally letting go of the coronavirus fears.
Although "The Street" is downgrading growth forecasts, for now the market has decided enough is enough. The source of funds for the latest asset price move is the PBoC’s policy bazooka bolstering Asia sentiment and the Fed's repo remedies which have left banks awash with cash.
The coronavirus impact is probably just a near term demand shock that has been mitigated by central bank liquidity. Still, given that stocks are purely a momentum story at the moment, investors have little choice but to get on board or risk getting left at the station.
The S&P 500 3400 level sure sounds like a beautiful Valentine's day gift, especially if you own equities.
Oil is up as OPEC awaits an official response from Russia regarding proposed production cuts. This is despite a hefty inventory build reported by the EIA.
Oil markets posted the most significant daily gain in six-week after reports of coronavirus cases in mainland China appear to be leveling off, according to the latest data from the Johns Hopkins Centre For Systems Science and Engineering.
So, despite the sizeable inventory swell, the EIA report fell through the cracks given the mounting evidence the coronavirus transmission is slowing. At the same time, oil demand sentiment is getting further boosted by stories that Foxconn hopes to resume 50% of its production in China by the end of the month and be at 80% capacity by the end of March.
But, not wanting to sound like a killjoy, the markets have a sizeable glut to deal with, and the EIA report did little to alleviate those oversupplied concerns, bringing market attention full circle back to the elephant in the room: Russia agreeing to the JTC production compliance.
But Russia may find it easier to stomach temporary production cuts given relief is just around the corner. And their market share won't necessarily be compromised by US production, which would also be less willing to absorb the start-up cost to ramp up production immediately, which could be hugely bullish for oil markets
But clearly the big story for prompt oil concerns is that coronavirus fears are lifting as the virus transmission eases, which should send more shorts running for cover, while those shorts that remain at the risk-on party won't be dancing too far from the exits as Chinese demand could return with a vengeance.
Gold demand was tempered by the strong US dollar and rising risk appetite and, while the underlying support remains there, the upside looks limited over the near term.
Gold has been range-bound of late but supported, given the headwinds it faces. Two factors continue to offer support. One is that global monetary policy remains soft and interest rates are low. The other is that geopolitical risks beyond the coronavirus are bullish. But, with ETFs, and Comex net long positions high and, if anything, a little bit stretched, when flagged against a firm USD, stock market gains and the bounce higher in US bond yields, it suggests fast money traders who have been driving the bulk of action these days would probably be more inclined to trade gold from the short side limiting gains.
Chair Powell's comments to Congress were bullish for gold longer-term but neutral in the immediate to short term. Without an immediate dovish Fed impulse, there’s limited upside for gold currently, but the US election cycle risk should support it. The race now moves to Nevada with a caucus on 22 February with an essential debate before that on 19 February. But it’s still unclear if Michael Bloomberg, who would pose a real threat to Trump, will meet the polling criteria to make it to the debate stage.
The PBoC continues to stabilize the markets and has limited RMB weakness via fixing USD/CNY lower than the market's expectation while introducing various countercyclical measures to encourage portfolio inflows. As the market gradually pivots out of the virus haze and begins to see some light at the end of the tunnel – coupled with the mainland macro measures designed to ramp up production – Asia FX traders could start to front-run the China rebound trade more aggressively.
According to Deutsche Bank MTD, net equity inflows are at ~$2bn, slightly more than in January and well above the 2019 average, while bond flows in January showed ~ $2.1bn of inflows.
So, if the PBoC continues to limit RMB weakness, and with the bond market rallying, portfolio inflows should continue to remain active, especially given the ongoing bond index inclusion, such as to the GBI-EM which will include China, starting from the 28 February. Hence the healthy Hedge Fund appetite for all things RMB.
While the Ringgit weakened on the worse than expected GDP print, which then brought forward a rate cut prediction, improving regional risk sentiment as coronavirus cases in mainland China appear to be leveling off and rising oil prices should provide some immediate support for the Ringgit.
The Tourism basket
While the Thai Bhat has recovered from the peak coronavirus fear levels, the Singapore dollar continues to struggle for traction. But unlike regional currencies like the MYR that should benefit from the local rebound trade on the back of China pent up production demand coming back online, there’s been a sizable chunk of tourism revenue in Thailand that has been lost and can't be replaced. So, any further gains in the THB might not be so immediately forthcoming, given that it's impossible to make up that lost revenue. Still, the Thai market is in a much better place than it was only 48 hours ago.
Secondary virus cluster fears continue to weigh on Singapore, so traders remain very defensive knowing the MAS could eventually cut interest rates to support the flagging Singapore economy.
The Japanese Yen
The main G10 flow over the past 24 hours has been USDJPY, with the pair back above the 110 handles as risk continues to trade well supported. And with risk sentiment well supported as virus fears turn benign, it seems pointless to fight it. While +110 has proven a tricky level to go long recently, gains could be a bit of a grind today unless the stock market momentum takes a run at the S&P 500 3400 levels.
In EURUSD, the constant supply over the past 24 hours is taking its toll. The pair is trading below Tuesday's lows, but still holding just below the October lows – at least for now. And with the Euro as the go-to currency trade funder via EM FX kicking in, offers will likely remain thick over the near term. The markets are at a critical level, so the next move could be key.
More positive signs for the Loonie is that more topside strikes north of 1.3500 are getting offered through the brokers as the spot price weakens, given the recovery in oil prices.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support