China virus spread rattles equity markets, oil
Global stock markets started the week under a lot of
pressure, as fears mount over the spread over China’s coronavirus
China has confirmed around 3,000 cases so far, with about
80 deaths. The authorities have extended the new year holiday by three days
through to Sunday in a bid to control the spread.
This has the potential to really rattle markets. And with
stock markets having been at or very near all-time highs before all this broke,
this is a perfect selling opportunity. The problem is for most investors
this is just not a risk event they are prepared for – a true black swan in the
making. If politics is hard to grasp for most buysiders then
virology is impossible – that is enough reason to see de-risking to
happen; although I would still anticipate dips to be bought. However the
conviction may be lacking amid what will be a persistent worsening of the
situation in terms of the number of the cases and the geography displayed
by the headlines. As warned last week, this is going to get a whole lot
worse before it turns. As with SARS though, I would expect a significant
rebound once the – or indeed before – the worst is over. It’s worth noting that
whilst the Hang Seng suffered heavy selling in the Jan-Apr period of 2003, the
index finished the year up by 34% (albeit that was after three horrible years). We just don’t know enough about this.
Japan’s Nikkei 225 dropped 2% but most of Asia is shut for
the holiday so trying to get a
really accurate view of how sentiment is
shifting is tricky – I’d think so would see some significant
(3-4%) moves in Shanghai and Hong Kong today if they were not
European equities have been relatively sanguine in the
sense that we’ve not seen a concerted move lower – Friday saw the major bourses
add 1% each – the DAX hit a record high in the middle of it all last week. But
I think as we start the week we
do see some more coordinated risk-off flows as the indications that this virus
has the potential to be a lot worse than SARS was in terms of the global economy. Looking at the futures, the FTSE 100 handed back all of
Friday’s rally and then some on Monday morning.
US markets had a tougher time – the S&P 500
suffered its worst week since August. But that’s only really because we’ve
had such a languorous grind higher over the last six months. A second
confirmed case in the US has spooked investors. Futures
indicate further selling today with SPX last at 3260. Earnings this week have
the potential to move the market – Apple, Tesla, Microsoft, Facebook and Amazon
all due to report this week.
The big risk right now for Europe and US equity
markets would be human-to-human cases within continental Europe/North America.
Without that happening the focus will be more on the risk to global growth
rates given the virus is hitting the drivers of global growth.
Oil extended losses sustained last week as traders
bet on slower China GDP growth and a hit to the global tourism industry – two
of the key drivers of crude demand. Crude oil WTI sank as low as $52.50 in
early trade Monday before paring losses to reclaim $53. We’ve seen further
unwinding in speculative net long positioning, with the latest COT
report indicating 520k net longs, vs 530k the week before. There’s a good chance we see $50 again, which is a level that
would likely spark a response from OPEC when they meet in March.
Havens are well bid with gold rallying north of $1480 and
the yen rallying past 109. US 10-year yields have sunk to 1.646%.
In FX, USDJPY has recovered to 109 having sunk as
low as 108.80, taking a look at the 100-day moving average. Safety flows
ought to keep JPY bid. 108.50, the 200-day SMA, is the key support. Bulls
looking to recover the gap and last Friday’s lows around 109.170.
EURUSD is still on the defensive at 1.1030. Next up
looks to be the key horizontal support at 1.0990, a level well-trodden in
recent months. Data is light today but
we do have the German Ifo survey at 9am GMT.
GBPUSD is holding around 1.3070 having come off from its highs
last week. All attention is on the Bank of England meeting on Thursday – it’s a
coin flip whether they cut or not, according to market pricing. However, my
inclination is that they will take this opportunity to ease.