Asia Morning: Asia Smells A Rat

With Chinese New Year starting tomorrow, bringing in the year of the rat, Asia clearly smells one with regional markets ignoring a positive overnight session on Wall Street and marking equities sharply lower today. The coronavirus outbreak in China is obviously the culprit. The fall-out of SARS in 2003 remains at the top of Asian investors’ minds.

News that China has effectively quarantined the entire city of Wuhan – a city of 11 million people and the source of the outbreak – has rattled markets regionally. The timing has been imperfect, to say the least, with hundreds of millions of people moving around China and Asia as a whole, returning home for Chinese New Year. Perfect conditions for a viral spread.

China, however, must be applauded for their proactive approach to controlling the coronavirus spread. China has been open in disseminating its nature, severity and spread. We have come a long way from SARS in 2003. The move lower in Asian markets, therefore, looks more precautionary than panic-driven.

China will be closed tomorrow until the 30th of January. Hong Kong is closed for three days next week, and almost all of Asia will be taking some days off or closed entirely such as Vietnam for Tet. Today then represents the last day for investors to rejig their portfolios properly ahead of all the market holidays.

It is thus, quite understandable that some money would be taken off the table until the true extent of the coronavirus issue becomes obvious. No one ever went broke taking a profit. The word, therefore, is don’t panic.

Australia has produced a mixed bag of employment data this morning. Headline Employment Change outperformed, rising by 28,900 jobs. That flattered the real story though, with full-time employment falling by -0.30% and part-time jobs increased by a massive 29,200 jobs. Australian employers are clearly hedging their bets and are reluctant to commit to full-time hiring’s, suggesting that the domestic non-resource economy remains as soft as ever.

The Philippines, in contrast, saw their GDP Growth Rates outperform. GDP for Q4 MoM climbed 2.20%, and the YoY Q4 rose 6.40%, giving further evidence that South East Asia is quietly recovering from the fall-out of the US-China trade war. Assuming China’s coronavirus outbreak does not escalate, South East Asia looks well placed to enjoy a positive Q1 following the underperformance of 2019.

Singapore releases inflation data at 1300 SGT for December. It is expected to remain stubbornly low at 0.60% YoY, coming as it does before the US and China trade deal sign-off. We expect Singapore inflation to remain persistently low even as growth accelerates in Q1, which is not necessarily a bad thing.

Following Malaysia’s surprise rate cut by 25 bps yesterday, Indonesia announces its latest rate decision this afternoon at 1530 SGT. Bank Negara yesterday, decreased rates pre-emptively to give the domestic recovery a little hurry along. Bank Indonesia may well be tempted to take the same approach and shave of 25 bps to 4.75%, as domestic demand remains sluggish and growth stubbornly is stuck at 5.0%. Both the Rupiah and Ringgit have rallied strongly over the past two months, giving central banks room to ease, a situation reflected right across emerging Asia.

The European Central Bank (ECB) announces its policy decision his evening at 2045 SGT. Rates will remain unchanged at 0.0 % with the quantitative easing programme stable. I find it hard to be bullish about the Eurozone when Greece and Italy can issue government bonds at lower rates than the US Government.

Equities

Wall Street enjoyed a mildly positive day, led by technology stocks. The S&P 500 rose 0.03%, the Nasdaq rose 0.14%, and the Dow Jones rose 0.03% also. US earnings season is in full swing, and the results have been mostly positive. US stocks though, do appear to be running on empty at these heady heights in the short-term with some sort of correction well overdue. A few surprise downside misses might be just the tonic.

Asia is an ocean of red today as the region locks in profits ahead of the extended Chinese New Year break. With the evolving situation regarding coronavirus in China, investors are erring to the side of caution and lightening portfolios, rather than risking increased downside volatility while on holiday. Reiterating, the moves lower today look more precautionary than panic.

The Nikkei 225 is down 0.70% and the South Korean Kospi by 0.90%. Singapore’s Straits Times is flat along with Jakarta with Malaysia slightly lower by 0.20%.

Mainland China and Hong Kong are where the action is today, though. The Shanghai Composite is down 1.25%, and the CSI 300 is down by 1.15%. Hong Kong’s Hang Seng is lower by 1.15% while Taiwan, surprisingly, is higher by 0.25%, perhaps boosted by tech’s outperformance on Wall Street overnight. Understandably, coronavirus fears have weighed on Greater China exchanges more, but it is also important to note that they will also have the most extended breaks next week. Investors, therefore, will need to manage portfolios more proactively.

Currencies

Currency markets were quiet overnight, although the US dollar rose 0.50% against the Canadian Dollar after the Bank of Canada’s dovish unchanged rate decision. Sterling powered through 1.3100 to 1.3150 on the tailwinds of positive data from earlier in the week. Sterling though will struggle to maintain gains above 1.3200 ahead of trade talks with the EU commencing shortly.

In Asia, USD/JPY has fallen to 109.60 as the Yen continues to benefit from safe-haven inflows ahead of Chinese New Year. USD/CNH rose to 6.9150 ahead of the extended break in China. However, weakness in either off-shore or on-shore Yuan is likely to be met by a Great Wall of China, in the shape of the PBOC.

Regional Asian currencies have so far refused to buckle in any meaningful way against the Dollar on coronavirus fears. In all likelihood, markets will need to see a much wider spread of the viral outbreak, to crack the underlying enthusiasm for the South East Asia recovery story.

Oil

The long-awaited flushing of stale long positioning from the oil pipeline began in earnest last night. Both Brent crude and WTI suffering heavy losses, as nerves over the implications on the consumption of the China viral outbreak, broke the will of a very long oil market. Long positioning packed the emergency exits with Brent recording a 2.80% drop through support at $63.50 a barrel to $56.30 a barrel. Meanwhile, WTI fell through support at $57.50 a barrel, on its way to recording a daily loss of 3.50% at $56.50 a barrel.

The rout has continued in Asia with Brent crude lower by 0.65% to $62.40 a barrel, and WTI is falling 0.90% to $55.80 a barrel.

The China virus impacts aside, the ball now moves to OPEC+’s court. From here, they will have to decide whether to hold their nerves; hoping this is a short-term clean-out of the long speculators and temporary nerves in Asia. Or whether it is a sign that the world has ample supplies of oil, that even an economic recovery will not be able to suck up.

Gold

Gold rose five dollars to $1462.00 an ounce overnight, supported by haven flows. It has though, given back all those gains in Asia, trading at $1557.00 an ounce.

The lack of buying in gold is another indicator that Asia’s equity sell-off, is more precaution than panic, ahead of the Chinese New Year break. If regional investors were seriously concerned about coronavirus, we would have expected gold to be higher and not lower today.

Gold has support at $1550.00 an ounce which held again overnight. It has resistance at $1564.00 an ounce. Of the two levels, the downside appears to be more vulnerable, which much stale long positioning in the market following the short-lived US-Iran crisis.

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