Asia Morning Session: Financial Markets Go Viral

The rotation into haven positioning, seen in the holiday-thinned Asian markets yesterday, gathered momentum overnight. Fears about the global impact on economic growth, due to the Wuhan virus outbreak, saw Europe follow Asia lower, with Wall Street having its biggest fall in three months. German Bund and US Treasury yields tumbled, oil continued its fall and US equities were stretchered off before half-time. Gold continued its grinding rally, although the $1600.00 mark remains elusive for now.

Mainland China is now closed until next Monday after officials extended the Chinese New Year break, as part of a concerted attempt to control the Wuhan virus spread. Hong Kong remains on its Chinese New Year break, but South Korea, Singapore and Australia have returned to work today. Early indications are that the welcome return of more liquidity to financial markets in the region, however, have had zero positive effect, with Asia remaining solidly in risk-off mode.

With global markets long to the gunnels on equities, base metals and energy for the buy everything global recovery trade to start 2020, the timing of the Wuhan virus, and its occurrence in China mark the worst of all worlds. How long and how deep the correction lower will last, depends both on the success of China’s efforts to control the viral spread, and the prevalence of its occurrence internationally.

Taking a step back, the underlying drivers of the buy everything trade has not disappeared. A global saving glut desperately looking for any sort of yield thanks to the world’s central banks cutting interest rates to the bone. Financial markets have demonstrated time and again over the past year, remarkably short memories when geopolitical events have upset the main narrative. I have little doubt the same shall occur at the first signs that China is making progress with controlling the Wuhan virus spread. It just won’t be this week.

The Federal Reserve FOMC begins its first meeting of the year today. The FOMC is unlikely to adjust the Fed Funds rate on Wednesday with both US data and US corporate earnings firing on all cylinders. The QE-lite programme at the short end of the curve – to prevent liquidy spikes in short-term rates – was probably at the top of their list for some adjustment. The Wuhan virus-induced rumblings through global financial markets have likely taken that off the table until the next meeting.

Equities

Wall Street had its worst day in 3-months overnight as Wuhan virus fears saw equities wilt in the face of a rush to liquid haven assets. US Treasury yields dropped aggressively even as Wall Street’s major indices also fell. The S&P 500 fell 1.57%, the Nasdaq fell 1.89%, and the Dow Jones fell 1.57%.

With much of Asia closed yesterday, major markets in the region have played catch-up to a sell-off that started yesterday in Asia. The Nikkei 225 has fallen again by 0.90%. The South Korean Kospi is down 2.80%, Singapore’s Straits Times by 2.10% and Australias All Ordinaries by 1.45%. China, Hong Kong and Taiwan are closed.

The picture is no better regionally, with Jakarta down 1.80%, Kuala Lumpur by 1.50%, New Zealand by 1.0% and Manilla by 0.50%.

Obviously, the entire Asia-Pacific region has a very high beta to China and thus, are in the front of the firing line of viral-induced growth concerns on the Mainland. That situation is likely to remain the status quo until we have a clear picture of China’s progress in controlling the Wuhan virus. One silver lining is that the region is well placed for an equally speedy recovery if positive news starts to emerge from the Mainland.

Currencies

It was currency trading 101 overnight with investors moving into haven currencies such as the Swiss Franc and the Japanese Yen, and of course, the mighty US Dollar. Notable losers are naturally enough, those currencies in Asia on the front line of the Wuhan virus outbreak.

Offshore Chinese Yuan continued its fall overnight, posting a weekly loss of 1.05% with USD/CNH climbing to 6.9810 this morning. The 7.0000 regions should provide some initial resistance, with authorities in Beijing unlikely to allow a panic rally in USD/CNH should it break.

The Korean Won has fallen 0.70% against the Dollar to 1179.20 this morning, reflecting its high beta to China. Elsewhere, USD/SGD has climbed to 1.3580. The USD/IDR has risen 0.35% to 13,645.00 and USD/THB has risen 0.20% to 30.7700 with the MYR and PHP also under pressure. The resource-heavy Australian Dollar has fallen to 0.6755 this morning, a two-month low.

Across the Asia-Pacific, the downward pressure on local currencies will continue until we see some good news emerging in the Wuhan virus fight. Regional Asian currencies in articular though had enjoyed a strong rally against the Dollar before the viral outbreak occurred. They are thus, well placed to weather the storm for some time to come.

Oil

Oil’s collapse started on Friday in New York and continued unabated in Asia yesterday as fears of the Wuhan virus’ effect on the global consumption, torpedoed a still heavily long market below the waterline. Brent crude ended the New York session 2.70% lower at $59.15 a barrel, and WTI fell 2.40% to $52.90 a barrel.

Oil in Asia has had a mixed session with Brent continuing its fall, drifting another 35 cents lower to $ 58.80 a barrel, In contrast, WTI has eked a small rise of 10 cents to $53.00 a barrel. WTI has benefitted from some short-term profit-taking spilling over from the New York session. The rally is unlikely to have many legs as global growth fears, in an oil market awash with product, rule.

Both Brent crude and WTI have now retraced entirely, their past year’s gains. The up by the stairs, down by the 25th-floor window price action, highlights both the role that sentiment played in oil’s rise and its fragility. An overwhelming amount of product is available in international markets. It is quite conceivable that the sell-off can continue, especially if the Wuhan virus makes inroads internationally or resists China’s attempts to control it.

OPEC and its allies have been mostly silent thus far, likely hoping the Wuhan crisis quickly passes. A drop in Brent crude below $55.00 though, will likely spur the grouping into action.

Gold

Gold continued to benefit from haven flows, grinding 0.60% higher to finish at $1581.00 an ounce, having tested $1586.00 in Asia. Gold is unchanged at $1581.00 today in Asia.

For gold bulls, the price action appears to be slightly concerning. The rally above $1580.00 has lacked momentum, with gold unable to make any gains even today, as much of Asia returns from holiday. Fears over the Wuhan virus have driven the rally, but it appears that investors much prefer the safety of high-grade government bonds to the yellow metal.

With that in mind, the $1600.00 an ounce region presents as a formidable obstacle to further top-side progress. In fact, and positive news from China could see gold vulnerable to a potentially aggressive correction lower. The $1550.00 region is the critical support level for gold in the near-term.

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