Authored by Michael Every via Rabobank,
As the death toll rises to 81 from just 2 one week ago it is clear that China’s efforts to contain the spread of the deadly coronavirus are failing to slow its spread. According to the country’s National Health Commission there are 2,744 confirmed cases on the mainland and more than 30,000 people are under observation.
As the human cost continues to rise, investors have become increasingly concerned about the potential economic consequences of the disease.
Markets are closed in several Asian countries to mark the start of the new Lunar year and Australia is also on holiday in respect of National day. Even so, bourses that were open have pushed significantly lower. The Nikkei 225 has closed down 2% this morning and prices of copper, iron ore and oil have slumped as investors anticipate supply chain disruptions across several industries and a broad slowdown in economic activity.
Echoing these fears Singapore’s trade minster Sing has commented that “we certainly expect there to be an impact on our economy”.
By contrast, Saudi Energy Minister has taken a more upbeat view commenting that the “extreme pessimism” that is impacting market confidence also occurred in 2003 as a result of the SARS crisis “though it did not cause a significant reduction in oil demand”.
The safe havens JPY and CHF are the best performing G10 currencies today. Losses in the FX space have been led by the South African rand and followed by the commodity currencies – the Russian ruble and the Mexican peso have dropped as oil plunged to a new year-to-date low. USD/RUB has cleared an important technical pivot around 62.20. The squeeze has the potential to extend towards the December 23 top at 63.1057 next. Hedge funds are facing the risk of a painful squeeze in USD/MXN if risk aversion continues to rise. According to the CFTC data, leveraged funds have amassed a record high long bets on the peso due to its attractive status of a carry trade currency. A break above the resistance area of 18.90-19.00 may catch many carry trade players short.
Confidence in the Italian markets has been boosted by the outcome of a regional election showing a strong result for the centre-left Democratic party. The result, which was a boost for PM Conte, was to the detriment of Salvini’s far-right League and its chances of toppling the government. Salvini had threatened to send an eviction notice to the government if his far-right coalition had prevailed on Sunday.
Week ahead
Sentiment this week will be heavily coloured by the spread and the impact of China’s coronavirus.
That said, it is a big week for earnings and these will be gleaned for insights into the relative strength of the US economy ahead...