21-Feb-2020

1) Asia Finishes The Week With Sniffles
2) The USD Continued Its Grind Higher Overnight
3) Brent Crude And WTI Recorded Modest Gains
4) More Pressure For The Aussie On Risk Aversion

1) Asia Finishes The Week With Sniffles

Wall Street showed the first glimpses of grudging acknowledgement that the coronavirus outbreak could see global growth lower for longer overnight. Stock markets retreated, US Treasury yields edged lower on haven flows, and the US dollar consolidated its gains. That sentiment appears to be flowing into Asian markets today, although it is more a case of the sniffles, rather than a full-blown cold.

Wall Street’s retreat probably has as much to do with position lightening after an impressive rebound over the past week, then a disinfecting of the V-shaped recovery prognosis. Although the rate of new infections in China has slowed overnight, thanks in part to their new counting methodology, regional markets have been spooked by a spike in new infections in South Korea, and more cases in Japan.

That is likely to see Asia trade cautiously lower into the week’s end with the data calendar relatively light internationally today. We have a procession of PMI’s from across Europe and the US Flash PMI’s for February to come, but its relevance is limited. What will matter are the February data releases due in early March. Only then, will the world gain an accurate picture of just how much impact the China coronavirus has had on our intertwined world.

Japan may have given us a foretaste of things to come this morning though, with the release of its February Flash Manufacturing and Services PMI’s. Flash Manufacturing sank to 47.6 from 49.0 previously, and Flash Services PMI fell to 46.7 from 51.0 prior. Manufacturing declined more modestly than services, highlighting the insidious infection that the coronavirus causes. That is that consumers stop consuming and stay at home. Everyday activity, such as simply going out for dinner, or to the cinema comes to a grinding halt.

If the coronavirus emergency loiters through all Q1 and part of Q2, the steady procession of companies globally announcing material impacts on either their revenues, or supply chains, could turn into a flood. That will inevitably be good news for the US Dollar and US bonds and gold, especially if it triggers another wave of easing from Asia’s central banks. However, equities markets may well find themselves having flown too close to the sun. That savings glut I often talk about, could just as quickly retreat into cash and bonds to wait out the storm for a while.

As the data for February rolls in over early March, the saying that “sell in May and go away,” could become, “long in March, your portfolio will get parched.”

2) The USD Continued Its Grind Higher Overnight

The US Dollar continued its grind higher overnight, albeit at a much-reduced pace than the frenzy of the day before. The Dollar Index futures (DXY) is within a hairsbreadth of the 100.0 level, a three-year high. With robust economic data, high developed market yields and a bond market that is the haven of choice, the Dollar strength is set to continue.

USD/JPY was a notable gainer, rising another 50 points overnight to 112.00 as the increasing number of coronavirus cases in Japan, wilts the Yen’s appeal as a haven. USD/JPY has interim resistance at 112.40, with a break thereof, opening further gains to 114.00 regions.

The antipodeans, with their high beta to China, remained anchored at the bottom of their ranges overnight following Wednesday’s sell-off. The AUD/USD is at 0.6600, an 11-year low, as forex markets remain nervous about its resource-heavy economies exposure to a material China slowdown. A weekly close under 0.6600 will imply that a medium-term move to 0.6200 is possible. NZD/USD remains at the bottom of its range at 0.6315. The picture is slightly more positive here, with a weekly double bottom at 0.6200 providing strong technical support, for now.

Having climbed to 1.4090 yesterday, the USD/SGD has retreated to 1.4000 as some calm has returned to the market. That leaves it squarely mid-range having started the week at 1.3900. The SGD has likely weathered the worst of the storm for now. Further losses, particularly through 1.4100, will require another bout of US Dollar strength and Chinese Yuan weakness.

3) Brent Crude And WTI Recorded Modest Gains

Both Brent crude and WTI recorded modest gains overnight after a lower than expected growth in official US Crude Inventories lent support. That allowed oil to shake off the malaise from the equity market, that wiped out their earlier rallies. If Wall Street is finally getting nervous about coronavirus, though, it may be a temporary reprieve.

Brent crude was flat at $59.25 a barrel having tested the critical $60.00 a barrel level earlier in the day. WTI climbed to $54.50 a barrel during the US session before retreating, but still eked out a 0.35% gain to finish at $53.70 a barrel.

Both contracts have edged 0.10% lower in restrained Asian trading, likely awaiting more direction from North America later this evening. Both contracts are within shouting distance of significant resistance levels at $60.00 and $55.00 a barrel respectively. Although I can countenance that a break of one or either, could see stop-loss and algorithmic buying hit the market, maintaining gains above those levels will be challenging against the coronavirus backdrop. Oil’s correction higher has come a long way, and those regions could be a bridge too far.

4) More Pressure For The Aussie On Risk Aversion

The Commonwealth Bank services PMI for February fell sharply to 48.4 from 50.6 last month. Expectations were for an improvement to 52.4 but instead the index fell to the lowest level since the index started in 2018. A combination of subdued client demand, adverse weather and the CoVid-19 outbreak contributed to the lower reading.

AUD/USD felt more pressure this morning, posting incremental losses on yesterday’s drop and reaching fresh 11-year lows. The FX pair is at 0.6604 and is poised for its fourth daily loss in a row, with the March 2009 low at 0.6285.

The shift in sentiment that occurred overnight has continued into today’s morning session in Asia. US indices are down between 0.20% and 0.32%, with the NAS100 index under-performing. The two indices in positive territory are the China50 index, which is up 0.75% and the HongKong33 index which is up 0.21%.

A spike in the number of new cases reported in South Korea was behind the turnaround in sentiment, with 52 new cases reported. South Korea is now second in the league behind China for the total number of CoVid-19 cases. The global total stands at 76,497 at 11.30am Singapore time, with deaths at 2,247.

South Korean President Moon said an economic package including financial, tax and budget steps by the end of February. The Health Ministry has maintained its current alert status and has said it has no plans to expand its entry ban on visitors from China. Japanese press has reported that Tokyo has cancelled or postponed major indoor events for the next three weeks.