26-Feb-2020

1) Wall Street Drop Continues On Virus Fears
2) Dollar Ends Broadly Lower As Rate Cut Expectations Rise
3) Is Pandemic Pandemonium Is Setting In?

1) Wall Street Drop Continues On Virus Fears

US indices slumped for a second straight day yesterday amid fears of an escalation of virus cases outside of China. US Treasury yields hit record lows on flight to safety. The US’ Centers for Disease Control and Prevention is preparing contingencies, even if President Donald Trump says the virus doesn’t post a threat. A report showed global trade contracted last year for the first time sine 2009.

The US30 index gave up a positive start to close lower again yesterday. Total losses over the last two weeks are now just under 10%, a level which technically would suggest a shift to a bear market

The index closed below the 200-day moving average at 27,285 for the first time since August 14

New home sales probably rose 3.5% m/m in January, according to the latest survey of economists, a turnaround from December’s 0.4% drop.

The Germany30 extended the recent decline to a fourth day yesterday as more companies warned that CoVid-19 would impact Q1 numbers

The index tested and closed below the 200-day average at 12,636 for the first time since August 23

Germany’s Q4 GDP growth was unchanged from preliminary estimates at 0% q/q and +0.3% y/y. There are no major data releases scheduled for today.

The China50 index fell for a second consecutive day yesterday, dropping to a more than two-week low

The 50% retracement of the February 3 to February 20 rally is at 13,239

A number of China provinces have started to reduce their virus alert levels as the number of new cases stabilizes and recovery rates improve. Jiangsu province is the latest one.

2) Dollar Ends Broadly Lower As Rate Cut Expectations Rise

The greenback pared intra-day gains and ended lower against majority of its peers on Tuesday as investors feared that the contagion of the coronavirus will impact global economy, which raised expectations that the Federal Reserve will cut its interest rate later this year.

Versus the Japanese yen, although dollar initially gained from 110.64 in Australia to 111.03 in Asian morning, the pair met renewed selling and dropped to 110.36 in Europe on falling U.S. Treasury yields as well as usd’s weakness before rebounding to 110.71 but only to tumble to session lows at 110.90 in New York afternoon on selloff in U.S. stocks.

Although the single currency gained from 1.0846 to 1.0867 in Asian morning and then moved sideways, price erased its gains and fell from 1.0866 in European morning to an intra-day low of 1.0831 on cross-selling in euro. However, the pair then rallied to session highs at 1.0890 in New York afternoon on usd’s broad-based weakness before easing.

The British pound found renewed buying at 1.2915 in Asian morning and gained to 1.2941 and despite retreating to 1.2928, cable then rallied to 1.2995 in European morning on cross-buying in sterling especially versus euro as well as usd’s weakness before weakening to 1.2952 ahead of New York open. Later, price rose to an intra-day high of 1.3018 in New York before moving sideways.

Reuters reported Britain wants the European Union to show the same respect for legal autonomy it afforded countries such as Canada and Japan when signing trade deals with them, Prime Minister Boris Johnson’s office said on Tuesday.    Johnson’s office said Britain was determined to protect its legal autonomy in talks with the EU to agree a future relationship, which are due to begin next week. The EU agreed its negotiating mandate on Tuesday, and  is seeking to impose onerous commitments on Britain that other neighbouring trade partners have not sought to apply to each other, Prime Minister Boris Johnson’s spokesman said on Tuesday.    The spokesman also said the EU had dropped a deadline to conclude assessments on equivalence for financial services by the end of June this year which was in the political declaration agreed between Johnson and the bloc last year. He said that suggested the agreement could be changed.

In other news, Reuters reported ECB policymaker Francois Villeroy de Galhau said on Tuesday that there was currently no need for more monetary policy action in the face of the coronavirus outbreak.    Speaking at a sustainable finance conference in Paris, Villeroy said the outbreak would have “negative but temporary consequences” on the economy.     “It is mainly a negative supply-side shock, and this has as a consequence that we shouldn’t overstate the adequacy of a monetary policy response,” Villeroy, who is also governor of the Bank of France, said.    He added that the French central bank was likely next month to revise slightly downward its forecast of 1.1% for French economic growth in 2020.

3) Is Pandemic Pandemonium Is Setting In?

Risk-off extended further overnight. S&P500 down a further 2½% heading into the close. Selling intensified in the afternoon after the US Centers for Disease Control and Prevention indicated they expect a sustained spread of COVID-19 in the US and advised communities to prepare: “it’s more a question of when.”

Fixed income rallied again, as the preferred hedge of choice with US 10Y yields slipping a further 5bps to 1.33%; 30yrs set a fresh record low of 1.8%. Oil down an additional 2.8%, gold lower into the close. GOLD LOWER?? Say what ??  Are the gold markets selling to cover more equity margin calls?

To suggest the market is a tad skittish over the coronavirus becoming a pandemic could very well be the understatement of the century with the virus morphing into the market’s biggest macro worry of the decade.

Given the lack of testing facilities, “As of Monday, only five US states – California, Illinois, Nebraska, Nevada, and Tennessee – can test for the virus, according to the Association of Public Health Laboratories (APHL).” ( Reuters ) it’s feared that there are far more cases than what is currently reported.

And since the containment strategy in the US is thought to be more penetrable owing to looser enforcement, and greater reliance on voluntary cooperation suggests a clustered super spreader virus crisis could accelerate exponentially.

Every few minutes, I see another travel ban headline while corporations and government agencies are stepping up efforts to stop travel to infected or suspected countries. Supply chain disruptions are coming, and if we were struggling to determine which particular straw broke the market’s back, its the susceptibility of the US market to this insidious virus that needs to rank beyond all other. And you can’t unscramble this egg. And without question, it seems to be the bearer of the truth.

The global habitat, let alone the market is ill-prepared to deal with an epidemic of these proportions as the porous containment strategies outside China could lead to an exponential flurry in new cases reported. God helps us if, as suggested by some medical experts, 40-70% of the world’s population becomes infected over the next 12 months.

Wasn’t this supposed to be over by now??

And only a week ago, it would still have been considered scaremongering to talk of a COVID-19 in pandemic terms. But now the markets must deal with the harsh reality that the COVID-19’s global footprint is likely to grow.

Renewed concerns about the depth and duration of the coronavirus impact on global growth were triggered by Apple’s lower revenue guidance and exacerbated by US PMI data. But the outbreak of cases in the US has seen risk pricing jump to December 2018 levels.

So far, the market sell-off has been reasonably well controlled in US markets. Still, the SPX is now nearly 8% below its 19-Feb intraday high, and the VIX breached 30.

Cross-asset moves were also plentiful with the US 10-year below 1.4% for the first time since July 2016, rates markets pricing 2.5 cuts over the next year, but gold is lower?