In China, a virus appeared
That seems to be worse than first feared
It’s spreading so quickly
That markets turned sickly
And stock market bulls got cashiered!
Some of you may remember the SARS virus from the winter of 2002-3, when a respiratory illness, emanating from Guangdong in China, spread quickly around the world resulting in some 800 odd deaths, but more importantly from the market’s perspective, created a very real risk-off environment. As an example, from January through March of 2003, the Dow Jones fell more than 16%, largely on fears that the virus would continue to spread and ultimately reduce economic activity worldwide. Fortunately, that was not the case, as those diagnosed with the virus were isolated and the spread of the disease ended. Naturally, risk was reignited and all was right with the world…until 2008.
I remind everyone of this history as this morning, there is another coronavirus that has been discovered in central China, this time Wuhan seems to be ground zero, and has begun to spread rapidly from human to human. In just a few weeks, more than 200 cases have been reported with several deaths. However, the big concern is that the Lunar New Year celebration begins on Saturday and this is the heaviest travel time of the year within China and for Chinese people around the world. And if your goal was to spread a virus, there is no better way to do so than by getting infected people on airplanes and sending them around the world! Of course, this is nobody’s goal, however it is a very real potential consequence of the confluence of the new virus and the Lunar New Year. The market has reacted just as expected, with risk aversion seen across markets (equities lower, bonds higher) and specific stocks reacting to anticipated direct effects. For example, every Asian airline stock has been aggressively sold lower, while manufacturers of things like latex gloves and face masks have rallied sharply.
Now, while none of this should be surprising, a quick look at market levels shows us that the current impact of this virus has been widespread, at least from a market perspective. For example, equity markets have suffered across the board, although Asia was worst hit (Nikkei -0.9%, Hang Seng -2.8%, Shanghai -1.4%, DAX -0.25%, CAC -0.85%, FTSE -1.0%). Treasury yields have fallen 2bps, although bund yields are actually higher by 0.5bps this morning on the back of stronger than expected ZEW survey data.
And in the currency market, the dollar is broadly, although not universally, higher. It can be no surprise that APAC currencies are under the most pressure given the risk-off causality, with KRW -0.75% and CNY -0.55%, its largest daily decline since last August. But we are also seeing weakness throughout LATAM with both BRL (-0.45%) and MXN (-0.35%) among the day’s worst performers.
In the G10 space, the results have been a bit more mixed, and actually seem more related to data than the general risk sentiment. For example, the pound is today’s big winner, +0.35% after UK Employment data was released with much better than expected results. While the Unemployment Rate remained unchanged at 3.8%, the 3M/3M Employment Change rose 208K, nearly double expectations and the first really good piece of data seen from the UK in two weeks (recall PMI data was a bit better than expected). This has resulted in some traders questioning whether the BOE will cut rates next week after all. Futures markets continue to price a 61% probability, although that is down from 70% on Friday.
Elsewhere, the euro reversed small early losses and now has small gains after the ZEW Expectations data (26.7 vs. 15.0 expected), while the yen has benefitted ever so slightly on two different fronts. First, the broad risk-off market flavor has helped keep the yen underpinned, but more importantly, the BOJ met last night, and although they left policy unchanged, as universally expected, there continues to be a growing belief that the next move there is going to be a tightening! This was reinforced by the BOJ raising its growth estimates for both 2019 (0.8%, up from 0.6%) and 2020 (0.9% up from 0.7%). Of course, offsetting that somewhat was the decline in the BOJ’s inflation forecast, down to 0.8% in 2020 from the previous expectation of 0.9%. In the end, it is difficult to get overly excited about the Japanese economy’s prospects, with a much greater likelihood of significant yen strength emanating from a more severe risk-off event.
Looking ahead to the week, not only is the Fed in its quiet period, but there is a very limited amount of US data set to be released.
|Wednesday||Existing Home Sales||5.43M|
Of course, there are two other events this week that may have a market impact, although my personal belief is that neither one will do so. This morning the US Senate takes up the Articles of Impeachment for President Trump that were finally proffered by the House of Representatives. And while the politicos in Washington and the talking heads on TV are all atwitter over this situation, financial markets have collectively yawned throughout the entire process. I see no reason for that stance to change at this point.
The other event is the World Economic Forum in Davos, the annual get together of the rich and famous, as well as those who want to be so, to pontificate on all things they deem important. However, it beggars belief that anything said from this conference is going to change any investment theories, let alone any fiscal or monetary policies. This too, from the market’s perspective, is unlikely to have any impact at all.
And that’s really it for today. Lacking catalysts, I anticipate a quiet session overall. Short term, the dollar still seems to have some life. But longer term, I continue to look for a slow decline as the effects of the Fed’s QE begin to be felt more keenly.