This morning, markets opened to news that Coronavirus cases in China have nearly doubled since Thursday, continuing last week’s risk-off theme. Chinese stock markets also opened for the first time after the Lunar New Year’s holiday and since the scale of the viral threat was generally acknowledged. Not surprisingly, the Shanghai Shenzhen CSI 300 took a beating, giving up nearly 11%. Chinese oil demand has dropped by 20% as a consequence of tightening travel restrictions throughout the country, which has increased talks of a potential emergency OPEC meeting in mid-February. Brent crude reached July 2019 lows but that wasn’t the only sign of market stress. Metal commodities, classically associated with the Chinese domestic expansion, also dropped by daily exchange limits in anticipation of slowing Chinese construction. The storm continues but we still don’t know how long it will last.
Bottom Line: It is important to bear in mind that this morning’s sell-off was expected, since it was the first real opportunity for the market to price in the risk of this intensifying crisis. That said, last week we reported that the World Health Organisation complimented the Chinese government response, although today we’re seeing some negative articles as well. For instance, it is believed Chinese doctors who discovered the virus in early December were silenced which delayed the nations response. As you might expect, the market is ignoring economic data and focusing on news headlines associated with Coronavirus.
Sterling’s rally continued Friday, following a more hawkish than expected Bank of England on Thursday. The Pound eventually found resistance against the US Dollar around the 1.32 level and has pulled back to the 1.31 handle this morning. This is due to fears that the UK will take adopt a tough stance with the EU over a post-Brexit trade deal.
Sterling outperformed the Euro on Friday despite a gain for both currencies’ trade-weighted indexes, as markets eased bets on the BoE cutting interest rates next month. To start the week, Sterling has fallen over 0.5% from Friday’s highs, with the next level of support around the 1.1780 50-day moving average.
The currency pair rallied back towards the 1.11 level on Friday as subdued US inflation data, along with the continued spread of the Coronavirus, led to a broad sell-off for the Greenback. A repricing in the Fed Funds future, meaning that a US interest-rate cut could come sooner than expected, also contributed to Dollar weakness.