What a January so far, volatility with a capital ‘V’ is back with a vengeance. We have had the US killing General Soleimani and Iran retaliation, Iran downing an Ukranian plane, Trump impeachment trial song goes on, Russian Prime Minister resigned, Philippines volcano eruption, Turkey earthquake, Kenya locusts, Australian fires and now a new strand of coronavirus. However one wants to spin this, the world is currently a potent cocktail mix. This is the 2020 version of the ‘Wild Wild West’, so hang on folks!
Markets went on a roiled funk last Friday on developing news of the rapid spread of the coronavirus as the death count rose. The world’s fear gauge, the VIX was at highs of 17.95. On Monday, all US stock indexes closed in negative territory. US government bonds yields dropped to 1.605 percent on Monday, its lowest level since October 9th on growing demand for safe-haven assets. De-risking is the theme of the game at the moment, with the haven assets and USD being on the ascendant. During the SARS epidemic, the S&P 500 Index fell 15 percent, before rising 25 percent until July when the WHO said the virus had been contained. The longer the party, the bigger the crash. Simple.
As part of efforts to contain the coronavirus outbreak, the Chinese government locked down at least 16 cities. The outbreak has reportedly infected more than 2,700 people and resulted in 80 deaths so far. Like SARS, the virus might lead to a significant, albeit transitory, shock to China’s economy, with transportation to and from certain regions now halted, tourism and retail sales taking a hard hit especially during the ongoing Lunar New Year. China’s GDP growth could be dragged 0.2 percentage points lower in quarter two of this year depending on the scale of the outbreak.
As of Monday this week, it was a sea of red with price gaps in most asset classes. Stand out beneficiaries for the risk off rally were gold (naturally), the Japanese Yen crosses and the mighty King Kong US dollar! The dollar, the winner of the beauty contest is the out-performer and just illustrates in an impressive manner who is the ultimate safe haven in the 5 trillion dollars per day forex universe! Going short the dollar is like scratching poison ivy, it feels good for a second but otherwise it is regrettable. Dollar bears will end in tears.
Adding fuel to the risk-off fire was the civil war situation in Libya that led to a blockade of crude oil exports. The Euro lost most of its recent upward enthusiasm by falling to a six-week low as the virus outbreak fueled risk aversion. Also breaking the camel’s back is the European Central Bank, in a lackluster fashion, signaling it will keep negative interest rates in place for some time.
Most Asian Pacific assets were losing ground against the greenback especially those countries with direct impact to the virus contagion. The Singaporean, Australian and New Zealand Dollars all took a hit against the US Dollar. Take for example Thailand, why would one short the Thai Baht? Well, because Thailand is in the firing line for a big hit to growth as tourism slows due to the coronavirus contagion. Thailand had almost 40 million tourists in 2019. The Chinese Yuan is likely to be on the back foot in the next few days to weeks as the news is likely to get worse before it gets better. China’s onshore markets remain closed for the Lunar New Year holidays. We at Mansa-X are short the CNY, looking for a target of 7.000 often referred to as the line in the sand and a further 500 pips above that line.
Brent crude oil which is already down 17 percent since January 6th, slumped over 2 percent to a seven-week low on speculation that China’s virus outbreak may dent demand amid signs of excess supply in the market. Mirroring the declines was copper, an industrial metal vital to construction and Chinese economic growth.
The Federal Reserve kept its monetary policy unchanged on Wednesday with Fed Chairman, Jerome Powell retaining his cautiously upbeat tone, given the positive conclusion to the US-China phase one trade pact. The market is currently pricing in a little bit more than one full 25 basis point rate cut for 2020. Across the Atlantic, there is speculation the Bank of England may cut interest rates on Thursday. As of writing the British Pound has been down for five straight market sessions against the USD. Year-to-date the Pound is down 1.76% against the greenback. As we wait for Britain to exit the European Union today, hopefully without another extension to a deadline that was not a deadline but should have been the deadline, the EU is acting ambiguous in an ambiguous situation, with a grey cloud lingering.
On something exotic, Apple’s market cap moves above $1.4 trillion for the first time. Hong Kong’s Hang Seng Index is down more than 6% from its high before the coronavirus started to spread! Kawamoto Corporation, a Japanese manufacturer of face masks, is now up 386% in recent weeks, all to the coronavirus. Whatever you are mining this weekend, have your face mask on!