Markets catch a cold

As expected, price action has failed to take notice of the BoJ’s decision to keep its short-term policy rate unchanged at -0.10%, despite the upwards revision of BoJ’s 2020 and 2021 real GDP growth forecasts. Instead, fears of an extended outbreak of a new strain of Coronavirus in Asia has been driving moderate risk-off behaviour across the board, especially with markets walking into Chinese New Year at the end of the week, a period well-known for increased cross-border travel.

While it’s not yet clear whether the virus is a public health emergency of international magnitude, the fact that cases have been reported as far as Thailand, Japan and South Korea could be some cause for concern. A broad equities sell-off which saw ASX fall as much as 0.55% before settling for a -0.19% finish points FTSE towards a weak start, with futures suggesting a fall in the vicinity of 40pts. DAX also expects to topple at the open to the tune of around 78pts.

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Should the Coronavirus in some way, shape or form reproduce the severity of the crippling SARs outbreak seen during 2003, the souring of risk sentiment might not be as temporary as most probably think. Perhaps, we could see it extend for some time as the economic ramifications become clearer.

FX homes in on USD safety

In the midst of the outbreak and arguably sluggish IMF forecasts, FX markets reasonably flocked to USD safety as activity in FX picks up following the return of US traders from yesterday’s MLK holiday. But overall, trading conditions still remain incredibly subdued with volatility unable to materially pick up from historically low levels.

Emerging markets appeared most sensitive to the move, all falling against the Dollar. USDKRW stood up 0.77% despite less negative than expected trade data. Pessimism washed over USDCNH with Offshore Yuan falling ~0.5% to brush 6.9, halting a decent portion of momentum seen after the signing of Phase One. USDJPY, long considered a safe-haven asset, nudged back into 110 having enjoyed the last couple of days above that level.

Cable on its own path

For GBPUSD Sterling, it barely took any notice and for good reason, given more pressing matters are to be worked through in the BoE and its highly contentious Jan. 30 MPC decision. The pair continues to play tug-of-war with the 55d-MA as markets look to assess several key data points upcoming.

One of two major releases that consolidates BoE thinking will be tonight’s release (9.30am GMT) of ILO Unemployment data which captures Nov. unemployment (exp. 3.8%), employment (110k) and average weekly earnings (3.1%). While it’s likely to make waves and adjust market pricing that currently suggests a 63% chance the MPC cut next week, it’s unlikely to surpass the significance of Friday’s UK PMIs forward-looking nature.

Therefore, price action away from 1.3, off the back of the UK unemployment print will be subject to change should UK PMIs charge to a surprising finish.

In EURUSD space, trading appears tentative as markets await the ECB’s upcoming Strategic Review on Thursday and important German PMIs on Friday. Both offer a glimpse into the ECB’s scope going forward, and whether Europe’s manufacturing malaise has bottomed. As a result, ZEW Economic Sentiment demands less focus, despite having just turned positive for the first time since April 2019. EURUSD likely maintains range-bound price action given bigger fish to fry.

How sick can Europe get from Coronavirus?

With airports on red alert looking for the virus on passengers flying in and out of regions, it begs the question: how much economic damage can be caused if Coronavirus develops into a SARS-like pandemic.

Immediately, European airlines and airports stand to bear the brunt of the consequences that result from arguably less consumer demand to fly, use airports or travel outside of one’s home country. In particular, airlines and airports that make a significant portion of revenues from cross-continental travel between Europe and Asia are likely to experience a bigger sell-off given higher risk premiums.

Optically then, International Consolidated Airlines Group (ICAG), owner of international airlines British Airways, appears to be more sensitive than the likes of regional airlines in Ryanair (RYA) and Easyjet (EZJ). Air-France KLM (AIRF), Deutsche Lufthansa (LHAG) and Aeroport De Paris (ADP) could also be a victim of lower risk sentiment among exposed stocks. Sydney Airport (SYD), Australia’s premier airport, shaved 3% in Asia trading.


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