The Chinese coronavirus remains the dominant market theme: it’s spreading at an accelerating pace, the death toll rises and authorities are stepping up measures to contain it. Risk aversion is the obvious outcome in absence of other market drivers. Slightly complicating matters is the lack of guidance from Chinese markets, who remain closed for the rest of the week for (extended) Lunar New Year holidays.

Asian stock markets lost around 2% with the malaise spreading to Europe. Main indices trade with even steeper losses and test/lose first key support levels. The Euro Stoxx 50 for example trades sub-3700, ending the uptrend since the start of Q4 2019 and paving the way for more losses with next support around 3590.

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Core bonds extend their positive momentum. Both the German and the US 10-yr yield gave away intermediate support, respectively at -0.3% and around 1.70%. US yields fall 4.4 bps (2-yr) to 6.2 bps (10-yr). The German yield curve bull flattens with yields decreasing by 0.9 bps to 4.4 bps.

USD/JPY gapped open lower at the start of Asian dealings, but the pair later stabilized around 109. The Swiss franc on the contrary steamed ahead with EUR/CHF below 1.07 for the first time since 2017. The dollar didn’t really bank on its safe haven status. EUR/USD changed hands around 1.1030. Last week’s drop below 1.1066 nevertheless improves the technical picture for the dollar. EUR/USD 1.0981 is the final hurdle ahead of the key 1.0879 support. EUR/GBP followed the intraday trading pattern in EUR/USD, changing hands around 0.8440.

The less liquid currencies like the scandies (NOK/SEK) or CEE currencies (HUF/PLN, but also CZK) are underperformers today. Gold prices surge to $1585/ounce, approaching multiyear highs.

Peripheral yield spreads vs Germany buck the risk averse trend. They narrow up to 3 bps with Greece (-9 bps) and especially Italy (-14 bps) outperforming. Italian BTP’s rally as Salvini’s Lega failed to sweep the leftist stronghold Emilia Romagna in regional elections this weekend. Such symbolic win would have backed his early election call. Now, the centre-left PD gains credibility and could even claim a dominant role in the coalition with 5SM (decimated in regional election and by internal fighting) despite being outnumbered in MP’s.

The only eco release figuring today’s agenda was a mixed German Ifo Business Climate. The single currency and German yields made a kneejerk reaction lower on the release. On the supply front, the US Treasury starts its end-of-month refinancing operation tonight with 2-yr and 5-yr Note auction while in Europe Greece (15y) and France (30y) announced near term syndicated bond deals.

News Headlines

The monthly Ifo survey showed a first unexpected setback in January following a steady recovery since setting a cycle low in August 2019. Sentiment among German companies fell to 95.9 in January, down from 96.3 in December. Ifo reported that this was due to companies’ more pessimistic outlook for the coming months. Manufacturing is showing signs of recovery, in line with signs from last week’s manufacturing PMI. There was a particularly notable increase in the index of the current situation, which has not risen so strongly since February 2017.

OPEC and its allies are closely monitoring markets and debating on how to respond to the coronavirus that is fueling oil demand concerns and pushed oil prices below $60 a barrel, OPEC officials disclosed. In a statement, The UAE energy ministry announced producers’ cartel is weighing all options and discusses whether to slash more output or extend deeper cuts to oil production until the end of the year.

EUR/CHF fell to 1.068 as investors are spooked by the coronavirus outbreak are hunting for safe havens. For now, the Swiss National bank appears to remain on the sidelines as sight deposits held with the central bank – a proxy for FX interventions by the SNB – increased only marginally (+0.22%). Nevertheless, appearing on Bloomberg on Thursday, SNB president Thomas Jordan argued that the pledge to intervene in currency markets still holds, if deemed necessary.


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