Markets

The spreading of the Chinese coronavirus outside Chinese borders is gaining steam and causing lockdown in South Korea and Italy. Ramifications on markets are significant today. This theme will continue to dominate intraday trading this week in absence of important eco numbers or central bank meetings. Main Asian equity indices opened the trading week with losses to the tune of 2% and a South Korean underperformance. The picture in Europe is even grimmer with stock markets down 4% and Italy even 5.5%. US indices gap open 3% lower. The risk-off trade sends investors towards core bonds. US Treasuries outperform German Bunds. The reason is obvious: the Fed is left with spare ammo to fight any economic slowdown. The market implied probability of a Fed rate cut has been pulled forward from the September to the June meeting. US yields decline by 8.7 bps (30-yr) to 10 bps (5-yr). The US 30-yr yield falls further into uncharted territory (1.82%) while the US 10-yr yield lost the 1.43% support (2019 low). It now trades at the lowest level since 2016 and is heading to the 1.32% all-time low. The US 5-yr yield tumbled below the 2019 low (1.31%) as well so technical pictures are impacted across the curve. The German yield curve bull flattens with yields dipping 3.3 bps (2-yr) to 5.9 bps (30-yr). The German 10-yr yield gave away -0.41%/-0.44% intermediate support. A decent German Ifo Business Climate indicator couldn’t change intraday trading dynamics. Obviously, the coronavirus situation deteriorated significantly in recent days, suggesting the indicator could already be lagging reality. 10-yr yield spread changes vs Germany widen by 3 bps with Italy (+8 bps) obviously underperforming.

The risk theme played out on FX markets as well. The Japanese yen recovered from last week’s weakness. USD/JPY bumped into 112.40 resistance, but is now again changing hands around 110. EUR/CHF fell below 1.06 for the first time since 2015, adding pressure on the SNB to return to/step up FX interventions. The trade-weighted dollar remains near multiyear highs, north of 99.50. EUR/USD is remarkably calm around 1.0820. The decline in US/EMU yield spread probably balances the risk aversion. Emerging market currencies and those from developed, but smaller and illiquid, markets cede ground. The Czech koruna is a notable underperformer. EUR/CZK rises from the low 25 to 25.25, with investors betting that the Czech National Bank will soon have to reverse last week’s rate hike. Sterling slightly underperforms other majors (EUR, USD), with EUR/GBP in the high 0.83-zone.

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News Headlines

US Treasury Secretary Steven Mnuchin declared he doesn’t expect the coronavirus epidemic to have a substantial impact on the phase one US-China trade accord, Reuters reported. Mnuchin nevertheless remains cautious and said it was too soon to know and his assessment could change as the situation develops and more data becomes available.

The Italian government is contemplating emergency measures as the country’s economic engine is grounding nearly to a halt amid the coronavirus epidemic, Bloomberg reported. The number of cases jumped to 219 and the death toll currently stands at 6. The country considers suspending local tax payments and delaying mortgage payments in virus-hit regions.

German Chancellor Angela Merkel’s CDU party is forging ahead and will convene a special congress on April 25 in Berlin to appoint a new successor to Annegret Kramp-Karrenbauer (AKK), a CDU spokesman announced. AKK initially planned to appoint a new chief this summer but CDU’s major defeat in Hamburg’s state election drove the need for urgency.

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