Major US indices plunged more than 3% in New York as worries that the coronavirus could become a global pandemic took a toll on the markets worldwide. Technology stocks led losses in New York; Apple (-4.75%), Microsoft (-4.31%) and Intel (-4.01%) lost big on anxiety that disruption in supply chains due to a subdued Chinese activity could really hurt company earnings in the first quarter and beyond, as warned Apple last week. Goldman Sachs’ basket of retail favorites tanked the most in nine months.
The US 10-year sovereign yield dived below the 1.40%, the lowest since its 2016 dip. The probability of a Federal Reserve cut in March 18 meeting increased slightly to 14.4% from 11.1% a week earlier, showed the activity on the US sovereign bond markets.
The heavy equity sell-off continued for the second day in Asia. Nikkei and Topix lost more than 3% as Japan returned from bank holiday. Stocks in Sydney lost 1.60%, as Shanghai’s Composite fell up to 2%. In Korea where the outbreak recently gained momentum, the confidence index fell the most in five years and spurred expectations that the Bank of Korea (BoK) will cut interest rates in its monetary policy meeting this week. Stocks in Seoul (+1.14%) were better bid on dovish BoK expectations. While in Hong Kong, where economy posts its first deficit in 15 years, the government plans to deploy extra fiscal stimulus measures to counter to negative impacts of months-long anti-China protests and now the coronavirus. Hang Seng (-0.08%) posted timid losses.
Despite yesterday’s calamity in the market, WTI crude managed to maintain support near $50.50 a barrel as investors judged that a 4% drop in oil would be enough for now. The most recent CFTC data showed that net speculative positions in crude oil increased on week to 21 February, meaning that investors are still hopeful that the coronavirus shock could have a less than feared impact on oil demand. However, many banks, including Goldman Sachs altered their coronavirus shock assessment, citing that the activity in China picked up slower than what they previously thought, and despite the slowdown in new contagion cases in China – which may well be due to another change in diagnosis methodology after the previous methodology hinted at a faster spread and costed jobs to certain high level Communist Party officials – the faster growth in cases outside China caused panic and Italy and Korea imposed quarantine in certain cities. We maintain our bearish bias in oil prices and believe that traders should continue chasing top-selling opportunity below the $55 resistance targeting a retrace below the $50 level due to the expectation that the divergence in supply and demand could widen and even additional production cuts from OPEC may not absorb the extra glut.
Gold gave back a part of Monday’s gains and retraced to $1652 per oz. The latest CFTC data printed a record high in net long speculative speculations in gold. It is hard to tell if and by how much the actual stock sell-off would deepen, but the US and European equity indices edged higher in Asia hinting that Monday’s debasement may follow a minor recovery. Hence, as soon as investors see the light at the end of tunnel, there could be a sharp sell-off to $1600 level and below, given the record high of speculative positions that could be unwound and give oil prices a further downside momentum.
The euro recovered past 1.0860 against the US dollar as German GDP is expected to confirm a 0.2% growth in the fourth quarter versus 0.0% expected by analysts. An encouraging data could further fuel recovery in single currency against a softening US dollar. But any disappointment should limit the upside potential.
Cable remains offered near 1.2940. Recovery in oil and commodity prices and a cheaper Sterling may help the FTSE 100 gaining some field above the 7200p level on Tuesday, following a 3.34% drop in the energy-heavy index on Monday. In the US, the Richmond Fed manufacturing index could hint at a slowdown in February activity. Any positive surprise, as we have seen in other states last month, could put a floor under the US dollar’s downside correction and give a positive spin to the greenback, while a soft read should send the US dollar index below the 99 level and encourage a further recovery in euro and pound.