Thursday was yet another rocky trading session amid the WHO said that for the first time since the beginning of the coronavirus outbreak, there were more cases outside China than inside. News spurred worries that the coronavirus is becoming a global threat and that containment measures elsewhere could further slowdown the global growth. Some European companies paused their business trips for the coming weeks and earnings forecasts are being pulled lower.
The panic sell-off continued. Nikkei dropped another 2%, Kospi fell 1.05%, but stocks in Shanghai (+0.19%) were slightly better bid.
FTSE (-1.47%) and DAX (-2.26%) futures hint at a deeply negative start in Europe.
WTI slipped below the $48 a barrel. The sharp fall in oil prices should take a toll on energy companies today.
US equity futures shred 1.50%, as the US 10-year Treasury yield plunged to the record low of 1.30% as investors rushed to safety on expectation that the sell-off in equities may deepen.
In fact, the slide we are seeing right now is not the correction of the recent stock rally, but the market’s understanding that the coronavirus outbreak would translate into significantly lower earnings and an anemic global growth. If we add the fact that the crisis has only started outside China into the mix, there is a meaningful shift in stock valuations.
But it is possible that there is an upside correction on rising expectations of a Federal Reserve (Fed) intervention to stop bleeding in the market. It is unsure how fast and how profoundly the Fed would react, but history shows that the monetary interventions have had the power to turnaround situations regardless of how serious they were.
As of today, the Fed funds futures predict two rate cuts before the November election. The first cut may come as early as the FOMC’s April meeting according to activity on US sovereign bonds market.
As such, the US dollar weakens as Fed doves take over the market.
The EURUSD advanced past 1.09 on softening dollar, the USDJPY hovers around the 110.00 mark and the Swiss franc stands at a three-week high as safe haven demand feeds into these currencies.
Due today, February business and consumer surveys in Europe will either fuel the euro’s rally, or reverse gains. Levels above $1.09 could be interesting top-selling opportunities for the euro bears.
Gold consolidates near the $1650 an ounce with a potential to extend gains toward this week’s peak if the equity sell-off gains momentum. Despite soaring prices, gold remains the most popular safe haven asset for hedging against a global risk sell-off.
The Australian dollar consolidated near its eleven-month lows as the private capital expenditure unexpectedly contracted 2.8% in the fourth quarter versus +0.4% expected by analysts and -0.4% printed a month earlier, reviving worries that the coronavirus outbreak has probably further deteriorated the situation during the first two months of the year.
In the US, the durable goods orders may have fallen by 1.5% in January versus 2.4% expected a month earlier. January data will start reflecting the impact of the coronavirus on activity; today’s data could miss expectations and further weigh on the US dollar. The fourth quarter GDP, on the other hand, should be no surprise. The US economy is expected to have expanded at 2.1% during the last quarter of last year. What will matter is the impact of the coronavirus on the US growth. Goldman Sachs expects a 0.8 percentage point drop in first quarter growth.