A new phase of the virus alert

On the trading front, it was a very predictable day as flat out bearish and oversold markets came up for air and booked some profits. 

Global containment efforts

As we enter the new phase of the virus threat, traders are trying to figure out what level of risk alert the market should be on. With coronavirus spread more widely outside China, effective containment and peak virus has given way to how reliable those containment strategies outside of China are. While it's early days, investors are still concerned that the efforts are more penetrable owing to looser enforcement and greater reliance on voluntary cooperation. At the moment, the market risk tolerance is shifting between effective containment where China declares peak virus versus the fear of a more substantial spread globally but still considerably below global pandemic fears.

Risk sentiment 

And while risk sentiment is trying to make a valiant comeback attempt on “Turnaround Tuesday," still with many unknowns surrounding the full extent of the economic impact as travel bans widen, airline suspensions involve more countries with extended duration, traders are finding it more uncomplicated to toggle “risk-off “rather than on. Ultimately these virus safeguards should lead to significant global growth and earning downgrades, and as such lower equity market appears to be the path of least resistance over the short term.

PBOC and China risk 

As for China's risk and given the impact of COVID 19 on the economy, Beijing may soon find themselves in the unenviable situation of whether to lower its economic goals. But if policymakers don’t compromise on growth targets, more aggressive easing, both fiscal and monetary, needs to be implemented. But on the back of the latest middling policy efforts,  if the market starts to believe that the PBoC tool kit is constrained on those policy fronts, it could trigger a colossal recalibration of Asia risk markets considerably lower. Given the backchannel debates on most trading desks, I suspect the market is having trouble tuning in the PBoC policy channels these days, which is not a good thing.

Gold 

Gold is trading a tad softer this morning as profit-taking is setting in after a massive build amid a technical correction. However, the yellow metal should acquire more lasting support from accommodative monetary policy worldwide, a rapidly shrinking pool of risk-free assets, and lower beta of traditional risk-off currencies even without triggering worst-case pandemic fears.