Asia Open: The Great Wall of Wuhan: Travel halted, and oil prices slammed

Wuhan, the epicenter of coronavirus outbreak, has been put in quarantine starting today.

Chinese authorities are taking proactive and extremely cautionary measures to contain the spread of the Wuhan pneumonia effectively blockading the city ahead of the annual Lunar New Year holiday rush All airport and train stations ordered closed. The local city bus, long-distance buses, ferries, and subways will also be closed, Chinese state media reports.

Residents were asked not to leave the city by road unless they have a "special reason" ahead of the Lunar New Year this weekend, which sees millions of people traveling to celebrate the holiday.

Oil markets

A sell-off that was getting measured in cents is now getting scaled in dollars.

Oil prices have been hit especially hard overnight due primarily to concerns over the demand devastation effect the coronavirus could have on global consumption. But more specifically, given the importance of China for oil demand and having the outbreak falling on the cusp of peak domestic travel season, the timing is particularly damaging for oil prices.

China remains the most significant driver of year-on-year oil demand growth. So, given the oil markets hypersensitive nature to all things that potentially impact the Chinese consumer, the market's direction of travel makes sense even more so after Chinese authorities quarantined the city this morning ,effectively closing all transportation hubs. 

Markets

U.S. equity markets wobbled into the close as the potential negative economic impact of the Wuhan coronavirus could undermine risk sentiment well into February ,given comparison still being made to the SARS. But its China's importance in the overall global supply chain and the fact they are a huge export market for many countries, it opens up a more unfavorable global outcome this time around.

The primary issue where risk managers have continued to bang heads off the wall is trying to quantify the level of economic damage that comes from the " fear factor" and where most of the financial cost could come. Even more so, given the proliferation of social media and its propensity to spread fake news farther faster and more fearfully than it disseminates the truth.

But equity markets are showing little sign of extreme panic from the outbreak, even more so given the market's appetite to buy on any dip recently. Compared to 17 years ago, online spending is far more significant, which reduces a large chunk of economic impact. And with global health agencies working much more proactively and transparently to contain the Wuhan pneumonia than they did with the SARS outbreak, the market remains confident that the damaging knock-on effects will be far less harmful than the SARS outbreak. 

But in absolute terms, its challenging to see how this will damagingly affect markets. During SARS, yields declined, and currencies bounced around a bit, but equity markets in Japan and the U.S. were okay.

Gold Markets

Gold prices remain supported by defensive positioning due to the unknowns around the coronavirus. If the virus continues to spread, and at a faster pace in the coming months, it will represent another significant headwind to growth. Given the changing economic dynamics and how early we are in the newfound growth cycle, more policy easing will be needed to support growth, which could be viewed as bullish for gold.   

Also, gold investors appear willing to increase gold allocation on dips ahead of "Super Tuesday " U.S. election risk. And as a hedge against trade tensions reigniting, but broadly speaking, they haven't brought out the big guns just yet. 

But these strategies along with the January seasonality support might be worth reassessing on a clean break of $ 1540/oz

Currency markets

The Yuan 

There was much more profit-taking into the Lunar New year on Asia EM Fx than was expected due the flu scare, which probably exacerbated the sell-off. Even more so, with local traders reluctant to add new Yuan longs ahead of the extended holiday. 

Trading will likely be confined to ranges with interbank desks only executing on an as-needed basis on the back of client orders as local Yuan liquidity is going to dry up quickly. 

For now, USDCNH 6.88 is too rich and 6.93 to cheap, which should formulate the fringes of the market near term risk perception over the holidays as traders staffing the desk will also keep one eye on the Wuhan headlines. 

The Ringgit

The flue scare is being viewed as a bit of hic-up in the overall bullish scheme of things. Inflows are expected to pick up after the Lunar New Year when the market returns focus to 'Phase 1' deal, which marked a modest but promising start to lower US-China trade tensions. Hopefully, the Coronavirus outbreak might not be so negatively impacting as on first blush. 

But over the short term, local traders will keep one eye on investor's appetite for Japanese yen as a haven and Singaporean dollar due to proximity, which could be an ideal proxy lens to view the Malaysian market sentiment over the near term.