Asia Wrap: Gnarly Hubei headlines linger

Stephen Innes SPI Asset Management

Markets

The coronavirus was back in the news, but in a negative way as the number of new cases in China's Hubei province, the epicenter of the outbreak spiked to 14,480 from 1,638 the previous day. However, this big jump was due to a methodology change for counting people with infections. It's possible to spin that the way you want to depend on your bias. But the essence of the issue is that questions continue to be asked about the accuracy of reporting. At the same time, there have been claims that factory reopenings have been questioned. For example, Foxconn said in a statement overnight that the recent news about plant reopening was "not mostly factual." The only thing that does seem to be factual is the impending hit to Q1 growth, so the market is back toeing that negative skew of economic certainly

Risk sold off early this morning in Asia, on the back of the headline. USDJPY quickly traded down to 109.80 and EURJPY to 119.40, and neither have really been able to recover since then. Putting my trader hat on, I think there is more room in this, but at the same time, I'm a bit skeptical we will see a massive wave of selling. So, with fast money now short risk (Oil, SPX, USDJPY) and long gold, I would expect to see these positions get squeezed later in the day given the market proclivity to look through virus headlines. And with market flush with cash providing the juice in the market and given the negative data impact is so well flagged, all of this headline noise may seem irrelevant by NY end of the day. However, this headline did, hit like a ton of bricks so that the effect will likely linger a bit longer.

Oil markets

Speaking of certainty, EIA data yesterday showed US crude inventories rose 7.5mb, more bearish than the 6mb increase in the API report on Tuesday, driven by a jump in net imports. Product inventories fell 8.5mb, partially offsetting the crude build.

OPEC's monthly oil market report on Wednesday was also bearish, with the 2020 demand estimate cut (mostly in China and Asia, suggesting an attempt to adjust for the impact of the coronavirus) offsetting a reduced US production estimate.

Oil has continued to slide today as the market remains unsure what's up or down with the virus statistics while reflecting on contradictory plant reopening headlines. And with no word out of Russia regarding agreeing on the JCT production cut suggestions, traders are back on the path of least resistance for oil prices, which is lower. So, traders are forced to begrudgingly walk back risk for fear of getting steamrolled if another hugely detrimental headline hits. While fast money sellers continue to squeeze weak longs

However, barring an acceleration of new infections, investors should begin to look to the longer-term fundamental drivers for oil.

Gold markets

Gold now seems almost exclusively to be moving on the back of coronavirus headline. However, the US CPI data out later today could offer something else to focus on. With a plethora of global risk simmering on the backburner – supply chains and demand contraction notwithstanding, it's too early to downgrade Covid-19 to a nasty case of the sniffles so gold remains a critical defense of the strategy

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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