Asia Wrap: The Panic/Fear mode lessened today

We are still trading in two separate modes around coronavirus: the panic/fear mode lessened today. While the hit to the real economy mode is still a wait and see however todays transitory bets are also counting on getting backstopped by an expected PBoC policy impulse

The RBA kept the cash rate on hold at 2.75%, as expected, and forecast Australia's GDP growth at around 2.75% this year. The central bank noted that the recent bushfires and coronavirus would weigh temporarily on domestic growth but overall presented a positive assessment. Given the overly bearish positioning, the Aussie galloped above .6700 before running into sellers, and technical resistance at .6720 as the market continues to push back rate cut forecast from April to March

USDCNH has moved below 7.00, JPY is trading soft, and rates are a bit higher, copper is up 2%, and oil prices are off the lows.

China equities traded up 1.4% and seem to the primary staging post for "risk-on "after gapping down on open. If the market lean is that the coronavirus outbreak is contained predominantly in China, risk should try and rally a bit more as follow the leader mentality takes hold.

The Euro is trading a bit lower as traders typically use the EUR as a "funding currency" to establish long Asian currency positions. This is both an early and positive sign risk is on the comeback, of course, supported by the PBoC backstop

With the risk-on theme during today's Asian session, USDCHF is testing the short-term resistance coming in at 0.9680. The next levels to watch in USDCHF after this are 0.9710 and 0.9760/70.

With the disinflationary shock of the coronavirus in the pipeline, I suspect mainland investors are also likely positioning for a more aggressive PBoC policy response. And as such the general knock in effect had seen the regional proxy hedge trades short cover.

But at the same time, this pipeline is undoubtedly providing a dovish Fed impulse and should support gold on the dip.

Meanwhile, markets await the results of the Iowa Democratic caucuses that have been delayed but challenged to put on a trade on this one given the current school of thought that a Bernie win is a Trump win.

Oil update

Commodities are the pulse of sentiment in the region. After yesterday's drubbing commodity traders are taking solace after Lian Weiliang, deputy head of China's NDRC, expects the economic impact from the coronavirus outbreak to be short-term. And claims, they to be fully capable and confident of winning the battle against the epidemic. China's economic strength, material, and goods accumulation and ability to cope with emergencies are significantly stronger than during the 2002-2003 SARS epidemic, Lian said at a State Council Information Office news conference in Beijing, Xinhua reported [in Chinese] Seem like an overtly Rah Rah statement. Still, the proof will be in the data pudding.

None the less there have been a few more unexpected buyers of oil stepping up to the plate covering shorts, but with the bears looking to fade a move back to Brent 54.85-55.00, upticks could be limited, and we would expect the parabolics to re trend downwards given the absolute demand devastation in China

We still haven't begun to quantify the economic fall out which will likely be market unfriendly so now is probably not the time to dawn the rally cap

Of course, additional OPEC+ cuts are necessary to put a floor on oil prices and may even prompt a bit of rebound around the meeting date. Still, I can't see investors turning bullish on oil or oil equities until the virus is appropriately in the rear-view mirror, and it is possible to quantify its economic impact.
 

Yuan Watch 

The temporary sigh of relief heard across ASEAN currency markets was heaved when the USDCNY fixing came in at 6.9779 vs. 6.9249 yesterday, a bit lower than the consensus. A fix above 7.00 is the next departure lounge for a currency risk wobble Recall  August 2019 and how things quickly devolved when the fix broke 7.0. That's when the USDCNH premium over USDCNY started to gap much broader; at the moment, its calm and USDCNH could veer toward the 7.0 handle.( Steve the eternal Yuan bull).

The Council for the Promotion of International Trade (CCPIT) has announced that businesses in China can now request force majeure certificates if their companies with overseas partners have been affected by the coronavirus outbreak.

As of now, it's not immediately clear if any commodity buyers are privy to these certificates, but there has already been some market chatter that cargo deliveries into China for late February are expected to be delayed. Adds another unwelcome layer of uncertaintly at a time when commodity traders are looking for market clarity.
 

Markets

Risk sentiment remains on the offs after guidance from the CDC, saying they are preparing as if the coronavirus is the next epidemic, which is similar to the warnings on the street in ASEAN countries that are closer to the outbreak epicenter. But I view this through a more positive lens that the world is in a heightened state of preparedness to better ringfence this nasty and stealthy flu.

But for the risk markets, the mere mention of the word pandemic these days raises the fear factor higher by multiples.

There are two separate but not mutually inconsistent dynamics evolving around the coronavirus: panic/fear and the hit to the real economy.

The market is still, for the most part, in the fear mode, but as traders consume more economic data fall out, the hit to the real economy should become more apparent. Then the market will get steered by data, not opinions, or the herd mentality.

Travel bans and other such containment measures should reduce the spread to other countries beyond China and therefore lessen the panic; at the same time, the global economic fall out to the real economy will be much more pronounced than the SARS outbreak in 2003 and should, therefore, linger longer.

The economic effects on the real economy are more eye-catching via commodity markets than anywhere else. But if you use global equity markets as your key risk barometer, you will think they are co-existing in non-parallel universes. At the same time, the ASEAN markets tank as the US market appears impervious to the knock-on effects of the heightened level of economic devastation to the world's most prominent player in the global supply chain, China.

For now, US investors remain mostly upbeat as US ISM manufacturing data beat on both headlines while the throttle bending Philly Fed and Richmond Fed numbers occurred mainly in isolation and discounted by the weak Chicago PMI.

I'm not a very good stock picker, so I will defer my view on China today but leave you with this thought. Chinese authorities limit shares to 10% drops on the day. With more than half of the CSI 300 down 9.95% (or more) yesterday before a rebound set in, it seems too orchestrated for my liking.

Oil markets

Oil markets remain under duress following news yesterday that Chinese demand has fallen 30% or 3million /mbd because of the coronavirus, which paints an incredibly dire picture. And while we can take some solace that the fatality rates are below the SARS epidemic, but travel bans and quarantines affecting some 50 million people are significantly impacting consumer behavior.

The situation is so dire that even Russia supports the proposed emergency OPEC+ meeting.

However, China's inventories are swelling as teapots run rates fall precipitously, adding to the global oversupply concerns as Brent crude oil front-month time-spread flips into contango for the first time since July 2019. But oil-price weakness in an oversupplied market only peaks when the whole curve goes contango. Suggesting we could see Brent contract follow WTI below $ 50 since the global economic fall out to the real economy will be much sharper than the SARS outbreak in 2003 and should, therefore, linger longer. At present, there is little hard data to support this view, but investors are proving very cautious.

Gold markets

Gold is trading a bit weaker as the risk-off move tentatively dissipates with relief that China market has reopened with a hefty backstop from the PBoC. Still, gold has much more room to outperform other traditional safe haven's regardless of the current state of affairs, even if the virus spread peaks.

Travel bans and quarantines will eventually reduce the spread to other countries beyond China and therefore lessen the panic. Still, the real economic impact will be broader than that of the SARS outbreak in 2003 and will persist for longer, forcing ASEAN banks to cut interest rates. Still, the April FOMC meeting will capture any Fed reaction that emerges from a broader economic hit. And with the market moving to price in a Fed reactionary rate cut this spring, gold should remain well supported on dips gather steam for the probable test of $ 1600 in the not so distant future.

Currency Markets

USD

With month-end rebalancing out of the way and with China back after a week-long holiday, the Euro is finding more support from EUR/Asia carry trade unwinds. But arguably, it has been a quiet start to the week.

But at some point, the currency markets will have no option but to turn to focus on the Sanders surge despite the school of thought that the higher the probability of Sanders becoming the Democrat Presidential candidate, the higher the likelihood of a Trump re-election. None the less, the head to head polling numbers is where the balance of USD risk will be so it could get bumpy.

The Ringgit

The coronavirus outbreak and the economic and trade uncertainties that it carries bring pressure on the local currencies none more so than the Ringgit due to Malaysia's close trade ties with China. All this is happening on the back of evidence that the coronavirus outbreak is significantly impacting the global economy, with China, the worst-hit, local ASEAN currencies are predictably feeling the most pressure and local commodity exporters especially.