nCov risk trades relatively benign today

FX flows have been very light in Asia. Equities are higher after closing in the green in New York, and vols are calmer in both EM/Asia and AUDUSD. Of course, as I always do, I will defer to my colleagues in London to see if they agree before jumping onto any recovery trade bandwagon. 

With Yuan trading stronger, it's supercharged cousin the Korean Won USDKRW  is trading offered as equities are higher with nCoV risk trading relatively benign.

While cash traders are tentatively getting involved option-related flows have turned USDASIA sellers as investors flush out  USDASIA gamma hedges.

However, with the regional tail risks still way too fat, its unlikely FX Asia risk toggles green until such times there's a definitive sign the coronavirus transmission has slowed. And uncertainty about renewed/secondary outbreaks becomes obsolete.

Similarly, the Ringgit is trading very much correlated to the Yuan today as the convexity of regional economic data to PBoC stimulus should be quite robust. 

Singapore says a 25-30% drop in tourism is probable this year on the coronavirus outbreak as it loses 18,000-20,000 tourists per day on virus fears. But traders have respected the 1.3900 USDSGD, thinking that beyond tourism, the nCoV effects are both temporary and transitory while investors are taking some solace on the anticipated PBoC policy deluge that has the CNH Yuan veering stable and stronger. 

Oil markets

Are we setting up for Valentine's day gift or massacre? (Emergency Valentine's day meeting continues to be discussed on the street)

The oil markets are trading beta to general risk sentiment today in Asia, which is being supported by stronger US markets and an anticipated PBoC policy deluge, which has probably triggered some weaker shorts to cover.

Still, it's tough for OPEC to ignore the forward curve that continues to move deeper into contango. And traders probably wouldn't be surprised to see an emergency meeting called if WTI moves much lower. 

But if one does happen and if the cut is only 600,000 barrels, given the drops in teapot refinery runs, I would suspect traders would use the price spike to sell the fact.

We're at a significant inflection point for the Oil markets. If China fails to contain the virus domestically within a few weeks and or virus clusters expand around the globe, it's a whole new kettle of fish as tail risks get incredibly fatter for oil markets. 

Gold

In the virus escalation scenario, I think gold trades well. Still, demand gets undercut by the strong US dollar, which could offset lower global yields in this scenario.