The sense of serious concern about the economic effects of the Wuhan virus - evident on Wall Street last Friday - has turned into something approaching panic in Asia this morning. China has taken the unprecedented step of extending the Chinese New Year holiday until February 2nd as it ramps up efforts to control the spread of the virus. Although confirmed cases have popped up all over the globe, the vast majority still remain confined to the Chinese Mainland.
Price action across Asia thus far today has had a look of panic about it. S&P 500 Futures down 1.0%, the Nikkei 225 down 1.80%, gold up 8.0 dollars. WTI futures futures have also fallen after being crushed on Friday. Meanwhile, the USD/CNH has risen 250 points to 6.9500 and China proxy, the Australian dollar, has eased 20 points to 0.6810.
It is very important to note, though, that Japan is the only major Asian market open today. Mainland China, Hong Kong, Singapore, South Korea and Australia are all closed for various holidays. Liquidity is, therefore, much reduced and at a premium across all asset classes. Thus, any moves, especially on Monday morning, can be exaggerated. Bitter experience has taught me that strong directional moves in the early hours on Monday are often the wrong ones on the day.
The Wuhan virus will off course hang like a shadow over financial markets this week. With asset markets pumped up on hopes of a global post-trade deal recovery and cheap central bank money, an unexpected growth shock leaves them particularly vulnerable to a potentially strong downward correction. The world’s central banks, having slashed rates to the bone in 2019, have a severe ammunition shortage on the monetary policy front to offset a growth shock. Fortunately for the world, two central banks that do are the two most important, the U.S. Federal Reserve and China’s PBOC.
Wuhan virus aside, the week will not be without drama in other corners of the financial markets. The Federal Reserve has its first FOMC decision of the year on Wednesday and the Bank of England announces its latest rate decision ahead on Thursday. We expect the FOMC to hold unchanged with U.S. data and U.S. company earnings all tracking in the Fed’s goldilocks zone. A response to the Wuhan virus, if required, will be a story for later meetings. The Bank of England was probably poised to ease this week, but recent UK data has been unexpectedly strong. The odds for a 25-basis point cut are probably now only 50/50 at best as the UK formally exits Europe this week.
Trade continues to be a concern that hasn’t died; it just took a vacation. Europe’s proposed digital taxes and carbon taxes have put it on a collision course with President Trump’s America First White House. Threats have emanated from Washington DC of reprisals along with veiled warnings to Britain if Huawei is allowed even a nibble of the UK’s proposed 5G networks. Readers may recall that after President Trump had finished with China, the tariff guns would swivel towards Europe, which also enjoys a massive surplus with the U.S. In a U.S. election year, none of this is likely to subside with America’s negotiating approach very much shoot first and not bother asking questions later.
U.S. earnings reach their peak this week, with big tech reporting amongst others. We expect earnings to remain strong although fears of a Wuhan virus-induced global slowdown will probably drown out the celebrations.
Gold rallied on Friday as haven assets saw heavy demand in New York, rallying 0.55% to $1571.50 an ounce. The escalation of growth fears from the Wuhan virus saw gold gap higher this morning on thin liquidity, jumping 0.60% to $1584.25 an ounce.