The Federal Reserve pricked the bubble of a nascent equity recovery overnight, with the FOMC leaving both rates and its forward guidance unchanged. A passing mention that it was monitoring developments with the Wuhan virus was the only bone thrown to the markets. Overall though, the decision makes complete sense. The Wuhan virus is a situation that is still developing in both its potential longevity and complexity. U.S. data and Q4 earnings continue to perform strongly.
Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) reported strong earnings, although the declining pace of new users clicking like saw Facebook’s shares Insta-sink 5.0% in after-hours trading. Two VIP corporate patients in the stock market isolation ward, General Electric (NYSE:GE) and Boeing (NYSE:BA), both saw their stocks rise after posting results that were less bad than expected. Tesla (NASDAQ:TSLA) stock performed precisely as expected, rising sharply on improved cash flow and higher forward guidance on deliveries. Amazon (NASDAQ:AMZN) will report this evening and is expected to show yet again revenues climbing from both its bricks and mortar—if you’ll excuse the pun—internet store and its cloud business.
None of this, though, was enough to overcome the shadow cast by an unchanged Federal Reserve, and the ever-present specter of the economic impact of the Wuhan virus outbreak. With equity markets pumped to juicy levels by the relentless flow of cheap central bank money around the world, unexpected Wuhan-like events leave them acutely vulnerable to potentially aggressive corrections. Any significant corrections, though, will probably be a buying opportunity.
If the Wuhan virus emergency peaks quickly, then regular service will resume just as fast, as evidenced by the short memories of the Saudi Arabian refinery attacks and the U.S./Iran ructions. If the Wuhan virus emergency stretches into months and starts to impact economic growth severely, we can be sure that the central bank monetary spigots will be fully opened.
Fortunately for the world, the U.S. and China’s central banks are well placed to do just that, as opposed to Europe and Japan, for example. With over $13 trillion of government debt around the world in negative yields, a one per cent yield on an equity blue-chip will continue to appeal. The Federal Reserve and PBOC will once again, put off the day of reckoning.
South Korean Business Confidence and New Zealand’s Balance of Trade both outperformed this morning, implying that the pre-Wuhan virus recovery in the Asia/Pacific was on track. Those waters are, of course, much more muddied now. Perversely though, New Zealand, with its high beta to China in regular times, could be well-placed to weather an extended viral storm. Even with a world in lock-down, people still need to eat, and New Zealand’s economy is built on primary industry. Food for thought.
Hong Kong’s Balance of Trade release later this morning will attract more than passing interest. After posting a deficit of HKD 26.2 million for November, the December data should make for grim reading. The deficit projected to slump to around HKD 60.0 billion, led by a slump in imports as the SAR’s economy remains in a deep protest-induced recession.
The Bank Of England will announce it’s interest rate decision later today. A 25 basis point cut to 0.50% had previously been pencilled in as the UK officially leaves the EU tomorrow. Robust UK data this month and the potential economic fall-out from the Wuhan virus has clouded that picture. I now expect the BoE to hold steady, preferring to keep its powder dry as it monitors events globally. That should add some support to GBP/USD, which is hovering around the 1.3000 zones.
Much attention will be focused on today’s U.S. GDP data. We expect it to print an on-course increase of 2.1% annualized for Q4. Financial markets will be more vulnerable than usual to a below forecast. Mix in a toxic cocktail with an unchanged FOMC and an accelerating Wuhan virus situation, it could set the scene for an ugly New York session for financial markets. Oil in particular, and equities being the most vulnerable.
Equities
The equity rallies in Asia and Europe ran out of steam in New York with an unchanged FOMC and Wuhan virus fears taking the steam out of some impressive earnings results. The S&P 500, NASDAQ and Dow Jones all finished almost unchanged on the day.
The tentative, but very piecemeal rally in Asia yesterday, always had a forced look about it. Major regional markets following Wall Street higher out of obligation rather than fact. With Wall Street unable to maintain a rally for more than 24 hours, New York’s flat close has seen the Wuhan virus-induced fears return to front and center, as they should.
Asian equity markets started the day solidly in the red.The Nikkei 225 and Hang Seng have fallen by 1.0% and the KOSPI by 0.55%. The Straits Times Index is lower by 0.10% with the Bursa Malaysia down by 0.40%. Australia’s All Ordinaries is lower by 0.30%. China’s Mainland remains closed for the Lunar New Year.
With yesterday’s rally consigned to history as quickly as it began, equity markets remain acutely vulnerable to adverse developments in the Wuhan virus situation. As I stated yesterday, beware of dead cat bounces. Nothing has occurred to change that viewpoint.
Currencies
The U.S. dollar strengthened against the euro and British pound overnight but eased slightly against the Japanese yen and Swiss franc, both boosted by haven flows. This left the Dollar Index futures almost unchanged at New York’s close.
In the developing market space, local Asian currencies continue to hold their own for now, despite concerns about a Wuhan virus-induced slowdown in the region. The retreat in regional currencies has been more of a slow grind than a full-blown charge for the exit, perhaps reflecting the currency market’s preference for more information on the evolution of the Wuhan virus situation. It also reflects the lack of extreme positioning evident in equity and bond markets.
USD/CNH continues to trade around 6.9800, unable or unwilling to test, and or break, the pivotal 7.0000 level. That implies that official selling interest lies in wait up here, helping to “calm” things.
Overall, U.S. dollar strength is expected to continue, boosted by yields and haven flows into U.S. Treasuries.
Oil
Oil’s rally morning petered out as an unchanged FOMC, flat equity markets and higher than expected U.S Crude Inventories systematically removed the pillars of the move higher. Not even rumors that OPEC+ would move their March meeting forward to formulate a response to a Wuhan virus drop in consumption could save the day.
Brent Crude finished unchanged at $59.80 a barrel and WTI dropped 0.30% to $53.25 a barrel. The selling has resumed in earnest this morning with both contracts lower by around 1.0% — Brent crude trading at $59.30 a barrel and WTI trading at $52.70 a barrel.
The Wuhan virus outbreak and its economic fall-out on Asia, the engine room of the world, remains the most crucial issue facing oil markets, with any rally likely to be short-lived. The world is awash with supply and energy markets are poorly positioned to manage a sudden demand shock. Intra-meeting action to cut production by OPEC+ would likely, at best, only keep the lights on by stabilizing prices.
Oil's recovery is tied to “peak-virus,” and until that occurs, rallies are probably best regarded as selling opportunities.
Gold
Haven flows came to the fore again overnight, with gold rallying 11 dollars to close at $1577.00 an ounce. Trading in Asia has been more circumspect, with gold unchanged as we near mid-session Asia.
Gold has resistance at $1585.00 an ounce followed by $1600.00 an ounce. Critical support lies in the $1545.00 to $1550.00 regions. Gold looks set to bounce between these extended levels, moving to the nuances of developments on the Wuhan virus outbreak.
With the U.S. dollar remaining strong, signs of “peak-virus,” will likely see the yellow metal test that support. Until that happens though, and that may be quite some time in the future, the topside remains the more vulnerable side of the equation. An escalation in the Wuhan situation should provide gold with the momentum needed to attack the $1600.00 regions seriously.