Markets Find Love On The Rebound

Asian markets are finding love again today after a drawn-out Wuhan virus break-up over the past two weeks, culminating in a vicious argument yesterday as China returned to work and plates got thrown. Asia has swept up the broken crockery with stock markets rising sharply across the region today following an out performance by Wall Street overnight.

Strong ISM Manufacturing PMI and a continuation of the impressive Q4 earnings season saw Wall Street cast caution to the wind, and jump into a new relationship with equities. The major New York indices all rising impressively and along with US Treasury yields as Wall Street pared back its virus-induced fears.

Today, even oil, that most unloved commodity class in recent times, has posted a positive day in Asia, along with every regional bourse including, the Chinese Mainland indices. The trouble about finding love on the rebound is that it rarely works out as the relationship due diligence runs its course. Swiping right on equities and commodities over the past few two weeks has been a strategy for short-term love only, it's not resulted in a portfolio you could take home and introduce to Mum and Dad.

While I fully acknowledge the strong earnings and data from the United States, indeed pre Wuhan crisis, I fully expected the US to continue to outperform the rest of the developed world. Those earnings and data points though are backwards facing, and the potential impact of the Wuhan virus is nowhere near yet being able to be fully quantified in its implications for global growth.

Nothing has intrinsically changed vis-a-vis the Wuhan viral outbreak. Cases and deaths are still growing by the day sadly, although still mostly confined to Mainland China. What is visible are the closing borders, the thousands of cancelled flights, the reports of slumping demand for energy and China enterprises are very publicly considering declaring force majeures, and reducing oil refining throughput. Asian LNG prices, in fact, hit record lows today as consumption slumps in the world's 2nd largest market, China.

Therefore, today's rebound should be treated as such, a potentially ill-advised rush into a new relationship soon after the previous one ended in acrimony. Investors should hold off assuming their portfolios are "the one" today and telling Mum to book churches and start on the guest lists.

Elsewhere in Asia, the Reserve Bank of Australia (RBA) held rates steady at record lows of 0.75%. A slight uptick in employment was all the RBA needed to keep its powder dry. With little powder left at these levels, using it frugally in the face of a potential Wuhan virus slowdown is a wise decision.

Hong Kong retail sales are released at 1630 SGT and are expected to post a mind-boggling drop of 25% in December. The ongoing protests have sapped the SAR's economy with nary a Merry Christmas in sight. The respite from the demonstrations due to the Wuhan virus is unlikely to bring a respite. In fact, it may well make things worse, with Hong Kong's economy likely to be in the isolation ward for quite some time to come.

The data calendar is light in Europe with the US Factory Orders data later likely to be today's highlight. Forecasts are for a rebound to 1.20% MoM for December. Tomorrow becomes altogether more interesting, with China's Caixin Services PMI for January, Indonesian GDP, European Retail Sales and US Balance of Trade. The elephant in the room remains though, developments on the Wuhan virus crisis.

 

Equities

Wall Street rebounded on strong earnings and factory orders overnight with the S&P 500 rising 0.65%, the Nasdaq by 1.50% and the Dow Jones by 0.50%. That positive tone, however misguided, spilt over into Asia with the region enjoying a good day, led by Mainland China bourses. The Shanghai Composite rose 1.30%, the CSI 300 by 1.35% and Japan's Nikkei 225 by 0.60%. The Hang Seng rose by 1.0% with Korea's Kospi jumping 2.0%.

We note though that the gains have been somewhat pared across the board from today's earlier highs, suggesting that the bullish momentum has waned and that investors are reluctant to carry short-term risk overnight. The positive finish by Asia should be enough to propel European stock markets cautiously higher, but recent bounces by equities have vanished as fast as they appeared recently. With the Wuhan virus crisis still in full flight, rallies should be treated with a huge grain of salt.

 

Currencies

The US Dollar rallied overnight, boosted by rising US Treasury yields as some of the rush to safety in government bonds unwound. The Japanese Yen and Swiss Franc gave back some of their gains, but the Dollar also made headway against the Euro and Pound, which fell to 1.1060 and 1.3000 respectively.

For the most part, the Dollar has held onto its gains in a quiet Asian session. Against regional Asian currencies, it was mostly unchanged with volumes light with the FX market refusing to by into the hype and hope shown by equities.

The USD/CNH rose to 7.0250 in early trading, its second failure in two days at that level, before falling back below 7.0000 to 6.9950 as China's stock exchanges move higher intra-session. The CNH is unlikely to move below 6.9500 anytime soon, however. It has most likely settled into a 6.9500/7.0500 range in the near-term. Chinese authorities will not want to see either the onshore or offshore Yuan weaken too rapidly from these levels for fear of upsetting the Americans.

 

Oil

Oil was crushed overnight as the Wuhan virus growth fears turned into a panic stampede for the exit door. Brent crude lumped 4.0% to $54.50, and WTI fell 3.0% to $50.10 a barrel having fallen below the $50.00 level briefly earlier in the session.

Today in Asia, oil has managed to trace out a modest rally as confidence peeked its head above the parapet in equity markets. Brent crude rose 1.25% to $55.00 a  barrel and WTI rose 1.20% to $50.70 a barrel.

Measured against the scale of oil's fall from grace, today's rally appears to be more corrective than structural. Speculation that OPEC+ will meet and enact more production cuts has offered some support. Brent crude below $55.00 a barrel is the stuff of sleepless nights for OPEC and Russia. We will almost certainly see some action, sooner than later, from the grouping. With the threat of force majeure's from Chinese importers hanging over energy markets, direct action is required.

Further cuts though from OPEC+ are likely only to stabilise prices, not be of the scale to engineer a structural rally. With the Wuhan virus presenting an as yet unquantifiable threat to global growth, oil remains one of the most vulnerable commodities to further bad news. Treat today's rally with caution.

 

Gold

Gold eased slightly overnight as the US Dollar and Treasury yield rose. It fell 0.50% to $1577.00 an ounce. With equities moving firmly higher in Asia today, golds retreat continued, falling 0.50% again to $1571.00 an ounce.

Gold has now tested and failed on three consecutive days, the $1590.00 level which is now reasonably strong technical resistance. Short-term support lies nearby at $1570.00 an ounce followed by $1550.00 an ounce.

Most of the near-term bad news from the Wuhan virus outbreak appears to be fully priced into gold at these levels. Gold is lacking upward momentum at this time, and likely requires another slew of bad headlines to regain its mojo. In the meantime, a continued equity rally from Europe and into the United States today increases the chances that gold's short-term correction lower has more to go.