Boris Schlossberg
BK Asset Management
Risk-off flow resume
Markets starting to appreciate the economic toll of virus
Nikkei 1.08% Dax -1.06%
UST 10Y.974%
Oil $46/bbl
Gold $1645/oz
BTCUSD $9099
Europe and Asia:
No Data
North America
No Data
It’s been a slow drip down in early European trade today as equity markets gave up their early Asia session gains and moved lower all morning on the realization that the coronavirus impact may be a long and tedious battle.
The rate of infection in the US appears to be ticking up with California now declaring a state of emergency as it monitors more than 9000 possible cases. Airlines have continued to issue warnings as travel may be off by as much 70%, And with swaths of China and parts of Europe still on effective lockdown, the rebound in economic activity may take longer than hoped.
All of this has put a damper on investor sentiment and futures were pointing to a 2% down open after yesterday’s 4% rise. The up-down nature of the markets will no doubt continue but the prospect of fresh will grow dimmer with every passing day as investors begin to take the true toll of the virus on economic activity.
In FX the euro continued to push higher rising to 1.1177 in morning London dealing. The move is less a function of confidence in the euro than flow out of dollar assets. With markets pricing in yet another 50bp cut by the Fed the one attraction of US assets – their positive yield – is losing much of its luster.
If the coronavirus forces all the G-3 rates to normalize around zero much of the greenback’s advantage will evaporate. Add to that the fact that euro is now a funding currency in many risk trades that will need to be unwound and that CFTC positioning still suggests a strong short bias and you have the perfect recipe for a vertical move to 1.1400 or higher.
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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