Stop Making Sense | Daily Market Commentary with Jeffrey Halley
If anyone needed evidence of the effects of the corona-virus’ negative feedback loop on economic activity around the world, one only had to cast their eye to Singapore this weekend. On Friday the Government moved their virus alert status up to Defcon Orange. That really meant nothing had changed too much, wash your hands a lot, be sensible and follow any additional instructions they might give.
Like a playlist of Talking Head’s greatest hits, a section of the population stopped making sense, went into a psycho-killer mode and said don’t take me to the river, take me to the supermarket. Across the island, shelves were emptied of rice, instant noodles, toilet paper and more bizarrely, condoms. The last one must have been particularly galling for the Government. Singapore would love nothing more than a silver lining corona-virus baby boom, with one of the lowest birth rates in the world.
Similar scenes have played out in Hong Kong as well. Bemusedly watching developments from a distance, we shouldn’t poke too much fun at either Hong Kong or Singapore’s populace. The scenes of panic could just as easily be irrationally replicated in other countries should the rate of infections ex-China accelerate globally, which the World Health Organisation has warned is still very much on its possible agenda.
Slews of companies warned towards the end of last week about the impact on sales from the shutdown in China. Hyundai and Kia announced factory closures today citing a lack of Chinese made parts from their supply lines. Force Majeure’s are very much in play from Chinese importers as well with factory closures, and slumping domestic demand cited as their inability to take delivery of cargoes.
China’s partial return to work continues today, but the economic knock-on effects of the Wuhan virus are being felt across the world. That is despite the outbreak being numerically still mostly confined to China itself. That likely explains why Friday’s blowout Non-Farm Payrolls print of 225,000 jobs was ignored, with Wall Street coming to its senses, and unwinding a part of the three-day recovery rally last week. Ever the optimists, Wall Street priced in a v-shaped Wuhan recovery last week to fit their narrative. That may not yet be a done deal with the Federal Reserve saying that they were monitoring the situation. One thing is for sure, the next move in global interest rates is not going to be up.
China’s January inflation rate accelerated to 1.40% MoM this morning, mostly driven by higher food prices, notable pork. The data, which covers pre-Lunar New Year spending and the initial viral outbreak, is likely to continue to print on the high side in coming months. Internal supply chain disruptions from the viral outbreak will drive price increases in food, although the fall in domestic discretionary consumption and factory output will mollify the former’s gains.
The China inflation data bookend a week of tier-2 economic data from around the world, culminating in US Retail Sales on Friday, expected to increase 0.30% MoM. However, novel corona virus headlines will dominate markets this week.
Wall Street finally retreated on Friday as forward-looking economic growth concerns from the corona virus outweighed another set of excellent, but backwards-looking, US economic data. The S&P 500 and Nasdaq fell 0.54% with the Dow Jones falling 0.94%. Friday’s falls though was only a dent in what had otherwise been an excellent week for Wall Street, which has been pricing in a v-shaped corona virus recovery.
Those growth fears are looking much more ominous this morning though after a weekend of bad news, however. Asia stock markets are solidly in the red as the corona virus outbreak shows no signs of abating. The Nikkei 225 has fallen 0.55%, the Korean Kospi by 0.70% and the Straits Times by 0.60%. China’s Shanghai Composite is down 0.60% along with the Hang Seng, with the CSI 300 is lower by 0.60%.
In their defense, most Asian markets opened much lower and have recovered some of those initial losses. It is, however, hard to see further gains occurring from here against the backdrop of the corona virus. That is likely to be the theme of the week, as the economic damage is totaled up from the outbreak.
The US Dollar rallied on Friday against the major currencies except for the Japanese Yen, which saw haven-based inflows. Robust US data and defensive moves back into US Treasuries by investors saw strong inflows in the greenback, a situation likely to continue in the first part of this week.
EUR/USD fell below 1.0950, and GBP/USD fell below 1.2900 as fears over the economic health of Germany weighed on the bloc as a whole. USD/CNH rose 300 points to 7.0050 but seems to be mirroring Mainland stock markets today. CNH fell again initially but tracked higher versus the Dollar as Mainland markets staged a dead cat bounce, USD/CNH falling to 6.9950 this morning.
The same pattern has repeated to a much lesser degree across Asian regional currencies. With the economic cost of the corona virus becoming more evident, local Asian currencies are likely to spend this week on the back foot against the US Dollar and rallies short-lived.
Oil eased lower on Friday, mirroring the drop in equities on growth fears and Russia’s reluctance to approve further cuts in OPEC+ production. Brent crude fell 0.75% to $54.50 on Friday and has fallen again this morning to $54.25 a barrel. WTI fell 1.10% to $50.40 on Friday, falling further to $50.20 a barrel this morning.
The fall in Brent crude, in particular, leaves it perilously close to last week’s lows around $53.80 a barrel. That level that was tested multiple times over the past five sessions and proved resilient, even if the ensuing rallies were unconvincing. With Russia and OPEC vacillating on production cuts and markets awakening to the actual fall-out of the Wuhan virus, that $53.80 region appears much more vulnerable this week.
With ample global supply and the Brent futures curve in contango, a fall through $53.80 on the global benchmark, may prompt stop-loss selling and a new rush for the exit doors. A fall by WTI thorough $49.50 will likely have the same effect. Even as equities rallied strongly last week, oil refused to climb far from the bottom, and that is a red light warning sign.
Gold climbed modestly on Friday to $1471.00 an ounce but remained firmly anchored in the middle of its longer-term $1450.00 to $1485.00 range. Haven flows balanced out by a generally stronger US Dollar.
Gold has eased slightly to $1569.00 an ounce in directionless Asian trading this morning. Gold’s overall price action remains consolidative but constructive in the bigger picture. A further escalation in the corona virus situation, such as a rapid increase in international cases, will strengthen the case for a test of resistance sooner rather than later.