ECB's Strategic Review And The Coronavirus Command Investors' Attention

Overview: The spread of the coronavirus and the lockdown in the epicenter in China has again sapped the risk-taking appetite in the capital markets.  Asia is bearing the brunt of the adjustment. Tomorrow starts China's week-long Lunar New Year celebration when markets will be closed, which may have also spurred today's drama that aw the Shanghai Composite tumbled 2.75%, bringing the week's loss to 3.2%, the most in five months. India was among the few markets in the region that managed to post small gains today. Europe equities are lower for the fourth day, but losses have been minor, and over the four sessions, the Dow Jones Stoxx 600 is off around 0.5%. US shares are trading with a slight downside bias. The US 10-year benchmark is near 1.74%, the lows for this year, while European bonds yields are off 2-4 bp, with Italy fully participating after yesterday's wobble on changes in the Five Star Movement. The US dollar retains firm tone, rising against most of the world's currencies today. The Australian dollar and Japanese yen are notable exceptions among the majors. The dovish twist by the Bank of Canada yesterday is behind the Canadian dollar's underperformance today.  It is the heaviest of the majors, extending yesterday's 0.5% loss with another 0.25% today. Among emerging market currencies, the Chinese yuan fell a little more than 0.35%, and the 1% loss for the week is the most since August.  Gold is trading heavier but is rangebound between roughly $1546 and $1568.  Growth concerns and a build in US inventories (API says 1.57 mln barrels) continues to pressure oil prices. The March WTI futures contract is extending yesterday's 2.8% loss with another 1.7% leg lower bring light sweet crude prices to their lowest level since early December, which is around 15% below the US-Iran confrontation high (~$65.40) on January 8. A broad measure commodity price (CRB Index) is falling for the fourth consecutive week, during which time it has fallen about 3.75%.   

Asia Pacific

Within the disappointing Japanese December trade report, there were a few bright spots. First negative signals need to be recognized to appreciate the positive signs. Exports and imports were weaker than expected. Exports fell 6.3% year-over-year, nearly half again as big as the median forecast in the Bloomberg survey (-4.3%). Imports were off 4.9% compared with the median estimate for a 3.2% decline. The auto sector remained problematic. Auto exports were off 11.8%, and parts exports fell almost 11%. Given that exports fell nearly 15% to the US, we suspect that it may show up in US auto import and inventory data. It is the fifth consecutive month exports to the US fell.  

The constructive news is that exports to China rose for the first time in 10 months (albeit less than 1%). Moreover, the export of semiconductor making equipment surged by a little more than a quarter. The two are no unrelated. Japan's exports of chip fabrication equipment to China jumped 60%.  This is important too because semiconductor chips (design and manufacturing) are seen to be a bottleneck for China. As part of its import-substitution strategy, it will likely ramp up its efforts to become more independent. Separately, Japan reported a 0.9% rise in its November all-industries index.  It was near twice the gain expected and as another piece of data showing recovery after the October typhoon and sales tax boost.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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