New Respiratory Illness Saps Risk-Taking Appetites

Overview: The spread of a new respiratory illness in China has spurred a wave of profit-taking in equities and risk assets more generally. All of the markets in the Asia Pacific region tumbled, with Hong Kong hit the hardest (-2.8%) after posting a key reversal yesterday. The sell-off continued in Europe. The Dow Jones Stoxx 600 is off about 0.8% in late morning turnover, led by consumer discretionary, materials, and energy. It is the biggest decline this month. US shares are trading heavily, with the S&P 500, about 0.5% lower in electronic turnover. Benchmark yields are lower in the Asia Pacific and core European countries, while Italy, Spain, and Portuguese yields are slightly higher. The dollar is mixed. With a better than expected employment report, sterling is the strongest of the majors followed by the Japanese yen. The dollar-bloc currencies and the Norwegian krone are nursing modest losses.  Nearly all the emerging market currencies are lower. The JP Morgan Emerging Market Currency Index is lower for the fourth session in the past five. Gold is acting as a risk asset and is off about 0.3%. Oil is heavy, and the March WTI contract is off 1% and is slipping back below $58.  

Asia Pacific

As widely recognized, the Bank of Japan's meeting concluded with no fresh action.  However, the impression that officials will look through the economic wobble in Q4 and focus on the fiscal stimulus and the summer Olympics was reinforced by comments from Governor Kuroda. Growth forecasts for this fiscal year and the next were lifted by 0.2% to 0.8% and 0.9% respectively. CPI forecasts were shaved by 0.1% to 0.5% and 0.6% FY19 and FY20, respectively. Two governors dissented (Kataoka and Harada) against the decision to leave the yield curve target unchanged.  

It is difficult to distinguish Hong Kong markets reaction to Moody's decision to cut the Special Administrative Region's rating to Aa3, which is the equivalent of an AA- rating by Fitch and S&P and fears of the new SARS-like virus in China. Consumer discretion, consumer staples, and real estate sectors fell 3% or more today. Fitch cut Hong Kong's rating to AA from AA+ four months ago. S&P has maintained an AA+ rating. Moody's expressed concern about the "slow" and "ineffective" government response to the demonstrations that began last April.

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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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