Risk off Asian Session As Concerns on Coronavirus Grow

Very good morning, hope everyone is well. Monday, 27th of January. Let's just, uh, get back to business then and have a talk about what's happening this morning at the open, but also for the entire week ahead. And obviously, as you can see to the side of me, much of the main news is covered by a general risk-off tone to proceedings overnight in the Asia-Pacific session. However, things have stabilized a little bit as Europe has come back into the market. And this really is going to dominate the topic of my discussion. But before I get into my view about where do I think this market is heading on the back of this type of news flow related to coronavirus, let's just have a quick look at what exactly is happening and how the markets are reacting in terms of the Asian session first. So again, just to remind you, on my, my charts I've got EURUSD on the top left, Cable center top, Gold futures on the top right, got the DAX center left, NASDAQ in the middle, S&P on the right, and then, uh, this should be WTI crude. So let me just move that back to here. So WTI crude, and then you've got the US 10-year down in the bottom right-hand corner. So as you can see, we had a bit of a gap down at the recommencing of trade last night on Globex in terms of US index futures gapping down. However, have gone largely sideways overnight, and if anything, at some starting to tick up a little bit as the European cash equity markets have got underway. And then the reverse case of that in the likes of the safe havens. So you can see gold and T-notes gapping up at the open, reflective of that risk-averse trade about the expansion, if you like, of the spread of the coronavirus, particularly in China. However, as I've just said, with the equity move, pretty similar with those other assets, gold and T-notes, just ticking down a little bit. So if anything, it was an initial risk-off open. However, a little bit of confidence and stability is returning as Europe come into the market. And one important thing I would say is that that has been a pretty familiar, uh, response of what we've seen, particularly with this virus, in terms of how markets have reacted. Definitely so far, I think it's something like over 98% or so of all cases have been in China. And so domestically, the ramification impact that that could have on the domestic economy is, is quite clear and present. However, as yet that hasn't seeped through, even though the number of reported cases has grown outside of China. It still isn't at that level as yet. And so definitely markets are being beat down overnight in Asia, led by China. However, generally have stabilized as Europe and the US start to come in. So let's just get up to speed though of what— where we're at with this story. And as you can see from the headlines, Chinese New Year holiday has been extended as the virus death toll climbs to 80. Now a couple of graphics to show you and cycle through. This is looking at the earliest reported onset of symptoms of this particular virus, which was back in December, and you can see the almost exponential rise in which it's had over the course of the last week or so. One particular good resource that I'm going to pop into the Trading Live chat room now— this is something I think was done by the Johns Hopkins University in America, where they're basically compiling lots of different statistics from different agencies, including the World Health Organization, but it gives you basically a real-time tracking ability to see what the current status is with total confirmed cases. You can see in the left, total deaths, 80 at the moment. And then you have a map here where you can just kind of zoom in and out to see. But you can see here the spread now of that virus across much of China. To give you an idea, Wuhan just trying to see if it's on here. The largest spot presumably is here because it's kind of center east, if you like, in terms of the country. But if I start zooming out, you can start to see the spread into other areas. So you've got France here, you've got the United States of America, of which now there, I believe, are 5 cases. 3 were confirmed within 24 hours over the weekend, including— you can see here the kind of Central America as well as the West north and west southern parts of California as well. So overall, it certainly has spread, but more meaningful in regards to China, as you can see here, it's slowly taking over the kind of proximity of the entire nation. This did prompt the Premier Li Ka-shing— well, they've put Li Ka-shing— I think that's a typo there by Bloomberg— but the Chinese, it's probably the Prime Minister rather than the Premier, visited Wuhan, the city at the epicenter of the disease. Anxiety obviously is growing amid evidence the disease has quite a lengthy incubation period, and that period is said to be up to about 2 weeks in duration where you don't show basically any symptoms. Now the country of origin, or the city of origin, which is Wuhan, wasn't put on lockdown until last week. Now that meaning though, the numbers that have been put forward is that approximately 5 million people had already left the city after it got locked down. And given the fact that it can take up to 14 days before actually you have contracted it but don't show symptoms, Just goes to show then, it's going to be probably another 2 weeks or so until we really get a clear handle on how, how far spread and to what level this virus has managed to get around the world. And obviously this coming at one of the most meaningful travel movements in kind of human society globally, which is Chinese New Year, makes it all the more worse. Now what has happened, as per those headlines, is that Chinese New Year has been extended. This is in order to kind of stop that type of large mass travel in order to contain as best they can the virus by the government. One thing that I saw this morning, S&P Global, their analysts have been crunching the numbers and they've said that if spending on the services in China falls by just 10%, that would equate to a growth slowdown of 1.2% off of Chinese GDP over that period. So again, from a financial markets point of view, this is kind of twofold. One is obviously the accumulation of people contracting this virus and obviously the death tally, but then also the implications on how severe it could be on the Chinese economy is what's going to be key for ascertaining, well, how violent markets might sell off in the, in the Asia Pacific region. So this is where we're at at the moment. As I said, it's very much still at this point at least contained to, to China to some degree, albeit numbers have been rising on foreign shores. But I think the, the reaction in the market is quite telling this morning. I, I still think that this disease— I think it's more of the fear fear of the unknown, particularly given that incubational point of not showing symptoms, which is possibly creating a fear trade, but very much more dominated during the Asian session. When we actually get back to business in Europe, in the US, only when we start to buy into that narrative is when you're going to get a much more bigger, pronounced, consistent move. And I just don't quite see that happening just yet. So definitely one to monitor for the week, and this is definitely going to be one for sure that you're going to have to keep a close eye on, no doubt. Other things that have been happening, this is one. This was over in Iraq. Still some ongoing tensions in the Middle East. US Embassy in Baghdad hit by a rocket attack. Injuries reported after barrage of missiles slam a compound, and attacks on US presence in Iraq rise amid tensions, of course, with Iran. However, if you actually— I mean, this was the headlines here that I was just spoken about. But if you actually look at the performance of WTI crude, you can see actually we've gone the opposite direction to what you might imagine if it was that headline alone. If anything, we've dipped down and we've moved lower. And again, a lot of this is more in the short term, a focus on the coronavirus and the impact that that could have on the Chinese and the global economy if it were to spread violently and create more excessive economic downturn within those respective countries and globally. The other thing at the weekend that a lot of people were, and, well, looking forward to is potentially a disruption in the eurozone, particularly for Italian assets, was two hotly contested areas and one in particular in the more northern part of Italy. And these were regional elections, but essentially Matteo Salvini has suffered another loss in a key regional vote, providing a much-needed boost to Prime Minister Conte's fragile government. And in a nutshell, it makes the possibility of a snap election less likely in Italy. So if anything, this should be taken as a net positive. BTP futures are rallying sharply this morning. We closed on Friday in the BTP, just having a look, on a price at about 144.5. We're now trading up 2 points above that, so a decent 200-tick move there in the BTP this morning as relief, if you like, that the more euro-skeptic Salvini of the League basically failed to gain any real traction. And the potential to disrupt the government and call for snap elections. The Interior Ministry figures showed a center-left bloc led by the Democratic Party, or PD, a partner in Conte's ruling coalition, were at 51.3% in Emilia-Romagna. And that area is key because for the last 50 years it has been run by center-left parties. And obviously the League were looking to disrupt that. The opinion polls were way closer than this actual result. So the center-right group headed by Salvini's anti-migrant league, they were at 43.8%, so nowhere near as good a performance as what some of the polls were potentially indicating. So a little bit of relief this morning for those Italian assets. I'm just going over to the, uh, the calendar then for this week. I know this is a bit small, so let me talk you over the highlights of what we're looking out for. From this morning, we do have the German IFO number coming out. Obviously, this is quite often well followed given that this is the actual companies and thousands of them across different sectors within Germany. And it gives a nice snapshot of how they feel right now about the present, but also about the 6-month future going forward. And with things like an ongoing tariff dispute with the US, the Brexit process still ongoing and some domestic political difficulties to navigate for the existing coalition government. Certainly, IFO is going to be quite an interesting number, but otherwise relatively quiet this morning, very much dominated by the updates in reaction to the, the spreading of the coronavirus. Going in towards the rest of the week though, and starting with Tuesday, Tuesday you can see US earnings. You've got Apple Now this week, if I just jump to this graphic here, we've had 17— 1-7— 17% of the S&P 500 reports so far in this earnings season for Q4. However, we've got 147 of those S&P 500 listed companies reporting this week, with 14 of the 30 Dow components. So half the Dow as well is reporting this week. Now, just to give you some of the highlights, really things kick off on Tuesday. Pre-market you get 3M, so one of the Dow heavyweights. You've also got Pfizer, United Tech, but then you get, you get the full kind of suite of the FAANG names reporting this week. You've got Apple aftermarket on Tuesday, you've got Amazon aftermarket on Thursday, you've got Microsoft and Facebook reporting aftermarket on Wednesday. So you get all of the big tech giants reporting, and I think overall, from the top of my head, you're talking about almost a third of the entire NASDAQ 100 in those companies alone, just to name a few. So particularly busy week, it ramps up a few gears on the earnings side of things. So do be aware of that, and that will be on your, your weekly calendar. Going back then to other things I'm looking out for, Before we get to the Fed, let's talk a little bit about the Bank of England. Lots of people, of course, talking about this because currently markets' expectations derived from where short-term interest rate futures are priced would show that it's an absolute coin toss about what the Bank of England are going to do on Thursday. Will they hold rates or will they cut rates by 25 basis points? Now, A lot of this has been thrown up in the air because generally economic data in the UK has been weak. However, then the PMI came out for the service number and it was quite strong at the end of last week, which again has kind of created even more uncertainty. From a Monetary Policy Committee point of view, you can see here, this is the updated graphic of the spectrum between doves on the left and hawks on the right. And there is an overarching tilt towards moving increasingly more to the left, becoming more dovish. Now, what do I think personally? For what it's worth, I think the Bank of England will not cut rates. I'm one of those who are of the belief that they're better off waiting at this point in time and keeping more bullets or ammunition for future policy action down the road should it so be needed. So I'm actually anticipating a vote split of about 5-4, so incredibly close, which is going to mean a very volatile intraday event to trade. And not forgetting that this Bank of England meeting also includes the monetary policy report where we get the outlook on growth and inflation, and we're able to get a bit of a sense about where rates might be in the future. So the Bank of England is set to be a really interesting event, and we're going to be covering that live via our YouTube channel. So do make sure you subscribe to the channel to, to, to listen to that and our, and our full coverage. The other central bank, of course, is the Fed. You've got the FOMC on Wednesday evening. Now this is a quick look at the implied probability of a, of a rate cut at the FOMC, and it is 87.3% likely that they will hold interest rates, and I think that is, um, very much expected to be the case. There is no update to the Summary of Economic Projections. We had that in December, so the next one not due till March. So here, definitely comparative to the Bank of England, not expecting as much action. Nonetheless, it does warrant watching because of course Jerome Powell will be hosting his press conference. Overall US data has been relatively mixed, showing them no real need for a change to rate policy after the 3 that they conducted in 2019. And with the Phase 1 trade deal that's been concluded, that's fine, but it's about the uncertainty on the implementation and the commencement and success of Phase 2 and beyond, meaning that the Fed kind of need to just stand pat in the wait-and-see mode for the time being. Other than that, Friday then is, uh, well, before I get to Friday, Thursday, don't forget you've got US advanced GDP, which is key. And then Friday you get manufacturing, non-manufacturing PMI data coming out of China. That of course will be closely watched. You've also got the preliminary readings of eurozone GDP numbers, which will be very important. Chicago PMI is coming out and a few other US-related releases. So economic data for the US is very much tilted towards the back end of the week. So front end of the week, that's hence the reason why we're quite coronavirus-focused at the moment. The earnings, as per usual, tend to peak midweek. As I said, Apple kicks things off on Tuesday, the big tech giants coming out Wednesday, Thursday, and the oil majors come out Chevron, ExxonMobil, likes of Caterpillar as well come out on Friday. And then finally, um, Sam, Sam's throwing a big party this weekend. So Brexit has been delivered. Brexit occurs as of 11 PM on Friday. We will then— the House, both the upper and lower house, does not sit on Friday. As of Monday, we are no longer part of the European Union. We go into this temporary kind of phase of then going into the implementation or transition phase of when the real business gets underway of trying to see whether or not we can construct a trade deal. Just to be clear, Friday's deadline about Brexit, and it's a light show, not the Big Ben, Big Bong that's going to happen, it's purely symbolic. Nothing's going to happen in terms of the pound. It's all a formality from here on out. The real turkey starts getting done in terms of potential market moving for the pound in the coming months as we close in on that summer deadline about the request or not of the transition beyond 2020. All right, that is it. Going to leave the briefing at that, and I'm going to wish you guys a good week ahead. I'm going to work on the weekly strategy, of which I have sent out to you in about an hour or so's time. Uh, any questions though, feel free to leave a comment on the video. Sam will be back on the briefing tomorrow as per normal. Um, so I look forward to catching up with you all later on. Thanks very much.