also the 3 month-10 year spread is bouncing today of the zero level ,another metric boosting positive sentiment.Simple way to think of yield curve Flattening bad for Risk , Steeper good for “risk on “sentiment
Contacts are pointing to a report from official Chinese news agency Xinhua that the virus may reach its peak in one week or about 10 days, citing a renowned Chinese respiratory expert. (IFR News) Positive spin
Spoos bouncing a bit as talk of FOMO and Buy The dip (BTD) half-jokingly half serious fill twitter and Bloomberg airwaves. Some stories are encouraging see above whereas other stories not so much. Germany reported her first case of Disease. , Hong Kong said it will close some border checkpoints and restrict flights and train services from the mainland(BBG). Fluid situation that no one can accurately predict, but for now what was lower yesterday is higher today and what was higher yesterday is lower. Common denominator to everything is what will the Central banks do? The OIS market, Overnight Index swaps pricing in the first rate cut in September whereas on Friday December was the first month for a possible cut. The uglier markets get the more they bet on the Fed to come the rescue.
Fed meeting tomorrow no change in rates expected statement likely a nonevent but press conference should be exciting were questions regarding balance sheet and Corona virus likely to dominate.
Economic calendar today shows durable goods and Consumer confidence and another heavy dose of treasury auctions $20 bn 2-yr FRNs, $26 bn 1-yrs and $32 bn 7-yrs
Chinas NHC: 4515 confirmed cases & 106 deaths
Barclays: Compounding effect of spill over to economic growth from China & region, expect transitory oil demand erosion of ~600-800k bpd in Q120 or 0.2m bpd for the full year; if demand erosion is more acute, expect OPEC+ producers to take further steps to keep mkts tight; Libyan oil prod could fall further if blockade of key infrastructure facilities by LNA-backed forces continue
Apple earnings today at 3:30
2 year-5 year yield now inverted not a bid deal if re- steepens quickly if not talk will increase about recession risks
From Morgan Stanley….Plotting a composite of 3-month implied volatility for equities, interest rates, credit, foreign exchange and gold, uncertainty has plunged to post-crisis lows in several assets.
Volatility primed for a short squeeze lets hope it materializes as the best trading environment is when forced covering is at hand
From IFR news
Perhaps the news infecting equities the most, incubation periods, and Chinese authorities extended the Lunar New Year holiday to February 2, from January 30. And authorities are likely to push the holiday out further, resulting in more days of less consumption. Really in reverse since the holiday spending would have likely been a record. As we pointed out last week, the incubation period is dramatically longer than SARS was, up to 14 days, versus SARS typically just 2 to 3 days.
China’s Minister of health Ma Xiaowei said “This is very different from SARS…the virus can be contagious during the incubation period, which is about 10 days, with the shortest being one day and longest being 14 days”. Thus markets anticipate that the number of cases and deaths could continue to increase exponentially. And the growth decay also spreads. For example, Thailand’s tourism is often fueled by as much as 50% Chinese tourists. For now, tourism busts are going global.( italics my own)
I just want to repeat it is worries about the Impact on Global growth that has markets worried at least for now. WSJ article talking about past health scares and market impact, this in regards to SARS epidemic” the SPX posted a gain of almost 20% 12 months after first occurrence of SARS epidemic” a bit of panic now but hopefully brighter skies ahead for Stocks.
This is the busiest week in earnings season as some of the Big Tech companies report Apple,Amzn Microsoft and close to 125 SPX companies post results. FED meeting,Advanced GDP and Bank Of England policy meeting are also highlights this week ,Plenty on the Calendar to keep traders busy. Vix having a nice pop today as front month futures move above the second month ,providing another kink in the vix curve.
A few charts
China announced that Lunar New year holiday will be extended to February 3rd to try and keep virus from Spreading. Schools will be closed to February 10th and many Business also will be closed beyond the end of the New Year celebrations
Slowdown in China=Slowdown in Global growth/ no reflation =Reason for Risk Off! The Human toll is scary but markets, for now worried about the Economic Impact to China GDP, This lunar new year is similar in spending habits to U.S. Black Friday /Cyber Monday Holiday spending. Watch out for any comments that extended holiday closings or mentions of more factory closings that could cause another leg down in Risk
Other News of Note ;Missile attack at the U.S. Embassy in Bagdad where injuries are reported, German IFO business climate index Unexpectedly dropped and Bernie Sanders leading the Democratic filed also apply pressure to Risk
Stock markets are oof worse levels of day and Bonds off best level of day
Dow and Spoos -1.5%, Nasdaq -1.85%, Stoxx 50 -2%, Dax-2.2%. Bund yield down 4 bps and a bit of surprise Italian 10 year yields -18 bps due to positive local elections. U.S. Yield curve flatter two year yields -5 bps, 5s -6 bps, 7s and 10s -7 bps and 30 year yields -6.5 trading at 2.06%. All-time lows back in the conversation for Bonds.
Cl and Brent both down 3% CL -13% and Brent -11 % YTD Copper -2% looking at 8th consecutive lower close, lean Hogs offered limit down pre-open, Corn -1.8% Soybeans -1.25 wheat -1.44% and Cotton -1.6% all due to demand destruction worries.
The U.S. confirmed three more cases within 24 hours: two in Southern California and one in Maricopa County, Arizona. All patients had recently traveled to Wuhan, China, and are hospitalized. Their close contacts are being identified and monitored for signs that they may be developing the disease. Washington state and Chicago also confirmed infections (BBG)
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman Al-Saud said on Monday he was watching developments closely in China and said he felt confident that the new virus would be contained. Markets are being “primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand,” he said.(reuters)
World braces for economic impact of Wuhan virus outbreak- The 2003 outbreak of SARS, or severe acute respiratory syndrome, caused $18 billion in losses, pushing down the economic growth rate in East and Southeast Asia by 0.6 percentage point, according to an estimate by the Asian Development Bank. The economic toll was extremely large relative to the extent to which SARS actually spread, according to the bank.
Cooper headed for the worst week in 3+ years if it closed right here right now.Of all the Assets impacted by Corona virus headlines it appears that copper is the one most highly correlated with the them ,Oil running a close second.Below histogram is weekly percentage change for copper