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Treasury Yields Erase Entire ‘Phase One’ Trade Deal Bounce Amid Virus Scare

It was risk-off out of the gate Monday.

Predictably, given the weekend news flow, markets kicked off the week with a defensive posture, as China struggles to contain the Wuhan virus, which has claimed at least 80 lives.

CDC officials said the total number of US cases has risen to five. All of those diagnosed with the new coronavirus recently traveled from Wuhan, the epicenter of the outbreak, which is now effectively under quarantine.

The US cases are in Los Angeles, Phoenix, Chicago and Seattle. At least 100 possible cases are being investigated, CDC’s National Center for Immunization and Respiratory Diseases, Nancy Messonnier, said.

Read more: Pandemic Fears Meet Fed, Impeachment, Tech Earnings With Stocks In Stratosphere

For equities, this is an excuse for a pullback, although barring something truly disastrous on the virus front, earnings will play a pivotal role in the new week given the tech behemoths are up to bat.

US equity futures dipped out of the gate, and the yen rose to a three-week high, with USDJPY down a fifth day, tied for the longest such streak since November.

10-year yields, which hit a YTD low on Friday after finally falling through the knee-jerk levels hit in and around Iran’s strikes against US interests in Iraq earlier this month, fell 6bps to 1.63%, the lowest since October 10.

Make no mistake, that’s notable. It was October 11 when Donald Trump and Liu He first announced that the US and China were set to work towards the “Phase One” trade deal which eventually came to fruition (if that’s how you want to describe it) last month.

Given that the “Phase One” deal was a big part of Q4’s reflation narrative, there’s a very real sense in which the long-end has now entirely priced that narrative out.

Holidays in Asia probably don’t help, as the less people there are around, the more illiquid the conditions. The Nikkei initially dove some 2% and the offshore yuan slid.

These moves have a tendency to reverse themselves overnight, but it’s worth documenting the early reaction coming off the weekend, as it underscores the extent to which markets are going to be uncomfortable up to and until there is evidence to support the contention that a pandemic isn’t in the cards.


7 comments on “Treasury Yields Erase Entire ‘Phase One’ Trade Deal Bounce Amid Virus Scare

  1. Charles Ponzi says:

    The Beijing government has announced that it is extending the New Year holiday for an “appropriate amount of time”. Y

    ou have to wonder what the impact will be of the hiatus given the size and import of the Chinese economy.

    • It depends. The Chinese economy regularly slows to a crawl for a couple of weeks around the Lunar New Year. One would think that purchasing managers would have taken that into account. As such, if the coronavirus outbreak does not spin out of control over the next month supply disruptions are likely to be muted.

      If the outbreak does become a pandemic then supply disruptions are likely to be on a global scale with travel and shipping grinding to a near halt amid mass panic and dislocation.

  2. The epidemiology research and reports from friends in/from Wuhan I’m seeing is that this is far worse that the CPC is letting on and a pandemic is likely with the possibility of a Spanish Flu level event not ruled out.

  3. John says:

    Reports I’m seeing is that while this is a more serious version of “the flu” it’s still just the flu. US media is clearly trying to push a narrative. China scratching Trumps back knocking impeachment out of the headlines? Plus a great reason to get people off the streets in Hong Kong, seems like win-win.

    Google “tests for Wuhan negative” and you might be surprised to see that many “suspected cases” worldwide are just “the flu”…

    Anyway, you get the idea. Xi is probably playing it straight knowing we would all ASSUME he’s lying.

    • Grumble69 says:

      Even if it’s just “the flu” (in terms of symptoms & mortality), that is still significant. Many health care providers struggle during a serious flu season. But if you have a novel coronavirus on top of flu, we very likely will see hospitals become overwhelmed. Not trying to paint a dire picture. However, it does have the potential to disrupt every day life.

  4. jyl says:

    3m 10y is only 12 bp now.

  5. jyl says:

    2 year forward rate for the UST 3 mo is about (eyeballing) 1.46% now, inverted by 7 bp vs 1.53% spot.

    UST 3 mo to 10 yr spread is just 7 bp

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