Markets don’t like uncertainty, and it would be difficult to conjure a macro scenario more fraught with uncertainty than the one traders and investors are facing in the new week.
The weekend brought a deluge of disconcerting news on the coronavirus front, and Bernie Sanders now looks to have a choke hold on the Democratic nomination.
With risk assets already on the back foot coming off a lackluster Friday session, the mood was predictably sour out of the gate, as US equity futures fell as much as 1.2%.
The Aussie sank in recognition of the floundering outlook for growth and the assumption that the virus fallout may lead to demand destruction in commodities. As one analyst put it, “this can only be bad news for commodity currencies”. The Aussie is hanging out close to an 11-year nadir.
The IMF over the weekend trimmed its growth outlook as G-20 finance ministers and central bankers struck a cautious tone when they met in Riyadh amid headlines out of Italy and South Korea, where COVID-19 is spreading. South Korea confirmed an additional 161 cases, bringing the new total to 763.
“The world is getting spooky with virus clusters breaking out all over Korea with Japan not far behind”, AxiCorp’s Stephen Innes said, adding that things may be “about to get extremely problematic, and market conditions could get exponentially worse this week”.
South Korean Vice Minister Kim Yongbeom said a negative impact from virus is “unavoidable” and Seoul will announce “extraordinary measures” to support the economy. Chinese officials (including Xi himself) have echoed that assessment in recent days.
The won fell to its weakest since August and the Kospi is in trouble – that’s about the simplest way to put it.
Nouriel Roubini didn’t miss an opportunity to pile on, writing the following on Sunday:
Even in best scenario of a V-shape recovery China can’t grow more that 4% yoy in 2020. Even if Q2-Q4 was 8% ar rather than preshock 6%, with Q1 growth being at least -2% (qoq or -8% ar) you cannot get more than 4% yoy for 2020. So markets are lunatic to expect 5.5% for this year! If China grows at an annual rate of 6% (1.5% qoq) in Q2-Q4 like pre-virus while it contracts in Q1 at at least at the rate of 2% (-8% ar) then 2020 growth is only 2.5% yoy, a dramatic collapse. So even with V-shape recovery China & world growth will collapse.
Take that with a grain of salt, folks.
And yet, although it’s important to avoid trafficking in hysterics, it’s also important to be realistic. In the near-term, that means recognizing that anything growth-sensitive and/or commodity-linked is likely to come under pressure barring some kind of quick intervention (verbal or otherwise) from the PBoC or other “manna” from stimulus heaven.
Oh, and it’s probably best if we all just go ahead and be realistic about the trade “deal” – it’s now little more than a figment of Donald Trump’s imagination.
“The phase 1 trade deal is by the way most likely 100% dead already, since China will never be able to i) keep USD/CNY stable and ii) more than double imports from the US due to Wuhan, but they will be able to call on the ‘force majeure’ paragraph in the deal”, Nordea’s Andreas Steno Larsen and Martin Enlund said Sunday.
“A renegotiation awaits after the US election”, they went on to remark. “At least if Bernie doesn’t beat Trump.”