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WHO Raises Alert, But Global Pandemic Fears Ease

By:
Stephen Innes
Published: Jan 30, 2020, 23:32 UTC

The World Health Organization (WHO) Director Adhanom: declared coronavirus a "Public Health Emergency of International Concern."

WHO Raises Alert, But Global Pandemic Fears Ease

Markets

Not so surprising from the market’s perspective as traders had already moved from buying the dip to selling fact, the World Health Organization (WHO) Director Adhanom: declared coronavirus a “Public Health Emergency of International Concern.” The upgrade, however, has triggered some shorts to cover after the director gave the WHO’s stamp of approval to China’s aggressive containment effort. While in the same breath, eased some mushrooming fears by suggesting the number of outbreaks is relatively small, easing ballooning global pandemic fears

Over hedged positions have continued to unwind; still, the market is left with the struggle to quantify the economic impact of the coronavirus, which is a cause for concern. Yet, for now, the market’s risk lights have shifted from flickering on red to a steady shade of amber, which could bring more risk back into play. It’s incredible just how resilient US equity markets are. It appears that investors are taking another virus shrug and are now turning the focus to this week’s dovish fed delivery that suggests equity valuation multiples can continue to expand because rates are low.

But at this stage, this should not be confused by the start of a big transitory trade as the market will need more clarity on the results of containment efforts in China. But the peak in coronavirus cases might be near, and the turning point may not be far away; however, the key will be the spread of the virus slowing each day, so this could be a considerable weekend for risk as the market remains focused on headcount.

A little encouragement was all that was needed. And those that were taking a more rational view of things and viewed the dip as an excellent buying opportunity are getting rewarded across a plethora of growth asset classes.

US Q4 GDP came in touch ahead of expectations on Thursday at 2.1%. But softer details around personal consumption & PCE, however, will likely keep US ‘weaker growth’ narrative and the market consensus 2020 ‘weaker USD vs. Euro ‘ trade alive. Not that it ultimately died, it’s been more or less a case that dollar bears have been unwilling to stand in the way safe-haven dollar flows compounded by the low FX volatility and negative carry.

While it will remain challenging to put concerns over the coronavirus to one side, but fortunately for the overall risk climate, the robust data in the US should at least be able to keep risk on the even keel.

The Bank of England’s Monetary Policy Committee left rates on hold on Thursday at 0.75%. And short sterling positions came under pressure immediately on the BoE hold but, given the dovish nature of the decision, a +1.3100 top was about right on the overshoot, and the market then eventually settled into the 1.3075-1.3100 level.

I’ve been trading Mark Carney from his 2008 Bank of Canada days and Carney’s style of delivery – the ‘on the one hand, and on the other hand’ mechanism – means the presser tends to have a lot of flip flops. But at days end, it’s challenging to view Carney’s comments through anything other than a dovish on hold lens with undetermined Brexit uncertainties yet to play out.

Oil markets

With the WHO decree now out of the way, and with a softer upgrade than expected which lessened pandemic fears, oil traders can get back to the business at hand.

While it’s virtually impossible to quantify the full extent of the demand destruction from the virus outbreak, if there was one asset class more oversold than others, it had to be oil given the bigger than life global supply overhang.

 

Saudi Arabia is reportedly open to discussions about moving a planned OPEC+ meeting to early February from March to coordinate action and counter the oil price slide. In the wake of the WHO’s softer decree, the market will likely now view OPEC compliance efforts in a more constructive light as the negative sentiment snowballing effect from the coronavirus gets temporarily kicked to the curb.

Shorts were covered very aggressively into the NYMEX close as a global pandemic appears less imminent for now. But the key for the move to extend will be the interpretation of peak contagion as viewed through the spread of the virus slowing each day. So, the next 24-72 hours could be critical for a near term oil price comeback.

Gold

Gold falls as risk appetite rises on a less risk toxic decree from WHO as the equity market sell-off reverts. Gold was very much an equity market play this week as traders we’re buying gold as a hedge against a stock market meltdown. So, with the S&P 500 gaining nearly 50 points in fast order into the New York close, gold has come off hard as fast money speculators headed for the exits all at the same time into the NY COMEX as the futures execution window was closing quickly.

The coronavirus is evolving but ultimately a short-term transitory story; however, the bullish long-term gold strategy remains intact. And it is supported by a fed impulse after Chair Powell was not too subtle about sounding dovish.

The US elections and an array of other market risks have been put on the back burner and have been consumed by the bandwidth taken up by the virus. Still, the laundry list of market threats is not about to diminish anytime soon, and this will remain supportive for gold.

Currency markets

A very aggressive 200 pips USDCNH sell-off in the NY afternoon, which is typically a shallow liquidity period for currency trading as a whole, let alone CNH and other ASEAN NDF’s.

 

But with ASEAN risk at the epicenter of all things virus and with the local adding machines continuing to tally up the negative China GDP implications. It might be safe to assume for the short term anyway there could be US dollar demand on dips across the ASEAN basket to defend possible outflows when China comes back online. But with global contagion fears easing, it’s hard not to think that those concerns won’t start to diminish also.

About the Author

Stephen Innescontributor

With more than 25 years of experience, Stephen Innes has  a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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