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Equities pullback, PBOC lending & higher inflation help CNH

The rate of new virus cases is slowing, and investors stepped heavily back into risky assets last week. A little caution was on display come Friday which is running through to Monday.

Workers at the Foxconn factory in Zhengzhou getting the go-ahead to return to work is hopefully a sign the worst economic drag from the coronavirus outbreak is behind us. However, five Britons contracting it in the French alps is a warning that things could take a turn for the worse again.

EQUITIES

Asian equities were mostly lower on Monday, tracking the losses from Friday on Wall Street. The first batch of a series of special lending programs from the PBOC to regional banks in areas of China affected by the coronavirus is helping shares in Shanghai gets a small boost. Assuming we aren’t headed for some apocalyptic outcome from the virus, from a market perspective the main concern is economic. The more Chinese central bankers do to address any economic fallout, the more investors can afford to discount the coronavirus.

A mixed bag non-farm payrolls report saw US shares pull back with some understandable profit-taking at the end of its best weekly gain since the summer. We might have considered it a goldilocks jobs report in other circumstances; big job gains with more modest wage inflation that should keep the Fed at bay. But after a big weekly gain and when the coronavirus situation isn’t still fully understood, traders took their gains and ran.

European equities are set for a slightly weaker start. European indices are just off record highs and awaiting more macro catalysts and better earnings to continue the rally. Monday could be a day of preparation with a lot of the action on Tuesday with Fed Chair Jerome Powell’s testimony to Congress and the New Hampshire Primary. Looking further out across the week we have earnings from Alibaba, Nvidia as well as Barclays and the scandal-hit Credit Suisse.

FOREX

A multitude of evidence that the US economy is acerbating again saw the dollar make some headway.

Easing concerns around the coronavirus and inflation data coming in hotter than expected helped the Chinese yuan gain ground on Monday. The better outlook for China, with inflation that implies an economy awash with money and performing well has helped the Aussie dollar rally off decade lows. AUDUSD at 0.67 is big support but we suspect given the prospect of lower demand for its raw materials from China, the level will break.

The Kiwi dollar is up slightly on Monday having fallen 5% year-to-date ahead of the RBNZ decision early Wednesday.

COMMODITIES

Oil prices are seeing a small lift after slumping over 6% last week, and over 15% in the past three weeks. Oil market sentiment is so dour that a rebound is overdue but its not clear what the catalyst can be if Russia stops OPEC+ from delivering on additional output cuts.

Gold is aiming for a fourth day of gains on Monday. There is a general sense that the coronavirus will have a negative economic effect that has already stirred up monetary easing in China and could easily do elsewhere.  

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