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Shares and yields slide in coronavirus spotlight. Sterling a haven?

There have been few places to hide while the coronavirus takes the spotlight across global markets. It’s looking like a defensive start to Thursday with shares pointing lower, bond yields falling, and haven currencies bid. Investors don’t like the uncertainty implied by California reporting the first coronavirus case of unknown origin in the United States. VP Mike Pence will lead the US coronavirus response.

 

Pandemic acceptance

 

There has been a rising acceptance that the China coronavirus numbers are baloney and a pandemic is coming. If you were looking for some comfort Australian PM Morrison wasn’t the man to ask. Morrison said the coronavirus is likely a pandemic but that no ‘broader larger’ fiscal stimulus was on the way in Australia to combat it. A pandemic plus no government stimulus increases the chance the RBA must cut rates and that in our view, means more decade-lows for the Australian dollar. Unless the coronavirus panic blows over very quickly, we think there is more downside in the Australian dollar given Australia’s export exposure to global growth.

 

From a markets perspective South Korea just set a dangerous precedent. The country has reported 334 more cases, totalling 1595. South Korean COVID-19 numbers have skyrocketed in the last week but today the Bank of Korea decided to leave interest rates unchanged.

 

Trump pep talk presser

 

US President Donald Trump failed to alleviate market concerns with yesterday’s press conference on the coronavirus. The main takeaway was that the virus will “probably spread in the US”.

 

Futures are pointing to another multi-100-point decline when Wall street opens. The S&P 500 has experienced an 8% drawdown in five days, 2% shy of being a technical ‘correction’. Putting the recent declines into context, markets had been so frothy that we are just back to where we were on December 3rd. Purely on technical price exhaustion, some bounce is due short term.

 

We think the next ‘breaking point’ will be when there is a big cluster of cases in the United States. Former Fed-Chair Yellen acknowledged yesterday that “it’s conceivable that coronavirus pushes US into a recession”.

 

10-year yields – how low can they go?

 

Government bonds are the preferred haven while gold takes a breather below seven-year highs. If you think the uncertainty over the coronavirus could cause a recession and encourage central banks to lower interest rates then buying bonds makes a lot of sense. That is unless you look at the prices which are so beyond par that US 10-year yields have struck another record low. The record low for the US 10-year yield was set at 1.31%. We think the limited space central banks have for lowering rates means they won’t be quick to respond and rather than a fall to 1.25%, a snap-back above 1.40 in the US 10-year is more likely.

 

Brexit coronavirus protection?

 

Ironically Brexit has made the British pound a haven from coronavirus fears. Sterling is virtually unchanged against the dollar this year and well up versus the euro. We still expect the pound to fall on bad news about Brexit talks but there is a benefit in it being uncorrelated to coronavirus concerns.

 

The most recent comments from the EU’s Chief Brexit Negotiator Barnier were a little more constructive. Barnier said the EU is ready to offer “super preferential” access to EU markets, a headline that helped Sterling off its lows of the day. Sterling is heading lower today before the release of the UK negotiating mandate. Press statements from the UK have rowing back against so-called level playing field provisions from the EU so presumably the UK mandate reflects similar ideas. It’s conceivable that UK press releases aimed to set the bar low enough that the EU ends up relieved when the UK mandate offers a plan of more limited divergence.

1-4-2020

End of one of worst quarters ever
The Dow Jones just posted the worst first quarter ever. That’s how bad things are at the moment, but are they ‘peak bad’? Because that would imply a bottom in the stock market. Data from China today continue to suggest light at the end of the tunnel there, bu… Read more

31-3-2020

Markets stabilise on hopes for vaccine, SNB intervening on franc
Beware the Ides of March. There is a lot of relief out there that March as well as the first quarter is almost over. A fresh month can offer some fresh perspective, and perhaps a more constructive one.   President Donald Trump extending social distancing gui… Read more

18-3-2020

The rebound on stimulus hopes loses momentum. Brent < $30
A bigger picture is starting to emerge of how governments are responding to the pandemic and that in itself offers some needed certainty. Authorities are trying to balance economically damaging travel restrictions and social distancing rules with cheap loans f… Read more

17-3-2020

Stocks Rebound after rout, Airline bailouts? Gold holds $1450
Governments are stepping up their response to the coronavirus outbreak which is allowing markets a chance to recuperate on Tuesday.   Following the worst day since Black Monday on Wall Street, US futures went ‘limit up’ – meaning prices could not rise of ove… Read more

16-3-2020

Central Bank Bazooka Misses Target, Stocks in Freefall
Central banks led by the US shot off a bazooka of lower interest rates and quantitative easing but it has missed target. Markets are back into freefall.     Friday’s gains have evaporated and shares are headed deeper into bear market territory. Bank shares a… Read more

12-3-2020

Dow falls into bear market, FTSE to tank, little hope for ECB
Dow drops into bear market, S&P to follow after Trump speech Trump managed to spook an already spooked market. European share markets are set for sharp opening losses. The FTSE is on course to tank 300 points to take it down 30% off its May 2018 peak. The… Read more

10-3-2020

US tax cuts lightening the mood in market hangover
There will be investors waking up today and wondering if it was all a bad dream. But it was all too real. Oil did fall by the most since the Gulf War and global stock markets did have their worst day since the 08 crisis. Today will be a like a hangover. All yo… Read more

5-3-2020

OPEC meeting, Flybe administration & fortune favours a brave BOE
Shares in Europe look set for higher open following the wake of a ‘Biden bounce’ on Wall Street. The Dow saw another +1000-points day led by healthcare companies on the hope the US can avoid a national healthcare service under a President Sanders. Actually, we… Read more