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We see some relief early doors for Europe but global equity markets are still rocking, with boards lit up red as investors manage risk in the face of China’s coronavirus outbreak. There are no signs of this letting up – but at least market expectations have shifted markedly since the middle of last week to better reflect the risk of a rapid rise in confirmed cases. The problem is investors have very limited visibility of the current situation in China, have virtually zero knowledge of epidemiology and virology, and have no clue how bad it will get or lasting the impact will be. Risk models are not geared for this situation.

Nevertheless, futures today indicate a very mild rebound in Europe and the US, with the DAX seen up at 13280 and the FTSE 100 at 7444 on the open. US futures point to gains too today.  But we are not convinced this will hold – as explained in yesterday’s note, buying the dips is alive and well – I would anticipate dips to be buying opportunities for many in the market. But one feels equities face headwinds still as the peak of this health crisis has some way off still.

Those Asian markets that are open have posted steep declines on Tuesday – Singapore, Sydney and Seoul all slipping 2-3% after we saw a day of heavy selling in Europe and the US on Monday. Hong Kong markets will trade as normal tomorrow – this will be the best gauge of how much risk sentiment has been affected.

Cases of the virus are rising fast – up to more 4,500 confirmed in China now from 2,800 a day ago. The death toll has hit triple figures.

Authorities are tightening restrictions on foreign travel and on things like when workers will be allowed back to their posts after the new year holiday. For example, Shanghai is reportedly banning companies from restarting operations until Feb 9th. Foreign carmakers are pulling staff out.

We know there will be an impact on consumption, but if factories are kept shut we will also see a downturn in output in Q1. The risk for the Chinese- and by implication the global economy – is that the lockdown across much of China persists for a longer time than currently anticipated, crippling output as well as consumption.

On Monday, the S&P 500 fell 50 points, or 1.57%, while the Dow fell by the same margin, shedding over 450 points. These were the biggest one-day declines since Oct 2nd. It was a brutal session in Europe too, with the DAX down 2.75% and the FTSE 100 losing 2.3%. Airlines, miners and luxury retailers suffered most.

Risk-off flows further supported government bond prices, with the yield on US 10yr debt moving back to 1.6%. Bunds are near -0.4% again. Could have further to run, particularly if markets think that slacker global growth as a result of this virus spurs central banks to be more accommodative. Likewise gold is holding gains with lower yields supportive of the bugs – steady around $1580.

Oil – ahead of their March meeting, reports suggest OPEC and her allies are examining all options – including extending and deepening production curbs – in an effort to control the slide in oil prices. For now traders are betting on weaker China growth in GDP and slacker tourism numbers in Asia to drive down demand. Libyan output remains sharply curtailed, by about 1m bpd, but this so far is providing little respite. WTI has firmed off its lows to $53.20 – bulls looking to quickly close the gap to $54 or we could get further weakness and retest of $50.

In FX, the yen has held gains but finding it harder to make much more headway. USDJPY was hovering around 109, having sunk as low as 108.7920. Key 200-day moving average support at 108.460 is yet to be tested, with the 100-day line at 108.60 also unscathed for now. The 50-day line around 109.20 is now resistance.

EURUSD is looking brittle having shed its Dec gains. A retest of 1.10 is on the cards particularly as coronavirus fears stoke bid for the relative safety of USD. Next up looks to be the key horizontal support at 1.0990, a level well-trodden in recent months. GBPUSD is a little weaker at 1.3030, having shed the 50-day line at 1.30640 which is now forming a resistance point. Sterling is likely to be well anchored around this 1.30 level until the Bank of England decision. Ahead of that is the Fed decision tomorrow night – no change expected but there could be some interesting nuggets from Powell in the presser.

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