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The pendulum of risk swings back and forth…Hong Kong shares sunk overnight as expected as the market played catch upon reopening after the new year holiday. The Hang Seng dipped 3% before paring losses a touch to trade 2.6% weaker.

This comes after a rebound in the US and Europe as investors decided to buy the dip following Monday’s sell off. The Dow added 187 points, after shedding 450 on Monday. The S&P 500 rose 1%. The FTSE 100 and DAX both climbed 0.9%.

Ahead of the open, futures indicate a flat open for European markets as they seek fresh direction from the Fed meeting later, developments in China with the coronavirus, and a raft of corporate earnings on Wall Street. The Dow could be particularly sensitive with Boeing, McDonald’s and Microsoft reporting. We also have Tesla and Facebook coming up – it’s a big day for earnings.

In terms of the Fed meeting today, the key thing we’re looking for today relate to balance sheet expansion – anything that suggests the free money taps could be turned off may expose riskier assets. Markets are accustomed to the Fed riding to the rescue and using monetary policy to create an easy path higher for stocks. Today’s Fed meeting will be important against this backdrop of heightened risks and we also need to look at whether the expected increase in the IOER by 0.05% to 1.6% will worry markets. As detailed in our Fed preview: Just tweaks, we expect no change to the fed funds rate and for the FOMC statement to describe policy appropriate. Market pricing indicates no chance of a cut. The emergence of the coronavirus in China will warrant a degree of caution in the outlook from the Fed, whilst there is little upward pressure on prices to suggest a shift in the FOMC’s stance. The signing of the US-China trade deal only confirms priors and doesn’t materially alter the outlook from last month. Recent economic data only confirms momentum has slowed but remains solid. Yesterday’s December durable goods orders ex-defence were sharply lower. Easing bias still very much place.

Coronavirus is already bigger than SARS was in China. There are now confirmed cases of the coronavirus in mainland China, including 132 deaths, according to China’s National Health Commission (NHC). There’s mutterings the true number is much higher. The White House is said to be considering an outright travel ban between the US and China – this would have serious implications for trade and the economy.

Cases are rising but the questions over the coronavirus outbreak as it pertains to the Chinese – and therefore global – economy remain unanswered. Could it affect China’s ability to meet trade deal commitments for instance? There is a worry if things get really bad, not only do we see a material decline in Chines GDP growth, but this also creates headwinds for complying with the deal. Further deterioration in the yuan is among the most obvious concerns as we have seen USDCNH rally since the outbreak and threaten to go above the key 7 level. In terms of growth being affected in China, there is a clear risk to supply chains and contagion in the rest of the region as well as knock-on effects further afield. The most obvious risks are to consumption but a sustained lockdown in the major cities would also tend to lead to a loss of output that could be hard to claw back later in the year.

The swing in the risk pendulum favoured stocks and oil but sent gold bulls packing. Crude oil recovered the $54 handle to successfully close the gap from Sunday’s open. Sentiment remains dicey. OPEC and co are getting on the wires talking up prices, indicating they’re starting to really worry. Gold has eased off highs north of $1580 to trade around $1563.

Interestingly both gold and oil have closed their respective gaps after moving sharply at the start of the week on coronavirus fears. Markets have been swift to retrace, so we now must see whether these mark reversals or whether the pre-existing trends reassert themselves.

Sterling is steady ahead of tomorrow’s knife-edge Bank of England decision. Markets see a roughly 50% of the MPC voting to cut rates. GBPUSD is well anchored at 1.30 but whatever the outcome will slip that berth. Recent comments from several policy makers at the Bank, some softer inflation data and GDP numbers, and persistent risks to the global outlook suggest the MPC may choose to act now to cut.

Meanwhile Britain has decided to allow Huawei to supply parts of its 5G network. This could be a mistake, and make doing a trade deal with the US harder. But it also be a bargaining chip. It also indicates the UK is prepared to forge its own course, which is no bad thing.

EURUSD has found support at 1.10 is bonding for now. USDJPY continues to languish at 109 but there’s not much conviction on either side to see 108 or 110 first.

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