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Asia has been sharply weaker overnight as fears over the coronavirus weigh on investors. Wuhan is in lock down – about time too, but coming as it does at the start of the New Year holiday, it’s a big problem for the authorities. Shanghai’s A50 slipped 3%, with the Hang Seng down 2%. Markets seemed to largely shrug this off yesterday but as I said in Monday’s note, it’ll get worse before it is sorted.

European shares are weaker at the open. Luxury and airlines are most exposed to the virus, as consumer sentiment and tourism suffers in China and around the region. The DAX has skidded a  further 0.4% lower to 13,450. The FTSE 100 was softer by around the same margin.

It was a strange old day yesterday as we saw record highs for the S&P 500 and Nasdaq but the bulls couldn’t maintain any momentum. The Dow eased a shade lower with Boeing down again. The DAX also notched a record intra-day peak but failed to hold on, closing 0.3% lower at 13,515. The FTSE 100 was 0.5% down at 7571, languishing on pound strength. 

Whilst it may seem odd to talk about what’s dragging on the market when we’re at record highs, there’s no doubt bulls are just a little timid right now to really blow this higher. And given the recent ramp, the market is ripe for a pullback.

First the coronavirus has everyone a little on edge, and is a clear and obvious drag for airlines etc. Chinese bourses and Hong Kong are most exposed to the risk, but there is definite risk of contagion.

Two, the rhetoric on trade we’re hearing from Mnuchin and Trump at Davos is as belligerent as ever, while Von Der Leyen is hardly striking an emollient tone over British hopes for a quick and easy deal with Europe. Divergence from EU rules means, er, trade not an equal terms. It’s unavoidable.

Brexit to one side, British and French digital tax plans are the next front in the Trump trade wars and could threaten to undo some of the recent gains in US and European equities. Trump will hit Britain with punitive auto tariffs if the govt goes ahead with a digital services tax disproportionately targeted at US tech giants. The same goes vis-a-vis a French tax. 

Balancing the three competing aims of Britain, the US and the EU will require Bismarck-like skill by Boris Johnson. 

Three, valuations need earnings growth to justify stocks at this level. On that front, doubts are surfacing over Q4 profit margins although S&P 500 companies are generally beating expectations and growing revenues. But it could be four straight quarters of profit margin compression – that should make investors a little more cautious. Growth in Europe remains anaemic.

Tesla keeps squeezing the shorts without mercy. Shares rose another 4% – earnings due next week. Analysts are rushing to update forecasts and price targets. There’s a lot riding on these numbers – Tesla misses it could be a bloodbath.

Oil has continued to slide after snapping key support yesterday. WTI broke at $58 and kept falling until it found some tentative support at $55.60. I remarked last Tuesday that oil had a $55 handle written all over it – the bearish momentum is very powerful but we are approaching a more stable support zone and the market is close to showing overbought conditions on the 14-day RSI, which last time this occurred was a trigger for a rally. Brazilian output has risen to an all-time high. This is important as it shows that the fears over non-OPEC+ production ramping higher in 2020 – US, Brazil, Norway etc – is being evidenced and this will make impotent any reactive measures by OPEC and its allies. Effectively all OPEC is doing is ceding market share. Prices of WTI broke down through important long term averages yesterday and this could herald a further retreat, though $55 is likely to offer an area of stabilisation. We have seen net oil long positioning rather stretched, exacerbating this decline as speculative net longs are forced to liquidate. Worries over the potential impact of the coronavirus on China/Asia growth are a factor but largely I see this as over-extended longs having stops triggered.

Brexit – the government’s withdrawal agreement bill has passed! Roll on trade negotiations…it’s not going to be easy and the pound will act as a barometer of success. Headline risk will reappear for the pound.

Sterling is a tad firmer this morning after retreating from yesterday’s highs in overnight trade. GBPUSD knocked on 1.3150 twice and twice come down to rest on 1.3120. A third push to 1.3150 may be on but ran out of momentum this morning early doors at 1.31450. The chart pattern has a bullish and flaggy look about it. Near term a lot rests on the Bank of England policy decision next week, though we may start to notice trade play an increasing role in sterling’s moves as we enter negotiations with both the EU and US.

USDJPY has been weaker overnight, slipping its 110 berth to drop below the 200-week moving average at 109.50 to test important horizontal support. The chart suggests a bullish flag as long as this level holds.

EURUSD is treading water around 1.11080 as traders await the ECB meeting.

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