Morning Commentary: Unknown Unknown

Foreign Exchange - Morning Commentary
Unknown Unknown
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Heading into the year, most market participants were hopeful that the pullback in known uncertainties (US-China trade, Brexit etc.) would clear the runway for a gradual rebound in global growth.  But before the first month of the year has even ended, an unknown unknown (coronavirus) has shaken the markets as evidenced by equity markets down sharply around the world.    

At first glance, the SARS outbreak in 2003 appears to be a good comparable in projecting out what could happen with the coronavirus.  However, during the 2003 SARS scare, G10 currency behavior was driven by dominant global macro trends with the markets more concerned about escalating tensions between the US and Iraq than it was about SARS. 

Ironically, the fact that the global economy was more driven by the macro backdrop and had limited impact from the SARS outbreak argues for increased outbreak risks this time around.  

In 2003, the world economy was in the early stages of its recovery from the 2001 recession.  Additionally China, where the impact was concentrated, was a much smaller percentage of the global economy (5%).   Today, the global economy is in a much more fragile place as it is in a late cycle slowdown and China plays a much more consequential part of the global economy (20%).  Moreover, the threat from the coronavirus outbreak is most acute in Asia and in the services sector, the two sectors that have been leading the global recovery. 
  • Fatalities from the Wuhan coronavirus have risen to over 81 people.  In an effort to control the spread of the virus, Chinese authorities have extended the Lunar New Year holiday by 3 days to Sunday.  The market’s move into safe haven assets has halted the emerging market rally and sent the Chinese yuan to its weakest levels this year.
  • Commodity assets have been one of the hardest hit asset classes with crude oil futures falling to its lowest levels in over 3 months.
  • The US embassy in Baghdad was hit in a Katyusha rocket attack.  Since September, there have been 14 attacks on US personnel in Iraq. 
  • Germany’s data came in softer than expected with the Ifo Institute’s survey of business executives missing across the business climate, expectations and current assessment sections.  The euro has fallen to its lowest levels of the year.
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