A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
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Andrew Kositkun Foreign Exchange Head Trader
Since the beginning of the year, the trend for the USD has clearly been higher and the SARS-CoV-2 outbreak has only supported this move.
Economically speaking the US economy continues to outperform the rest of the world. Looking forward, the US economy’s continued outperformance and the market’s belief that US assets will be relatively insulated from the SARS-CoV-2 outbreak should support the attractiveness of US assets. With price action around the world starting to reflect a delineation along the basis of what markets believe will be the most affected by the virus, what are some of the key factors to look at outside of the US?
To us, activity data in Asia will be critical. As touched on earlier, the markets are pricing various asset classes based on what it thinks will be impacted. But the fact remains that the real economy effect remains unknown. As such, activity data from countries such as South Korea, Taiwan, Singapore, Thailand and China will be important. With regards to China, the data will be noisy with Lunar New Year effects making it difficult to isolate the virus’s impact.
As we wait for these data points to come out and, in China’s case, for data to be clarified, policy reactions should be the center of attention. Last week, Singapore announced a series of support packages and markets will be watching to see whether Hong Kong will follow suit with its own fiscal package this week. On a monetary front, South Korea’s central bank meets Wednesday and is expected to cut rates but acknowledge that it’s a close call. Should monetary and fiscal support come, the hope is that it will provide a breather, if not stabilization, to the market sell off over the past couple sessions.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Risk sentiment has bounced back a bit with slivers of good news on the SARS-CoV-2 virus. The Korean won has bounced back strongly, after yesterday’s sell off, as the rate of new cases seems to be slowing. Additionally, the rate of new infections in China also continues to slow. Given this, Northern Italy remains on lockdown and Japan has warned of a possible surge in new cases with confirmed cases popping up in more than 16 prefectures.
DM market yield curves continue to flatten with the US 3 month/10 year curve inverted to a level not seen since last October. While I acknowledge the historical relationship between yield curve inversion and recessions, it warrants mentioning that correlation doesn’t equal causation. This holds especially now with the preference for government bonds as a hedge for equity risk.
President Trump has asked Congress for $2.5 billion in funding to offset the impact of the SARS-CoV-2 virus. While the US administration has downplayed the impact of the virus, it could prove to be a vulnerability as the current administration has eliminated many of the infectious disease protocols put in by prior administration during the Ebola scare.
The next Democratic debate will be tonight. With Bernie Sanders pulling ahead in the polls, expect him to come under increased scrutiny. Sanders’ win in Nevada was notable not only due to his margin of victory but also due to the coalition of votes that supported him. Current polling in South Carolina has Biden leading with Sanders in second.
Both the EU and the UK are expected to deliver their respective negotiating mandates today. The expectation remains for the starting points for the two sides to be far apart.
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