Friday, 24 January 2020

MARKETS ATTEMPT TO FIND SURER FOOTING AMID CORONAVIRUS CONCERNS

Han Tan,
Market Analyst at FXTM

Asian currencies and equities are advancing amid subdued trading volumes on the eve of the Lunar New Year, despite news that the death toll from the coronavirus’ spread has climbed to 25 with new cases being reported in more countries, such as Vietnam and Singapore. Market participants are taking heart from China’s efforts to lock down the epicenter of the outbreak by imposing travel curbs on seven cities and the World Health Organization who held back from labelling the situation as a global health emergency.

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With several Asian markets seeing a holiday-shortened trading week ahead, investors will be hoping that the outbreak doesn’t worsen over the coming days. Still, regional markets could see an outsized reaction when trading resumes should pent-up concerns be unleashed if the virus’ spread worsens drastically over the near-term.

However, any such reaction may eventually prove transitory, as long as the still-fragile expectations for a stabilising global economy in 2020 aren’t shattered. Once investors’ fears dissipate, that could allow investors to focus on the more positive, recent news such as encouraging US corporate earnings and macroeconomic data.

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Gold, Yen offer muted reaction to coronavirus concerns
In a rather subdued response to the spread of the coronavirus, Gold and the Japanese Yen have seen limited moves over recent days. Bullion prices have refused to stray too far from the mid-$1500 range, while USDJPY appears content trading in the 109 to 110 range.

While not wanting to get too far ahead, fears over a potential pandemic are still supporting risk aversion. As the situation stabilises, investors may gradually eschew safe haven assets in favour of riskier assets in the markets, which should prompt eventual softness in Gold and JPY.

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Oil prices set to extend weekly losing streak
Unlike Gold and JPY, Oil traders are more nervous and have reacted more negatively to the viral outbreak. Brent crude dipped briefly below the $62/bbl handle before recovering slightly, but remains on course to mark three consecutive weeks of declines, while winding back most of its gains from December.

Recent price action highlights the notion that demand-side uncertainties are in the driver’s seat when dictating the overall mood in the Oil markets, with investors apparently more willing to brush aside supply-side risks, given recent geopolitical events involving Iran, Iraq, and Libya.

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However, from a technical perspective, Brent futures are moving closer to oversold territory. Oil prices could see a rebound once the fears surrounding the coronavirus’ spread begin retreating, allowing for global trade and travel conditions to stabilise. This should act as support for the world’s demand for Oil.

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