Risk Finally Takes a Hit

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Market Drivers February 13, 2020
Virus fears drive risk lower
USDJPY backs off 110.00
Nikkei -0.14% Dax -1.12%
UST 10Y 1.57%
Oil $50/bbl
Gold $1574/oz
BTCUSD $10163

Europe and Asia:
No Data

North America:
USD CPI 8:30

Risk took a hit in Asian and European dealing after Chinese authorities released fresh coronavirus figures that markedly increased the number of cases and deaths in one day.
The official count jumped by more than 14000 new cases in the Hubei province while the new death count also rose sharply by 242.

The news instantly rocked the markets with both equities and yen crosses pull lower and they have been drifting lower ever since. By mid day London dealing yen was trading at session lows of 109.68 while US futures were by 75 basis points.

Up to now financial markets have been steadfastly ignoring the coronavirus issue with traders instead focusing on the ample central liquidity that has pushed US markets to record highs. But hopium can only last so long and the stark reality of the impact of the virus is starting to finally raise a modicum of concern amongst investors.

The scope of the problem is clearly bigger than the initial official reports and more importantly, the surprisingly long incubation period of the coronavirus will force much bigger and longer quarantines than initially thought. That suggests that much of the global supply chain may be offline for the rest of the month and that the bottlenecks in the system could last well into Q2 of this year.

Still, the negative reaction in the market is muted at best as investors continue to view this as a “China-only” story given the limited spread of the virus beyond the mainland. However, with equities now in a near parabolic move it won’t take many more negative headlines to prod traders into profit-taking mode. The standard protocol for this rally has been for US sessions to overturn Asian and European flows, but if North American traders back away from buying the dip the correction in risk could quickly pick up momentum with USDJPY trading back towards 109.00 while the S&P tests the 3300 support.

Boris Schlossberg
Managing Director

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