Markets Steady But Risks Lurk

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Market Drivers January, 23 2020
AU Labor Data beats
Confusion on corona virus as markets steady
Nikkei -0.98% Dax -0.47%
UST 10Y 1.74%
Oil $55.1/bbl
Gold $1554/oz
BTCUSD $8473

Europe and Asia:
No data

North America:
EUR ECB Presser 8:30

Both FX and equity markets were generally steady in Asian and European trade today despite the fact that Chinese authorities have now closed off access to a second city in an effort to stem the spread of the corona virus.

China put a second city, Huanggang on lockdown as the death toll from the virus has risen to 17 people. The true state of danger from the virus remains unknown as it is difficult to gauge its virulence. Reports from the Chinese media have been confusing as to the number of casualties and more importantly, the type of casualties suffered so far.

If the virus becomes deadly to the younger, non-compromised cohort, the global panic is sure to rise significantly, but for now little is known about its pathology aside from the fact that it can be transmitted by air. Markets remain wary but unperturbed for the time being as investors see little economic impact so far. However, pandemic typically has a slow start and could quickly spread exponentially so the risks to the downside could be substantial especially given the massive rally in risk assets.

Meanwhile, on the economic front, Australian labor data beat printing at 29K new jobs versus 15K eyed. The unemployment rate also dipped 5.1% from 5.2% the month prior, prompting traders to slash estimates of an RBA rate cut in February to only 20%. However, the headline number was far less impressive than it looked with all the gains coming from part-time rather full-time jobs. This has been the current trend in Australian labor data which explains the relative weakness of consumer demand as income growth remains muted.

While chances of an immediate rate cut from RBA have diminished the pressure on Aussie is unlikely to relent especially if the corona virus story begins to have a bigger impact on the Chinese economy which in turn would spill over into Australia. Although the Aussie popped to .6870 in the aftermath of the release the pair remains capped at the .6900 level and there is a good chance that it could retrace all of today’s gains.

Meanwhile in North America today the focus will be on ECB with President Legarde announcing the direction of its strategic review. While no one expects any policy changes, the markets will listen carefully to Ms. Legarde’s view on the balance of risks as well as any changes in its inflation target. Ms. Legarde is likely to stick close to script, but if she hints that the central bank will not expand any further any of its QE initiatives the euro could see a mild boost in the post presser reaction.

Boris Schlossberg
Managing Director

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