Risk Rips Again on Virus Cure Hopes

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Market Drivers February 5, 2020
Coronavirus cures spark risk flows
Final PMIs inline
Nikkei1.02% Dax 0.64%
UST 10Y 1.622%
Oil $50/bbl
Gold $1554/oz
BTCUSD $9243

Europe and Asia:
EUR PMI 51.3 vs. 50.9
GBP PMI 53.9 vs. 52.9

North America:
USD ADP 08:15
USD ISM Non-Manufactiring 10:00

Risk flows ripped to the upside in early European trade after Chinese scientists stated that they may have found an effective drug against the coronavirus while UK scientists stated that they may have a vaccine in a matter of months rather than years.

The news lifted investor spirits and sent stock index futures to fresh record highs as markets continued to ignore any negative impact of China’s economic lockdown. Markets are now in full melt-up mode aided by massive central bank liquidity and improving economic fundamentals that have completely quashed any concerns over the lingering effects of the pandemic in China.

On the economic front, the final PMI data from both EU and UK was better than forecast with the former printing at 51.3 vs. 50.9 eyed while the later came in at 53.9 vs. 52.9 forecast. However, only cable benefited from the good news as the pair rose above the 1.3050 level while euro lagged dropping to a low of 1.1022. The EURUSD decline may have been caused by carry trade flows. The pair is now one of the favorite funding instruments for the carry trade and tends to move on risk on/risk-off flows rather than any fundamental data.

Cable, on the other hand, received a real boost from much better than expected services sector data which saw the new orders component rise to 54.1 from 50.5 as post-Brexit optimism clearly kicked in. It’s still to early to tell who the UK economy will fare under the new regime, but global financial markets in a buoyant mood the UK services sector should remain supported for the time being and that in turn will keep cable supported as well.

In North America today, all eyes on the ADP and ISM Non-Manufacturing report. The risk rally has been driven by massive central bank liquidity but also the narrative that US growth will continue to expand at a solid pace. The improvement in ISM Manufacturing data earlier this week helped fuel the bull thesis and if today’s eco data can confirm equities could trade to fresh record highs as the day proceeds. On the other hand, and sharp surprise to the downside could quickly bring in some profit-taking flows after the massive run we’ve had so far.

Boris Schlossberg
Managing Director

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