Capital Markets: "Escaped from a Crocodile’s Mouth, Entered a Tiger’s Mouth"

From Marc to Market:

Overview: This colorful Malay saying captures the spirit of the animal spirits. Narrowly escaping an escalation of a trade war between the world's two largest economies, the outbreak of a deadly virus has spurred moves, especially the sell-off in stocks and rally in bonds, for which many investors seemed ill-prepared. Even though the virus contagion has not peaked, the recovery in US equities yesterday points to a break the fear and anxiety. Most Asia Pacific equity markets pared recent losses, though Hong Kong re-opening for the first time, played some catch-up, and the Hang Seng fell 2.8%. European bourses are also stabilizing, and the Dow Jones Stoxx 600 is up about 0.3% in late morning turnover, led by healthcare and materials. US stocks are firm in Europe after the S&P 500 held the support we identified near 3235, the (38.2%) retracement of the leg-up from the December 3 low. Bonds remain bid. The benchmark 10-year yields are mostly 2-4 bp lower today, which leaves the US yields hovering above 1.6%. Of note, Italy's generic 10-year yield reached over 1.25% a couple weeks ago amid political worries, is now near 86 bp, the lowest since before Christmas. Meanwhile, the dollar remains firm against most major and emerging market currencies. The yen continues to outperform, suggesting that the risk-off fears continue to linger despite the equity market stabilization. The price of oil snapped a five-day drop yesterday and is extending the recovery today, helped perhaps by the unexpectedly large drop API's estimate of US inventories (-4.27 mln barrels) and talk of OPEC+ extending curbs. Gold ended a four-day advance yesterday, shedding almost 1%, but has returned bid today.

Asia Pacific
The confirmed cases of the new coronavirus have surpassed China's official estimate of the SARS virus. Travel restrictions and output cuts continue to broaden. At first, it seems services were more vulnerable than production, but now it seems clearer than manufacturing will also be depressed, and supply chains remain vulnerable. It appears the disruption will last through at least next week and possibly the first week in February and extends to international companies operating in China. Starbucks, for example, has announced extended closures of more than half of its branches on the mainland. Japan's Toyota also shuttered local production. China is to report the January PMI tomorrow before markets reopen.

Australia reported slightly firmer than expected Q4 19 CPI. The net impact was to reinforce that the Reserve Bank of Australia will not cut rates when it meets on February 3. The derivative markets showed a nearly 85% chance of no change in policy at the end of last week, and the odds have moved close to 90%. The year-over-year rate edged up to 1.8% from 1.7%. Economists expected no change.It is the highest since Q4 18 when it also stood at 1.8%. It rose 0.7% on the quarter, instead of the 0.5% expected. The underlying measures increased by 0.4% in Q4 19. The drought and fires pushed up food prices. Fruit prices, for example, for 6.8%. Tradeable goods prices rose by 0.2%, while non-tradable goods rose 1%....MUCH MORE