Capital Markets: "Covid-19 Contagion Outside China Keeps Investors on the Defensive"

From Marc to Market:

Overview: The spread of Covid-19 outside of China and early signs of the economic consequences again emerged to weigh on investor sentiment. Poor Japanese and Australian preliminary February PMI reports and some trade indications from South Korea saw most Asia Pacific equities sell-off. China was an exception. The small gain (0.3%), lifted the Shanghai Composite 4.2% on the week. Australia's benchmark also managed to eke out a minor gain (~0.12%) for the week after absorbing today's (0.33%) loss. Europe's Dow Jones Stoxx 600 was nearly flat for the week coming into today's session, and despite better than expected PMI news, it is off about 0.35% in late morning turnover. It had gained about 4.8% in the previous two weeks. The S&P 500 staged an impressive rally as once again, the pullback was bought. However, US shares are trading lower, with the S&P 500 trading near yesterday's lows. Asia Pacific bond yields tumbled, partly as catch-up, and partly driven by local data. European bond yields are a little lower, and the 10-year US Treasury yield has fallen below 1.50% for the first time since last September. The US dollar is mostly softer, with the Australian and New Zealand dollars are main exceptions, nursing about a 0.3% loss. Although the yen's typically drivers appeared to breakdown earlier this week, relationships appeared to return to status quo ante with lower US Treasury yields and weakness in equities underpinning the yen, whose roughly 0.3% gain is leading the majors. Gold is on fire. It is at new 7-year highs near $1635 to bring this week's gain to about $50 a little more than 3%. Oil prices lower, and the WTI for April delivery is halving this week's gains to about 1.4%.

Asia Pacific
The steepness of Japan's Q4 contraction, 1.6% quarter-over-quarter, and the disruption of supply chains of people (Chinese tourists) and goods (supply chains) has fanned fears that the recovery is put off until Q2. The preliminary PMI, though it does not have a long history, has a somber message. Manufacturing stands at 47.6 down from 48.8. Here the weakness was exacerbated. Mild strength in services (51.0) turned south in a big way (46.7). The composite reading fell to 47.0 from 50.1. The fragile recovery from Q4 shattered. BOJ Governor Kuroda quickly said it was not time to think of additional stimulus. Separately, Japan's January CPI figures were little changed. The headline year-over-year rate slipped to 0.7% from 0.8%, while the core rate (excludes fresh food) did just the opposite.

The Australian dollar has been sold aggressively as growth concerns escalated given the wildfires and the disruption caused by the coronavirus. The February PMI confirmed these investor fears. Even though the manufacturing PMI actually rose (49.8 vs. 49.6), the decline in the services PMI (48.4 vs. 50.6) more than offset it. The composite fell to 48.3 from 50.2. Last year it averaged 50.5, though it was below the 50 boom/bust level in November and December....

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