Capital Markets: "Dramatic Investor Adjustment Continues"

From Marc to Market:

Overview: The warning by the US Center for Disease Control and Prevention that Americans should prepare for an outbreak of Covid-19 sent the S&P 500 tumbling to an 11-week low and the 10-year Treasury yield to a record low near 1.30%. The volatility of the S&P (VIX) jumped to its highest level since 2018. The sell-off in global equities continues unabated. Thailand (-5%) and Australia (-2.3%) led the carnage in the Far East. The MSCI Asia Pacific Index was sold through its 200-day moving average yesterday, and the Dow Jones Stoxx 600 did so in early morning activity today after gapping lower. However, as the morning progressed, the benchmark was paring its losses and moved back above its 200-day moving average. US shares have pared their earlier losses. The 200-day moving average is a couple percentage points lower near 3045. Bond yields are not responding as strongly to the fifth consecutive losing session for global equities as they did previously. Most core yields are slighter softer, while the European peripheral bonds are being shunned like risk assets, and yields are mostly 3-5 bp higher there. The US 10-year is near 1.33%. The dollar is mixed, but firm against most of the major currencies, but the Swiss franc and the euro. The Australian dollar and sterling are the weakest so far today, off about 0.4%. The JP Morgan Emerging Markets Currency Index is trading at new multi-year lows, led by the South African rand, Korean won, and Mexican peso. Gold, which counter-intuitively fell yesterday (~-1.5%), is back on track, gaining around 1% today. Demand concerns and rising US inventories have pushed April WTI briefly below $49 a barrel.

Asia Pacific
There has been a dramatic market reaction in the last few days, but as recently as this past weekend at the G20 meeting, the IMF seems to be naively in denial. It shaved its 2020 world growth forecast by 0.1%. Given the accuracy of private and public sector economists in forecasting GDP, a 0.1% adjustment gives a sense of precision that is not justified. The IMF also shaved its forecast for China by a little more, but at 5.6%, it is still unreasonably high. It said it was looking at more dire scenarios.

It is still five months away, but the Tokyo Olympics will likely be at risk if the coronavirus cannot be contained in the next two-three months, according to the longest-serving senior official on the International Olympics Committee. More likely than relocating or rescheduling the games, the Olympic official, suggested they would be canceled.The decision would be made in conjunction with the World Health Organization.

Hong Kong is taking bold action. It unveiled a stimulus program that is worth a little more than 4% of (2018) GDP. It includes a one-time cash disbursement of HKD10k ($1285) per person. The deficit will widen from 1.3% to about 4.8% of GDP. Even with the fiscal support, the economy may still contract as much as 1.5%, according to officials, or grow by as much as 0.5%. Separately, Hong Kong reported a sharp fall in January exports (-22.7%) and imports (-16.4%). The decline was a combination of the Lunar New Year, fewer working days, and the coronavirus disruption....

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