Capital Markets: "Investors Continue to Look Past the Coronavirus"

From Marc to Market:

Overview: The capital markets are heading into the weekend, still trying to look past the coronavirus despite the new cases in Hubei. Tokyo was a notable exception in the Asia Pacific region, as the other major equity markets, like in Hong Kong, China, Taiwan, South Korea, and Australia, advanced. The MSCI Asia Pacific Index rose for the second week. European shares are little changed, and the Dow Jones Stoxx 600 has risen by about 5% over the past two weeks. US shares are firm, and the S&P 500 has gained about 4.5% over the past two weeks coming into today's session. Benchmark 10-year yields are softer on the day, but mostly a couple basis points higher on the week. Greece is a notable exception. Its 10-year bond yield broke below 1% for the first time and is finishing the week near 90 bp. The yield of the 10-year UK Gilt, on the other hand, rose 15 bp over the past three sessions and is paring the gains today. The dollar is little changed against the major currencies ahead of the start of the US session. The dollar appears to be in greater demand in the North American session that other centers in recent days. For the week, the dollar is mixed. Sterling has been the strongest of the majors, gaining a little more than 1%, while the euro has been the weakest, shedding a little less than 1% to fall to new two-year lows. Gold is little changed on the day and week, while oil is snapping 5-week and 20% slide with a 2.4% gain for the March contract.

Asia Pacific
Hubei province reported another 4823 new cases of the coronavirus after a 14.8 surge when the CAT scan diagnoses began being included the previous day. The point to keep in mind is that the surge represents old cases being properly recorded rather than an escalation of the contagion. Tragically, another 116 people died. Many, including the White House, expressed concern about the transparency from China, noting that US health officials have still not been allowed to enter. The Financial Times quotes a noted epidemiologist in London expressing concern that only about a tenth of the cases may be being correctly detected. In Wuhan, he suggests the undercounting may be more extreme, catching maybe one in 19 infections.

Japan's tertiary index (services) unexpectedly fell by 0.2% in December. Economists had expected a continued recovery as the economy continued to recover from the typhoon and sales tax increase in October. The November series was revised to 1.4% from 1.3% after the sharp 5.2% decline in October. This bodes ills for the first estimate of Q4 19 GDP due at the start of next week. At an annualized pace, economists expect around a 3.5% contraction. Meanwhile, foreign appetite for Japanese bonds remained strong for a second week. In the two weeks through February 7, foreign investors bought roughly JPY2.7 trillion of Japanese bonds. It is the most in two weeks since the end of 2018. Note, however, that the demand for (Japanese and EMU) bonds is not the same as demand for the currency. Hedging out the yen (or euro) exposure back into dollars can generate a higher return than US Treasuries....MUCH MORE

.... The Federal Reserve is making a strong statement. The market has been abuzz about the fact that the last three term repos were oversubscribed. Yesterday, it announced that starting next week, it was cutting the amount it would offer by $5 bln to $25 bln. It preannounced it would taper by another $5 bln in early March. It would only make sense to do this if it concluded that the increased demand for the term repo reflected banks being drawn to the cheapness of funds than an underlying problem.....