Hong Kong’s Hang Seng index plummeted by three percent after returning from the Lunar New Year break, although most other Asian assets are advancing on the day after US equities rebounded from their worst selloff since October. Risk sentiment is being given some reprieve from concerns over the novel coronavirus outbreak, following the positive surprise in Apple’s latest earnings, along with the better-than-expected US January consumer confidence, which served as distractions from the coronavirus gloom that has beset investors since mid-January.
Gold prices eased off the $1580 handle, USDJPY is now trading back above the 109.0 psychological level, while 10-year US Treasury yields’ dip into sub-1.60 percent levels proved short-lived for the time being.
Outbreak fears could yet trigger more losses in risk assets
Markets will be yearning for signs that the outbreak is stabilising. Otherwise, “risk-off” could well be the de facto mode in the interim. Investors are certainly cognisant of the USD2.6 trillion in market cap that have been erased from global equities since January 20, with more losses potentially in the pipeline for risk assets considering the persisting uncertainties surrounding the virus.
However, with history as a guide, global markets tend to rebound after such outbreaks, provided that the toll exerted on the global economy is not too damaging. A meaningful recovery in the markets however could be months away, as health authorities around the world continue efforts to contain the virus which has already claimed 100 lives and infected thousands.
Fed unlikely to rock defiant Dollar
The Federal Reserve is widely expected to leave US interest rates unchanged later today, which should help buffer the Dollar Index’s 1.6 percent year-to-date gain. The Dollar has managed to defy expectations for a softer performance in 2020, aided by a series of unforeseen events such as the US-Iran conflict and the ongoing coronavirus outbreak, which have elevated demand for the safe haven currency.
Signs that the US economy is poised to extend its record expansion, judging by the better-than-expected US consumer confidence in January, should also bolster the Greenback’s recent trajectory while allowing the US central bank to keep its policy settings unchanged for the time being. However, should downside risks such as the ongoing coronavirus outbreak leave a major dent in economic conditions around the world, central bankers may have to resume policy easing in order to sustain the still-fragile prospects of a global economic recovery this year.