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Coronavirus fears hit Asia markets

The widespread fears surrounding the evolving coronavirus off Wuhan can be seen taking a hit on markets with the slow return from the Chinese New Year holidays while China remains away on an extended break.

Knee-jerk reaction to the Wuhan virus

Wall Street commenced the week shrouded in fear even as the reach of the latest coronavirus remains mostly concentrated in Asia, around the epicentre of Wuhan. To some extent, given the good run of the US markets, this may have been an excuse to lock in profits from January while the impact of the evolving virus continues to be estimated. Both the Dow and the S&P 500 index saw declines of 1.57%, marking the worst one-day drops and first moves of over 1.0% since October. All sectors on the comprehensive S&P 500 index pulled back with defensives not being spared either. Correspondingly, the CBOE volatility index, VIX, had jumped back to the highest level since October, concluding the day at a level of above 18.00.

Asia markets are expected to grapple with the impact of the coronavirus in the near term as the market sentiment similarly gets badly battered over the worsening situation. In fact, given the experience from the SARS episode, this would be a region to see impact linger for a longer duration than the west going by the current state of the virus spread. As far as early movers are concerned, the likes of the South Korean KOSPI and the local STI have all pulled back over 2.0% reflecting the more severe reactions in areas with multiple confirmed cases of the virus.

Wuhan virus economic implications

Going forward, the question would be how severe the implications of the virus would be for markets. Over and above the knee-jerk reaction we have seen going into this week, it had been key sectors such as transport, tourism and selected services arena getting implicated. Other sectors are not expected to be spared either, but it remains early stages to estimate the impact. Governments including the local Singapore Ministry of Trade and Industry had spoken out on the expected impact upon the economy, business and consumer confidence, expecting this to persist for some time.

Experience from the previous SARS episode had seen to approximately six months of impact. A similar duration for the latest episode would likewise take a hit on the relevant sectors, more so now for China with the lockdown affecting more than 50 million people in the Hubei province and Wuhan being a key transportation hub. That said, defensives such as consumer staples and utilities are expected to fare relatively better given the nature of their demand. Although China had also extended the Chinese New Year break by one day to the following week, the seasonal holiday distortions may also mute the effect on production, that is barring further extensions from here.

All in all, the economic implications remain to be seen, but amid the uncertainty, it seems that China would be one taking a bigger toll. It had perhaps been no surprise seeing USD/CNH shooting to the highest level since December as the weak sentiment hit. USD/CNH can be seen eyeing the 7.00 figure, one to watch.

Safe haven and commodities react to Wuhan virus risk

Similarly, USD/JPY had traded lower as the Wuhan virus ratchet up the market reactions this week. Prices had slipped past the $109.00 level into Tuesday’s trade, threatening the 100-day moving average of around $108.70, which could be at risk of being broken should the return from the Chinese New Year holidays bring about a worsening of the health risks.

More importantly, Brent Crude can be seen resting at a key support level at around $58.03 per barrel (bbl) after sliding past the $60/bbl figure. The rise in US supply coupled with the potential dent of the coronavirus on demand and production, particularly for China which is the world’s number 2 consumer, had underpinned this uncomfortable drop in prices for OPEC and co. There are some expectations that the oil coalition could step in, but any firm break here of the support could open the room towards $55/bbl levels.

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