February 13, 2020

European Markets Feels The Virus Blow

Investors over in Europe are pessimistic today due to the spike in the Coronavirus infection and the rising death rate in China. A revised methodology for diagnosing the disease has been implemented which should address the initial erroneous testing techniques which led to an increase in the spread of the infection. The surge in the infection rate has made investors cautious and they continue to mull over its implications.

This happened when investors were feeling confident that the central banks around the globe have sufficient tools to tackle this issue, and more importantly, they were celebrating the news that the infection rate over in China seemed to be under control. But today’s development has shaken that confidence.

Asian markets were hit hard overnight due to the spike in Coronavirus cases. China’s Hubei province, which has been hit the hardest, reported 242 deaths on Wednesday. This is double the previous day’s number, and the confirmed cases soared to 14,840.  The news was enough to topple the positive sentiment which drove the US markets toward their record high yesterday. Remember, the Dow Jones closed with 275 points, another record high. The S&P500 index also surged by 0.65% and the NASDAQ recorded 0.90% gain yesterday.

Clearly, investors were interested in taking the risk and this pushed the VIX index, by 10%. But, today we are expecting this index to reverse these losses.

Oil Prices Move Lower

As in the commodity prices, the oil demand is under the influence of Coronavirus. The on-going travel restrictions and the lower factory operating rate over in China have made the second biggest importer of oil to curtail its supply from producers.

Basically, we are facing a pretty much textbook situation, there is less demand and ample supply. The hope is that we will see some aggressive measures from the OPEC + organization. The cartel recommended additional output cut by 600K barrels per day. It also lowered its 2020 forecast for oil demand by nearly 200K bpd and this fulled further speculation that the group will cut its production during their net meeting. Of course, promises are only promises, action without any reaction doesn’t mean anything at all.

Economic Data

In terms of the economic docket, it is lit with US data. The US inflation numbers are due at 13:30 UK time and the expectations are for the core CPI number to improve to 0.2% against the previous reading of 0.1% while the headline number, the US CPI m/m rate to stay stable at 0.2%–prompting no reaction from the Fed in terms of their monetary policy.