European bourses rebound but traders remain wary of virus

London — European markets rebounded early on Tuesday after the previous day’s thumping, when investors huddled in safe-haven assets amid worry about the economic fallout from the coronavirus outbreak in China.

There was relief as Europe’s Stoxx 600 and Wall Street futures bounced as much as 0.5% from their closing levels on Monday, which was the worst day for world stocks since October.

Chinese markets remain closed all week, but the 0.5% overnight drop in Tokyo’s Nikkei was more modest than Monday’s and many of Asia’s other bourses that were open rallied from the day’s lows too.

Brent oil prices stabilised above $59, safely above their three-month low of $58.50 and 10-year US treasury yields stabilised above 1.60% after briefly dipping below that level on Monday.

In the forex markets, Japan’s safe-haven yen slipped back and dollar/yen recaptured ¥109, while China’s yuan strengthened from Monday’s three-week low in international “offshore” markets.

“We saw a bit of a bounce-back overnight in the most high volume liquid assets like the S&P 500 futures, but it’s hard to find anything to hang your hat on because we still need to assess the risks,” said Saxo Bank’s head of forex strategy, John Hardy.

As the death toll from the flu-like virus reached 106 in China, the country extended the Lunar New Year holiday to February 2 nationally, and to February 9 for Shanghai.

China’s largest steelmaking city Tangshan, in northern Hebei province, suspended all public transit in an effort to prevent the spread of the virus.

MSCI’s broadest index of Asia-Pacific shares outside Japan had ended down 0.8%. Japan’s Nikkei, which was down nearly 1% at one point, closed 0.6% lower. Australian shares ended 1.3% down and South Korea’s Kospi index skidded 3%.

In an indication of the size of losses for Chinese stock markets when they reopen, iShares China Large-Cap ETF sank 4% on Monday. It is down about 10% since January 17, when the worry began to intensify about the virus that emerged in the central Chinese city of Wuhan.

“The wild card is not the fatality rate, but how infectious the Wuhan virus is,” Citi economists wrote in a note. “The economic impact will depend on how successfully this outbreak is contained.”

Moreover, as major companies report potential business disruptions and governments advise against unnecessary travel to and within China, analysts are trying to compute how much the disruption could damage growth.

Apple eyed

Tech titan Apple is due to report results later, and its plan to ramp up iPhone production by 10% in the first half of 2020 will be the top question as the coronavirus outbreak spreads across major markets like China.

“The market will continue to watch the number of how many people become infected,” said Christian Lenk, an interest rates strategist at DZ Bank.

“But the interesting part will be how much the virus and the contamination efforts of the Chinese government will hamper supply chains and growth and that is really hard to grasp in the short term.”

Some investors have dipped their toes in guessing that inflation will be weaker, with market gauges of long-term expectations falling to their lowest in one-and-a-half months in the eurozone at 1.2640%.

The yield on the benchmark German Bund was flat at -0.385%, though not far from the three-month low -0.391% it fell to on Monday. Yields across other European markets, including Italy and Spain, were also stable.

In the US, a two-day Federal Reserve meeting starts later in the day. The market consensus is that the central bank will keep interest rates unchanged at between 1.5% and 1.75% but all attention will be on whether it thinks about the virus woes.

Chinese authorities may also have more limited room to stimulate the economy than it had during the 2002-03 outbreak of the severe acute respiratory syndrome (SARS) virus, another reason investors were jittery.

Treasury 10-year note yields were off lows after diving as deep as 1.598%, the lowest since October 10, while Fed fund futures have rallied in recent days as investors priced in more risk of a rate cut later in 2020.

Futures now imply about 35 basis points of easing by year-end.

JPMorgan said it has not yet altered its developed or emerging markets forex forecasts, though it was taking profits on “bullish” euro-dollar positions and remains “considerably long” on Swiss francs, which benefit from safe-haven demand.

Short build-up in the Aussie was another risk hedge. The currency was last flat at $0.6760 after two consecutive days of losses. The euro was a shade firmer at $1.1022 while the yen’s dip looked set to end five consecutive sessions of gains.

In commodities, Brent crude was off 12c at $59.20 while US crude eased 2c to $53.12. Brent is now down 18% from a spike caused by the US killing of Iran’s top military commander at the start of the year.

Spot gold was a shade weaker at $1,579.28 having climbed to its highest since 2013 on Monday.

“[Gold] could reach $1,600, but would be more around the $1,570-$1,590 levels as we need to get more information, there are a lot of unknown variables around the virus,” said John Sharma, an economist at National Australia Bank (NAB).

Reuters