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Risk sentiment stabilizes as virus worries calm, but caution lingers


    • Wall Street futures signal a rebound, even without any ‘good news’
    • However, pockets of stress still evident in the market
    • Japanese stocks decline further, aussie and kiwi can’t get off the floor
    • Today: US durable goods, earnings bonanza begins with Apple

Risk aversion takes a breather as virus nerves calm, for now

The virus-related uncertainty that plagued global markets in recent days started to abate on Tuesday, with the safe-haven Japanese yen unable to extend its recent gains and futures tracking the major US stock indices pointing to a ~0.4% higher open today. Admittedly though, this recovery in sentiment seems fragile at best, considering that American stocks fell by nearly 1.6% yesterday and that the yen is still substantially higher this week.

Indeed, pockets of nervousness are very evident in other segments of the market. For instance, Japanese stocks closed in the red once again, while in the FX space, the aussie and the kiwi can’t get off the floor against the US dollar. Australia and New Zealand are both heavily reliant on China for trade, so the utter inability of these currencies to rebound even a little alongside risk appetite suggests that sentiment hasn’t turned around in a material manner.

In other words, caution is still the word for investors and with good reason, as there haven’t really been any encouraging news on the virus front – if anything, the opposite is true. The number of confirmed cases in China nearly doubled overnight as the death toll continued to climb, raising questions about how contained the disease really is given the rampant rate of increase in infections.

Is the worst yet to come?

Overall, investors are still trying to decipher whether the situation deteriorates further from here, or whether it is increasingly time to start ‘buying’ again. A simple answer is that there might be a few more waves of risk aversion left in this virus theme, before it ultimately quiets down.

For one, the number of confirmed cases keeps soaring, and some medical experts estimate that the actual number of infected patients in China might be ten times higher than the official figures. On the plus side, there have been no deaths outside of China so far, so investors may be thinking that the economic fallout will be contained – similar to the SARS coronavirus two decades back.

That thinking might be flawed though, considering how much bigger China’s share of the global economy is this time around, and how much more exposed other major economies and corporates are to China now. If Chinese growth takes a serious hit from this, what does that imply for the sales of US multinationals, many of which generate a good chunk of their revenue in China and view the country as their highest growth market?

The bottom line is that this could still get uglier from here for the markets, but unless it evolves into something much bigger, at some point it will be time to ‘buy the dip’ again – especially given the abundance of liquidity in the financial system. For that moment to come though, investors may need concrete signs that the situation is under control, and we haven’t gotten those yet.

US durable goods and Apple’s earnings today

It’s a relatively busy day ahead, with the highlight on the economic calendar being the US durable goods orders for December.

Meanwhile, the earnings season fires up with Apple reporting its quarterly results today after Wall Street’s closing bell. Other notable names releasing their own results today include Lockheed Martin, McDonalds, Ebay, Visa, and Pfizer.

Finally, the ECB’s chief economist, Philip Lane, will speak at 15:00 GMT.

XM.COM Review

Source: https://www.xm.com/daily-market-comment-risk-sentiment-stabilizes-as-virus-worries-calm-but-caution-lingers-116004
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