By Han Tan, Market Analyst at FXTM
The sell-off in Asian markets continues, with risk appetite struggling to find a solid footing as the coronavirus spreads across the globe. South Korea now has more than 1,100 cases, adding to the worldwide tally that has exceeded 80,000, with more confirmed cases in Europe and the Middle East. Pandemic fears are stoking the risk-off sentiment in markets, with the MSCI Asia Pacific index set to decline in nine out of the last ten sessions, while most Asian currencies are weaker against the US Dollar.
The rout in stock markets suggests that the divergence between valuations and fundamentals needs to be reconciled, especially in light of the uncertainties surrounding Covid-19’s eventual toll on the global economy and the effectiveness of any incoming stimulus measures by central banks. Equity investors believe that the gains so far this year have run their course, and they need stronger conviction to etch out new record highs. The pullback in riskier assets however, should bode well for safe havens, creating a supportive environment for the likes of Gold and US Treasuries in the interim.
Dollar could drop further on Fed easing bets
The Dollar index (DXY) has seen a technical pullback from overbought territory, falling by about one percent since breaching the 99.90 level last week. If the warning from the US Centres for Disease Control and Prevention of a potential outbreak Stateside does materialise, that could prompt the Greenback to surrender more of its recent gains.
Should the incoming data on consumer spending, home sales and ISMs come in below market expectations, that could prompt investors to ramp up bets that the Federal Reserve may have to lower US interest rates sooner than expected. Money markets have currently priced in around a 75% probability of a rate cut in April. Further dovish expectations could also lead to more Dollar softness.
Still, the DXY is expected to remain at relatively elevated levels, with other G10 currencies offering little threat to King Dollar’s throne at present, considering that the US economy is in a better place compared to other major economies.
Gold moderates to $1645, upside bias to remain
Despite shedding some three percent since breaching the $1689 level earlier this week, Gold is expected to remain supported above $1590 as investors continue to cling to safety, while assessing the coronavirus’ impact on global economic conditions. Bullion could yet make another run towards the psychological $1700 mark, especially if the negative virus impact shows up in the hard data out of developed economies over the coming months.
Demand-side risks still primary driver for Oil
Oil’s sensitivity to coronavirus-linked concerns has made for a tumultuous 2020 so far. It could see another sharp drop towards $50/bbl, especially if the CDC’s warning of contagion in the US occurs. OPEC+ may decide to trigger more supply cuts at next week’s meeting, but this may only have a limited effect on Oil prices, as demand-side concerns are expected to continue having a major sway on the commodities complex.
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