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Asian sell-off continues as pandemic fears rise

Markets questioning stocks’ resilience in the midst of an epidemic

Dollar index to remain relatively supported Gold could yet return towards $1690 OPEC+ supply cuts may only have limited impact on Oil

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.

Read: Fears of a global spread of COVID-19 are fuelling a risk-off episode in markets

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.

Read: Markets struggle to stabilise after brutal global stock market sell-off

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.

Read: Equities fall across the globe as the coronavirus outbreak spreads

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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