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Stock market rebound could be on shaky ground

Han Tan, Market Analyst at FXTM, comments on the latest in international markets.

Coronavirus cases and death toll continue rising Policymakers could yet offer more economic and financial support Dollar largely ignores political theatrics

Asian stocks are building on Tuesday’s gains, taking their cues from Wall Street overnight, as the former attempts some form of recovery after Monday’s selloff. Most Asian currencies however are weakening against the US Dollar, while Gold is stabilising around the mid-$1500 region.

The rebound currently seen in equities may be on feeble footing as the coronavirus outbreak casts a wider net, with the death toll now approaching 500 while confirmed cases have exceeded 24,000. Once the US earnings season is over, the support for global equities could be eroded as investors focus primarily on the outbreak and its impact on the fragile global economic recovery. The near-term demand for safe-haven assets is expected to remain elevated, while assets across the emerging markets complex are likely to remain susceptible to further bouts of risk aversion.

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China PMI still expanding at onset of coronavirus outbreak

China’s just-released Caixin PMI figures indicate that key sectors of the world’s second largest economy remained in expansionary territory in January, although it marked a deceleration from December’s figures. Economic data will continue to be in keen focus over the coming months, leading up to April’s Q1 GDP reading for the Chinese economy as investors attempt to ascertain the fallout from the coronavirus outbreak. More and more companies are reporting distortions in supply chains due to the quarantine measures. Still, policymakers across Asia have enough levers and willingness to support the economy if the need arises, which should also help mitigate any downside risks.

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Dollar to snub political risks, focus on hard data

The Dollar index edged higher during President Trump’s State of the Union address, crossing above the psychological 98 level. Still, neither the speech nor the impeachment proceedings are expected to have a meaningful effect on markets for the time being, as investors have bigger and more pressing factors to contend with. US assets’ inclination to react to domestic political events and risks should only grow as we draw closer to the November presidential elections.

In the interim, the Greenback remains exposed to overall global risk sentiment, the Fed’s policy bias and economic data. The US Dollar has defied expectations for weakening so far this year, aided by risk aversion stemming from unforeseen events such as the ongoing coronavirus outbreak.

Having been buoyed by the positive surprise in the January ISM Manufacturing print earlier this week, Dollar bulls will be keeping their eyes on the January non-farm payrolls data due Friday. Markets are currently expecting a print of 162,000 new jobs and wage growth to tick higher, having dropped below 3% in the prior month. Should the US economy demonstrate that it has a solid enough foundation to potentially offset the downside risk stemming from the coronavirus outbreak, that could support the DXY’s presence above the 98 level.

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