S&P futures slipped, Asian stocks eased and European markets were a sea of red even as the relentless dollar juggernaut continued on Thursday, as virus cases rose in South Korea and Japan even as China added more stimulus via a rate cut to support its economy.

US equity futures first pushed higher reaching just shy of 3,400 before turning lower after Japan reported two deaths from passengers holed up on the formerly quarantined Diamond Princess viral cruise ship, with South Korea confirming its first fatality from the disease shortly after. China reported a large drop in new cases which was due to yet another change in the definition of “infection”, but that came together with a jump in infections in South Korea, two apparent deaths in Japan and researchers finding that the virus spreads more easily than previously believed

Corporate earnings also disappointed with ViacomCBS slipping in the premarket after its quarterly revenue missed estimates. Underwhelming results from AXA SA and Telefonica SA dragged the Stoxx Europe 600 Index lower. In Asia, stock gains in Shanghai, Tokyo and Sydney were countered by declines in the rest of the major markets.

European shares eased from record highs on Thursday, as a raft of disappointing earnings added to fears about the global impact of the coronavirus outbreak after research suggested it was more contagious than previously thought. The European Stoxx 600 dropped 0.3%, led by a 1.2% fall in insurance stocks after Swiss Re posted a lower-than-expected annual profit. The reinsurer’s shares dropped 4.2% to a two-week low. A 4.6% fall for Spain’s Telefonica weighed on the benchmark index after the telecoms group said one-off charges in Mexico and Argentina hurt its annual profit. The stock was also the biggest decliner on the Spanish bourse. Joining a growing list of companies to put a number on the impact from the coronavirus epidemic, Franco-Dutch airline Air France-KLM SA forecast an earnings hit of as much as 200 million euros ($216 million) by April. Its shares fell 6.5%.

Analysts said European equity investors were in a wait-and watch mode ahead of flash readings of the PMI on manufacturing activity in the euro zone, due on Friday. “You’ve got the manufacturing PMIs tomorrow, which is probably the most important figure this week because they may show the early impact of the coronavirus on demand and the supply chain,” said Connor Campbell, analyst at Spreadex.

Earlier in the session, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6%, led by falls of 0.8% on Hong Kong’s Hang Seng and South Korea’s KOSPI.  Markets in the region were mixed, with the Shanghai Composite Index and Australia’s S&P/ASX 200 Index rising, while Thailand’s SET and South Korea’s Kospi index fell. Trading volume for the MSCI Asia Pacific Index members was 26% above the monthly average. In the latest news about the health emergency, South Korea reported its first death from the coronavirus, with infected patients doubling in one day. Japan confirmed two deaths from a quarantined cruise ship. The Topix gained 0.2%, with Yuki Gosei Kogyo and V-Cube rising the most. The Shanghai Composite Index rose 1.8% to an almost one-month high

China cut its benchmark lending rate earlier on Thursday, as anticipated, with both the 1 and 5 Year LPR cut by 5 bps, adding to a slew of measures in recent weeks aimed at cushioning the virus’ impact on the economy.

That kept Chinese stocks supported, while Japan’s Nikkei advanced 1% as an overnight slide in the yen is a boon for exporters, though the mood was more nervous elsewhere.

“I think there’s a realisation that before we get all the stimulus measures that people have been frothing about, you’ve got to deal with a lot of companies that are finding themselves with impairment charges or indeed solvency problems,” said Sean Darby, global equity strategist at Jefferies in Hong Kong, before adding something we have been pounding the table on for the past month: “Markets have taken a step back because the authorities won’t do any major stimulus until they are completely sure the virus has stopped, because there’s no point in doing it when people are sitting at home.”

Bingo. If and when the algos figure this out, watch out below.

China had 394 new cases on Wednesday, the lowest since Jan. 23, after Beijing reversed an earlier, broader definition of “infection” to represent fewer cases and get people to get back to work; so far that approach has failed. More than 2,100 people have died from the coronavirus in China, with eight deaths in other countries but not including the two from the quarantined cruise ship in Japan.

However, overnight the attention was not on China but rather its neighboring countries: South Korea’s government reported 31 new cases of coronavirus on Thursday, after a new outbreak traced to a church, bringing the number of people infected in the country to 104.

In Japan, where the government has come under intense criticism for its handling of an outbreak on a cruise ship carrying about 3,700 people, broadcaster NHK reported that two passengers in their 80s had died.

In FX, dollar’s strength climbed to the highest level in more than four months and the Swiss franc gained on haven bids while the yen extended its slump, weakening past 112 per dollar, with market participants ascribing a host of reasons, ranging from disappointing economic news to early positioning before the fiscal year-end next month.

The Yen plunged nearly 1.4% against the dollar, its sharpest fall in six months, and 2% against the Norwegian krone – its sharpest daily drop in almost three years. “Nearness to China and dependence on China have not helped the yen as a risk-off. We have seen the yen and gold diverging for a while and this may not be the end of it,” said Shafali Sachdev, head of FX in Asia at BNP Paribas Wealth Management. “The kind of classic correlations between U.S. yields and the yen, those have been kind of breaking down…we need to see past this virus situation to see whether the yen will regain its safe-haven status.” The skittish mood had investors punishing the Australian dollar, sending it down 0.6% to an 11-year low of $0.6633 after a surprise rise in unemployment.

The flight to safety was observed across most assets, with treasuries and European higher and gold surging to a seven-year high.

Elsewhere, oil prices added to overnight gains while gold loitered around $1,609 per ounce. U.S. crude last sat 25 cents firmer at $53.54 per barrel and Brent added 16 cents to $59.28.

Economic data include initial jobless claims, Philadelphia Fed survey. The Southern Company, Newmont and Hormel Foods are due to report earnings

Market Snapshot

• S&P 500 futures down 0.1% to 3,385.25
• STOXX Europe 600 down 0.3% to 432.58
• MXAP down 0.5% to 167.59
• MXAPJ down 0.5% to 551.21
• Nikkei up 0.3% to 23,479.15
• Topix up 0.2% to 1,674.48
• Hang Seng Index down 0.2% to 27,609.16
• Shanghai Composite up 1.8% to 3,030.15
• Sensex down 0.4% to 41,157.48
• Australia S&P/ASX 200 up 0.3% to 7,162.49
• Kospi down 0.7% to 2,195.50
• German 10Y yield fell 0.4 bps to -0.422%
• Euro down 0.02% to $1.0803
• Brent Futures up 0.07% to $59.16/bbl
• Italian 10Y yield rose 2.2 bps to 0.787%
• Spanish 10Y yield fell 1.2 bps to 0.259%
• Brent Futures up 0.1% to $59.18/bbl
• Gold spot down 0.1% to $1,610.13
• U.S. Dollar Index little changed at 99.71

Top Overnight News

• The global death toll climbed to 2,129 and the number of confirmed cases reached 75,730. Hubei province reported a sharp drop in new cases after another change in the way China diagnoses infections, raising questions over the reliability of the data
• U.K. retail sales jumped the most in almost two years in January, ending the worst run for British stores on record and adding to signs of an economic rebound. Sales excluding auto fuel rose 1.6% from December, the biggest increase since May 2018. Economists were expecting a rise of 0.8%.
• The bond market is signaling approval of U.K. Prime Minister Boris Johnson’s planned spending spree. With the March 11 budget looming into view, the average cost of government borrowing is close to the lowest levels on record
• The world’s largest container shipping company, is positioning itself for a strong rebound in two months, based on an expectation that the fallout of the coronavirus on global trade may soon peak
• Indonesia’s central bank cut its benchmark interest rate by 25 basis points to 4.75% after a three-month pause as the spread of the coronavirus threatens growth in Southeast Asia’s biggest economy

Asian equity markets traded mixed having pared a bulk of earlier gains despite the promising lead from Wall Street which saw the S&P 500 and Nasdaq print fresh record highs. The optimistic sentiment in the region faded following the number of coronavirus cases in South Korea rising by 60%, and amid reports of two deaths from the Japanese cruise ship. Nonetheless, ASX 200 (+0.3%) was buoyed by its large-cap mining and energy sector, following recent gains in the respective complexes. Nikkei 225 (+0.4%) initially posted gains of over 1.5% with upside originally fuelled by a considerably weaker JPY, although the index later pulled back with a chunk of its transport stocks in the red, and amid reports that multinational companies are avoiding travel to and from Japan over fears that the country will be the next hotspot in the outbreak. Elsewhere, Hang Seng (-0.9%) erased opening gains and underperformed as a bulk of its stocks reversed course into negative territory, and with its heavyweight financial sector on the defensive. Meanwhile, Shanghai Comp (+1.0%) rebounded with a vengeance in late trade and topped the 3000 mark for the first time since before the Lunar New Year, after initially swinging between gains and losses despite the expected stimulus measures by the PBoC, as traders were cautious following the case jump in South Korea and deaths on the cruise ship off Yokohama, with the former prompting South Korea’s KOSPI (-0.5%) to trade with losses of almost 1.0% at one point.

Top Asian News

• China Nears Takeover of Troubled HNA as Virus Rocks Economy
• 7- Eleven Owner Said in Exclusive Talks for Marathon’s Speedway
• Ping An Insurance Full Year Net Income Misses Estimates
• Vietnam to Order Loan Interest Rate Cuts for Virus-Hit Companies

European indices kicked the session off on a relatively directionless footing before seeing modest downticks amid increased fears over the spread of coronavirus outside of China. Focus in recent trade has been placed upon developments in Japan and South Korea with the former reporting two passenger deaths aboard the Diamond Princess cruise ship off the coast of Yokohama, whilst the latter announced a marked pickup in coronavirus cases (total now stands at 104 vs. Prev. 51) and its first death. Sectoral performance has been a mixed bag thus far with price action largely dictated by a slew of large cap earnings, which has seen Telefonica (-5.7%), act as a drag on the Telecom sector following disappointing 2019 profit metrics. Elsewhere, to the upside, post-earnings, Smith & Nephew (+8.5%), Schneider Electric (+5.2%), Fresenius Medical (+4.2%), Fresenius SE (+4.2%), Maersk (+3.7%), Lloyds (+3.3%), Bouygues (+2.7%) and BAE Systems (+2.5%) lead the charge for the Stoxx 600. To the downside, Air France (-8.9%), disappointing earnings release has hampered other airline names, including Deutsche Lufthansa (-3.2%) and RyanAir (-1.8%), whilst corporate updates from Swiss Re (-4.9%) and Axa (-3.0%) has triggered losses in their respective shares.

Top European News

• Irish Lawmakers Begin Search For PM After Sinn Fein Surge
• Maersk CEO Predicts ‘Sharp’ Rebound After Coronavirus Peaks
• Britons Return to the Stores After Johnson Election Victory
• Death of Bond Vigilantes Clears Path for U.K. Fiscal Splurge

In FX, USD began the session on a firmer footing once again after taking out overnight highs of 99.778 to print a session high thus far of 99.875. Once again, there has been little in the way of fresh fundamental catalysts behind the USD move with gains instead largely as a result of weakness elsewhere, namely the JPY. Early doors in Europe, USD/JPY took out the overnight high of 111.59 before taking out 112.00 to the upside (current high of 112.18), which could open up a test of the April 26th high at 112.40. Explanations for the JPY have varied with some leaning on the traditional arguments of selling of JPY by Japanese pension planners to buy US assets; however, others favour focusing on recent disappointing data prints for Japan (Monday’s GDP figures) and concerns over the ramifications of the coronavirus for the nation, something which could impair the Tokyo Olympics this summer. If JPY declines continue to accelerate, 100.00 in the DXY looks a reasonable bet, with 100.50 marking the April 18th 2017 high.

• EUR – Price action for the shared currency has largely been dictated by the “King USD” after gains in the greenback knocked the pair below yesterday’s low of 1.0782, with the session trough at 1.0778 (gap support from April 2017) at the time of writing. Should the EUR continue to fall victim to the USD, technicians’ eye 1.0761 which was the 20th April 2017 high, with not much in the way of support until the 1.0700 figure. From a fundamental perspective, the main highlight on today’s docket from the Eurozone comes via the minutes from the January ECB meeting (full preview available via the research suite of the website). That said, participants are unlikely to glean too much in the way of fresh insight from the Bank with the meeting itself providing little in the way of fireworks as policymakers tread water ahead of the upcoming strategic review. Furthermore, greater policy guidance from the ECB since the meeting has come from commentary via President Lagarde who noted that low interest rates and low inflation have significantly reduced the scope for the ECB and other central banks to ease monetary policy in the face of an economic downturn.
• GBP – Momentum for GBP early doors was driven by the pick-up in the USD before the pound dug in and reclaimed 1.2900 to the upside after printing a low of 1.2874, just above the multi-week low of 1.2873 seen on February 10th. Sentiment for the GBP was also bolstered by encouraging retail sales metrics, with all four metrics exceeding expectations amid a pickup in clothing and footwear sales, helping to add to the evidence-pile for those championing the so-called “Boris-bounce”. That said, gains for GBP were relatively fleeting with perhaps some in the market apprehensive amid simmering tensions between the UK and EU this week ahead of upcoming trade negotiations at the beginning of next month.
• AUD/NZD – Focus for the antipodes has largely fallen on AUD given overnight employment figures which saw modest downside in AUD/USD upon the release despite the headline employment change topping estimates (led by full-time employment), as the unemployment rate rose more than expectations, although money market pricing for a March RBA rate cut was largely unchanged. AUD went on to take out stops at 0.6650 before printing an eventual low at 0.6623 (10yr low!); note there is a large AUD 2.1bln expiry in AUD/USD at 0.6700. NZD has also been weighed on during the APAC and EU session in sympathy with Aussie losses with the NZD/USD pair being dragged from just shy of 0.6400 to take out 0.6350 to the downside and print a low of 0.6335.
• CNY/KRW/TRY/ZAR – USD/CNH saw little action on the expected PBoC LPR rate reductions, although the pair saw upside amid a firmer Dollar, and stabilised ~7.0300. China has continued to reassure the market over the fallout of the coronavirus with the Commerce Ministry stating they will roll out targeted support measures in a timely way to mitigate the impact on firms and consumption. However, some in the market have raised concern over newly revised guidelines by Chinese authorities in classifying coronavirus designations, something which could potentially obfuscate matters further. On the coronavirus footing, USD/KRW rose from ~1191.00 and breached mild resistance at 1198.40 (3rd Feb high) before eclipsing 1200.00 to the upside during the APAC session amid increased coronavirus cases in South Korea. Elsewhere, overnight, TRY experienced a spiker higher amid thinned volumes and alongside broad EM FX weakness, USD/TRY immediately rose from ~6.0800 to levels north of 6.1000 before completely paring the move to reside on a 6.09 handle. Finally, ZAR has seen some softness relative to EM peers amid an announcement from ESKOM that rolling blackouts will be impose in South Africa from today until Saturday, something that will act as a further drag on activity ahead of next week’s budget announcement.

In commodities, WTI and Brent prices are essentially unchanged on the day with less that USD 0.15/bbl of variation from flat at present. Newsflow specific to the complex has been slow for much of the session, with price action initially moving in tandem with the overall risk picture as main equity bourses are similarly little moved overall. Focus overnight was on the ongoing demand concerns stemming from the coronavirus, with reports this morning of a death in South Korea prompting some mild weakness; as well as the private crude inventories which printed a larger than expected headline build. Although, the internals did feature surprise/bigger draws for gasoline and distillates respectively. As we await Russia’s stance on the JTC’s recommendations interest was piqued by remarks from Energy Minister Novak but to no avail on the production cut recommendations; although, he did firmly push back on the need for an early meeting which, alongside the short proximity to the original March date, means a early meeting is all but off the table. Looking ahead, today sees the release of the EIA weekly crude report at the slightly later time of 16:00GMT/11:00EST; expectations are for a build of 2.49mln which would be just over half of the API’s 4.2mln build last night; while internal estimates are in proximity to those forecast for last nights numbers. Moving to metals, where spot gold is currently little changed but is comfortably above the USD 1600/oz mark, with a YTD high of USD 1612.93/oz yesterday which takes us back to levels not seen since 2013

US Event Calendar

• 8:30am: Philadelphia Fed Business Outlook, est. 11, prior 17
• 8:30am: Initial Jobless Claims, est. 210,000, prior 205,000; Continuing Claims, est. 1.72m, prior 1.7m
• 9:45am: Bloomberg Economic Expectations, prior 56; Bloomberg Consumer Comfort, prior 65.7
• 10am: Leading Index, est. 0.4%, prior -0.3%

DB’s Jim Reid concludes the overnight wrap

Back from a 2-day trip to Madrid and a bit upset that in the season that Liverpool potentially break all records for winning streaks and points accumulation, I go to watch a game they lose! Thankfully there is a second leg. I got home last night to a daughter screaming due to a 39.2C temperature and a frazzled wife with tonsillitis who in half term has had to look after all three terrors without help due to our nanny being bed bound and at home in her last week. It’s fair to say my wife wasn’t particularly interested in me going through how sad I was that Liverpool had lost the night before and where they could improve for the second leg.

Talking of bruising encounters, the Democratic nomination debate in Nevada has just finished. This was the first featuring Mr Bloomberg and it’s fair to say that he had to absorb a large amount of attacks from the other candidates on his past record as Mayor of New York and lack of Democratic credentials. Predictit’s odds on Bloomberg winning the nomination fell from 29% to 16% at one point during the course of the debate, with no one candidate gaining particularly from that decline. The former mayor is not on the ballot in Nevada on Saturday so we will have to wait to hear from voters on Bloomberg. It will be interesting to see if there is any hit to his polling, because it is likely that – given the amount of money he has spent on TV ads already – many more Super Tuesday voters are likely to see his ads than have watched last night. Bloomberg has already spent more on the first few months of his 2020 presidential campaign than former President Barack Obama did on his entire 2012 bid.

Staying with overnight news, Asian markets are seeing a little increase in concerns about the coronavirus as 2 people from the quarantined ship died in Japan and South Korea reported another 31 confirmed cases thereby raising worries over the spread of the virus outside China. However, China’s Hubei province reported the smallest increase in confirmed cases (349) in recent times but it has to be interpreted with some caution as it came on the back of another change in the counting methodology. Total deaths in China now stand at 2,118 with confirmed cases at 74,576.

On a related note, the PBoC continued with its easing measures to support the Chinese economy by lowering the 1yr loan prime rate to 4.05% from 4.15% previously and the 5yr loan prime rate to 4.75% from 4.80%. On a more micro level, Qantas Airways said overnight that it is slashing capacity on international flights to China, Hong Kong, Singapore, Japan and Thailand by 15% and freezing recruitment as the coronavirus drives down travel demand. It added that the reductions will remain in effect until at least the end of May.

A quick refresh of our screens shows that markets are trading mixed this morning with the Nikkei (+0.38%) and Shanghai Comp (+0.75%) up while the Hang Seng (-0.69%) and Kospi (-0.47%) are down. However, the Nikkei is off its early highs of as much as +1.73% on the news of the 2 deaths mentioned above. Elsewhere, futures on the S&P 500 are down -0.14% and yields on 10yr USTs are down -1.3bps.

This comes after normal service resumed in markets yesterday with US equities back to hitting new all-time highs after shrugging off the Apple Q1 revenue warning. The S&P 500 finished +0.47% higher last night while the NASDAQ rallied to the tune of +0.87% and is only 1.86% away from 10,000 and a landmark that will be sure to get a lot of press. In fact it was a very strong day for tech with semiconductor stocks up +2.57% – the sixth gain of at least 2% this year – with the NYSE FANG index up +2.33% for its seventh consecutive daily gain. Apple, Amazon and Google now have a combined market cap of $3.54tn – nearly half a trillion more than the CAC and DAX combined.

It’s not just the US that is getting its turn in the spotlight though. The STOXX 600 yesterday closed at a new record high following a +0.83% gain. The MSCI EM index is also up +5.08% from the recent lows and within 12% of the all-time highs. What’s curious about all this though is that Gold continues to rise – up +0.63% yesterday (+6.22% YTD) finishing at the highest level in USD terms since March 2013 – and the yield curve continues to flatten with 2s10s down -0.7bps to +13.8bps and to the flattest level since November. 30y Treasuries are also trading only a shade above 2% and are down -37.7bps this year already.

So risk on and many safe havens performing well. China stimulus stories appeared to provide the sufficient ammo risk needed yesterday with an HNA nationalisation story in the early afternoon probably the most interesting. Indeed Bloomberg reported that the government of Hainan is in talks to take control of HNA with the core airline assets to be potentially sold off to other local companies. It’s possible that we get an update very soon. So, clearly the bail-out is a near term positive but it does highlight some of the stresses and leverage in China’s financial system and economy.

Back to yesterday, where European bonds generally rallied (Bunds -1.1bps) but with BTPs the exception (+2.2bps) possibly partly on news that global investors sold EU3.8b of Italian bonds and bills in December, in the latest data from the European Central Bank. Treasuries yields climbed slightly by +0.03bps to 1.564%. Credit also continued to tighten. Renault bonds were weaker however after the car maker was another to fall victim to a ratings downgrade, pushing bonds into fallen angel territory. Indeed Renault’s near EUR5bn of bonds will enter EUR HY indices next month and will immediately become a top 10 issuer making up just shy of 2% of the index.

The FOMC released the recent January meeting minutes yesterday, and there was little new news. There was no discussion of the impact of the coronavirus and the Committee mostly stayed on message that policy remains appropriate barring a material reassessment. Officials like Chair Powell have been saying that it’s still too early to assess the impact and the minutes indicate that was certainly true in Jan. On inflation targeting, the Committee discussions seemed to lean against adopting a symmetric inflation range so as to not convey being comfortable with below average inflation. The balance sheet was the other major topic, with repo operations planned through April though gradually reduced through that time.

In other news, trade headlines were a focal point again yesterday with EU trade chief Hogan telling EU lawmakers that work on a revised trade truce will go on for the next few weeks. It’s worth noting that headlines in recent weeks had suggested that talks had centered on a mini deal so a move to a truce is perhaps more realistic. Our economists yesterday made the point that the biggest obstacle appears to be the US demanding that the EU gives way on agriculture. This has been a focus not only for Trump but also Congress. The question then becomes – are there enough low hanging fruit on food/agriculture (previously EU agreed to take more soya and beef imports from US) that can make the US happy to do a mini deal while not crossing the bigger red lines that the EU has on agriculture.

Elsewhere, all the data in the US was by and large better than expected. That was particularly the case for the housing data where January housing starts declined a lot less than expected (-3.6% mom vs. -11.2% expected) while permits surged +9.2% mom (vs. +2.1% expected). That’s a post crisis high for permits now with upward revisions to the prior month also included, however it’s likely that the warm weather has been a big driver. As for PPI, the headline and core ex food and energy readings both rose +0.5% mom, exceeding expectations for +0.1% and +0.2% respectively. Significantly, the health care component which feeds into PCE was strong also, rising +0.4% mom.

In the UK the latest inflation data was slightly higher than expected. The January core reading rose two-tenths to +1.6% yoy while the headline rose to +1.8% yoy (vs. +1.6% expected). Measures of RPI and PPI also rose. While the tick higher for core CPI will have been of some comfort it’s worth noting that the latest print is still a tenth below the BoE’s estimate for January. A reminder that today and tomorrow we get retail sales data and the latest PMIs in the UK, however so far the data has shown signs of improvement since the election. Sterling was weaker yesterday nonetheless, falling -0.60%.

Finally before the day ahead Craig Nicol, Credit Strategist and a member on my team, has just gone live with a podcast called ‘Green Bonds – Increasingly Relevant in the Corporate Bond Market. The podcast is based on a report Craig published earlier this month (link here) exploring the stratospheric growth of the green bond market. Listen on http://www.dbresearch.com/podzept/ or subscribe on iTunes, Apple Podcasts, Spotify.

Looking at the day ahead, this morning data due out in Europe includes March consumer confidence in Germany, January CPI in France and January retail sales in the UK. The February CBI survey for orders and selling prices is also due out in the UK. This afternoon we’ll also get February consumer confidence for the Euro Area while in the US the only data due is the February Philly Fed index, weekly jobless claims and January leading index. Away from the data the Fed’s Barkin and ECB’s Guindos are due to speak while the ECB’s minutes from the last policy meeting are also due. Worth watching also is the EU leaders meeting where the EU budget is due to be negotiated.