LCG Market Wrap: February 21st 2020

February 21, 2020

The sudden shoot up in the number of coronavirus outside of China has seen sentiment sour again across markets. The Japanese yen, Korea’s KOPSI are under fire, automaker shares might be next, and the dollar and gold are the places of choice to take cover.

Automaker shares: China car sales -92%

Carmakers will be on our radar on Friday after China car sales fell off a cliff, down 92% in February. Carmakers have already seen significant underperformance but proof of the cratering demand in China could see that exacerbated. BMW shares are down -12% in 2020 while the DAX index reached new record highs. The shares have lost roughly one third in value in two years. A drop below €64 and the bottom could fall out for BMW.

KOPSI (South Korea): Down 1%

South Korea’s stock market is now at the sharp end of the market reaction to the coronavirus. The KOPSI dropped over 1% on Friday, easily outpacing other stock indices in Asia. The emergence of a ‘superspreader’ has seen the number of cases in South Korea spike in last two days. The KOPSI has failed to hold above 2200 after three attempts this year and it may prove to be a top if the number of coronavirus cases continue at the current pace.  

US Dollar: Dollar Index to reach 100 (then 102)

King Dollar is reigning again. The buck is retaking big milestones against several currencies. EURUSD is below 1.08, USDJPY is above 112 and AUDUSD is below 0.66. The next big achievement for the dollar should be 100 in the dollar index. It would be the first time the dollar index is above 100 since April 2017. We’re looking for 100 as early as today and 102 within a month. The flight to quality amid the coronavirus uncertainty and a booming US economy is proving hard to live up to for other currencies.

Japanese Yen: Cannot be a Coronavirus haven

Dollar yen is above 112 at 9-month highs but look too at euro-yen which has surged above 121 to a new February high in just two days. It’s not just dollar strength as intimated by Japanese officials on Friday. The yen cannot act in its traditional capacity as a haven from the coronavirus because of its direct effect on Japan. The rising number of cases in Japan has caused Tokyo to cancel major indoor events for next three weeks, 100s are leaving the quarantined cruise ship and Japan’s economy is on brink of recession. Japanese GDP growth was negative in the fourth quarter and judging by today’s manufacturing PMI’s which cratered strong expansion to contraction, the first quarter will too. Japan’s finance minister has shown the government is worried by stating ‘FX stability is important’.

Gold: Up despite stocks and the dollar

Gold has just taken out $1630 per oz, the first time it has done so since February 15, 2013 – within a week of exactly seven years. There is a sense that the coronavirus means central policy says ultra-accommodative even longer, and that’s good for a non-interest-bearing asset like gold. Although markets largely overlooked Fed minutes this week, a key takeaway for gold is that the Fed didn’t sound in any rush to stop adding liquidity through its T Bill purchases.

Coming up Today:

Germany, Italy, France preliminary PMIs, Eurozone CPI, Fed speakers: Brianard, Mester, Clarida.

Opening Calls:

FTSE 100 is set to open 16 points lower at 7420

DAX is set to open 17 points lower at 13647

S&P 500 is set to open 21 points lower at 3352