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Asian selloff continues as pandemic fears rise

26 February 2020

The selloff in Asian markets continues, as risk appetite struggles to find a solid footing amid the coronavirus bog. 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 mode in the markets, with the MSCI Asia Pacific index in the red in 9 out of the last 10 sessions, while the South Korean Won is leading Asian currencies’ decline against the US Dollar.

The rout in stock markets suggests that the divergence between valuations and fundamentals need to be reconciled, especially in light of the uncertainties surrounding Covid-19’s eventual toll on the global economy and the efficacy of incoming stimulus measures. Equity investors have deemed that the gains so far this year have run its course for the time being and need stronger conviction to etch out new record highs. The pullback in risk-taking activities however should bode well for safe haven assets, 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 99.9 mark last week. If the U.S. Centers for Disease Control and Prevention’s warning of a potential outbreak stateside indeed materialises, that could prompt the Greenback to surrender more of its gains of late.

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. Such 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 currently in a better place compared to other major, developed economies.

Gold moderates to $1640s, upside bias to remain

Despite shedding over three percent since breaching the $1689 level earlier this week, Gold is expected to remain supported above $1580 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 major 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 for Brent futures. Brent futures could see another sharp drop towards $50/bbl, especially if the CDC’s warning of an outbreak stateside materialises. Should OPEC+ decide to trigger more supply cuts at next week’s meeting, that 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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