Yields Lead Slump in Virus-Driven Market Selloff

Risk trades deepen their slump as market react to weekend news of the growing coronavirus outbreak, claiming at least 80 fatalities and sending the number of confirmed cases to 2744. Markets were especially hit in early Monday Asia by the revelation that the virus has an incubation of as long as 2 weeks, raising the possibility that people carrying the virus but not yet aware of the symptoms could infect others. Markets were also concerned with news reports of rocket attacks on the US embassy in Baghdad (see below). The US crude oil short opened at 59.65 on Jan 8th will be closed today. Here is the rationale for entering the trade even after a sharp drop in oil.

A second city of 7.5 million people 70km away from Wuhan was put on lockdown with 10 cities placing curbs on travel. One startling fact is that Chinese foreign tourism has risen 8-fold since SARS in 2003 and the lunar new year holiday is an extremely busy time of year for travel.

Aside from oil, one other striking development is the breakdown in the 4-month trendline support of the US 10-year yield to 1.62%, which could clear the way for 1.51%, followed by the record low of 1.42% (Sep 3). JPY leads in FX, while the Aussie and kiwi lagging in a classic risk-off mood.

US new home sales are due up later but economic data will take a backseat to virus news.

The Baghdad Story

One story that could push its way into the limelight was a rocket attack on the US embassy in Baghdad. Reports from AFP says the dining facility was directly hit and that helicopters were removing casualties. It's not clear if they are Americans but if they are it could mark the start of another escalation in the region.

That would put oil traders in a particularly tough spot as they weigh a Middle East flareup against the demand destruction of shutting down large parts of China. In early trade crude breke through the November low and sank to $52.15 even with an OPEC warning that it was watching closely.

The week ahead is filled with US earnings and a few economic data points including new home sales on Monday but it's tough to see how anything could steal the spotlight from the virus. Don't forget the Fed meeting/press conference on Wednesday and BoE decision on Thursday.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -47K vs -48K prior GBP +25K vs +31K prior JPY -45K vs -31K prior CHF +1.5K vs flat prior CAD +38K vs +33K prior AUD -19K vs -20K prior NZD +1.8K vs flat prior

The risk off mood related to the virus caught the market just as it was shifting away from risk trades and the safety of the US dollar. That means that more specs will be at risk of going underwater sooner if risk aversion persists.