Western Markets Absorb China's Plunge

Chinese markets did their part in returning from a long holiday with a broad sell-off as part of a price discovery catch-down exercise in light of the virus fallout. But markets in Europe and the US resumed their rally, after SPX held up above 200-DMA mentioned in Friday's note. China's decisiom to cit rates on 14-Day and 7 day reverse repos did help sentiment, as well as insistence from the PBOC to offer extra liquidity where needed. Sterling lost all of its post-BoE gains on prolonged conflicting statements from UK and EU officials regarding a future trade deal.

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Coronavirus cases in China have increased to 17,205 and the first death outside of China was reported in the Philippines Saturday. The city of Wenzhou (pop: 9m) became the first outside of Hubei to be locked down. It's an important port city in the Zhejiang province that's south of Shanghai. Only one resident per household will be allowed to leave the residence every two days to buy household necessities.

Economically, oil market watchers are estimating that Chinese demand is down 20% below normal levels and WTI fell as low as $50.42 at the open.

The bigger spotlight was on Chinese equities, which fell 8% despite Beijing's efforts to curb short sales and boost liquidity. The rates on 7 and 14-day reverse repos were also cut by 10 basis points along with a series of smaller banking measures. Here's Ashraf's warning below to the shorts late Friday after the short DOW30 trade hit its final target for 520-pt gain.

China has many levers to pull to stimulate demand but no amount of stimulus will reverse the fortunes of the country while the virus is still intensifying, with millions of people cut off from commerce.

Early-week sentiment outside of China is modestly positive, perhaps on signs that  there has been no sustained transmission outside of China. Further curbs and quarantines could help it from turning into a pandemic. What's worrisome is that, there are more reports of low-intensity cases. On the surface that sounds like good news but researchers highlight that it means there is a higher likelihood that there are dozens of people outside of China with only cold-like symptoms who are unwittingly seeding the virus internationally.

Expect coronavirus news to dominate the week ahead with more of the kinds of swings we saw late last week.

CFTC Commitments of Traders

EUR -59K vs -47K prior GBP +18K vs +25K prior JPY -36K vs -45K prior CHF +3.5K vs +1.5 prior CAD +35K vs +38K prior AUD -27K vs -19K prior NZD +2.0K vs +1.8K prior

Expect a continued unwind in yen shorts if the coronavirus threat remains high.