Risk-off sentiment has dominated markets so far this week triggered by the uncertainties surrounding the Coronavirus and its likely negative impact on China’s growth and spill-over impact on Asian growth but also the uncertainty of whether it could spread globally having a more widespread impact. This has helped to reverse some global equity market gains so far this year and edged the Dow into negative territory on yesterday’s close. That said, the S&P500 future is indicated in positive territory for Tuesday’s trading at the time of writing. In contrast to equities, USTs have rallied and the yield curve has flattened: the yield on the 10 year UST is down 34bps YTD to 1.58% at the time of writing with ~15bps of the move having come over the last 3 trading days. Broadly, IG USD credit has lagged the UST rally at this stage.
The renminbi has given back some of its recent gains versus the US dollar ahead of the signing of the US-China trade deal on the back of the Coronavirus news and at the time of writing is down 0.29% YTD (CNH spot basis). Over the medium term we still expect it to appreciate. Further renminbi appreciation should be supported by the positive carry against the US dollar and China’s net foreign asset position as over the longer term creditors’ currencies tend to appreciate. Plus, greater index inclusion and improved market accessibility will support investor inflows into China and reinforce the case for continued internationalisation of the renminbi.
Coronavirus is expected to detract from China’s growth in 2020 with the extent of the impact dependent on the duration, extent and severity of the virus which is to a large extent driven by the authorities’ success in terms of virus containment. Forecasting an impact at this early stage is clearly difficult: the Economist Intelligence Unit note that “Assessing the eventual impact is challenging at this stage” but “that the virus could reduce real GDP growth in 2020 by 0.5-1 percentage points against our baseline forecast of 5.9%.”