Three Shocks to Investor Sentiment

January 27, 2020

It’s been a difficult day in the marketplace despite the closure of many markets including China, Australia, Hong Kong, Singapore, South Korea and Taiwan for Australia Day and the Chinese New Year. The safety of investments has displaced the usual priority of return on investment.

  • The dollar advanced overnight by 0.7-0.8% against a number of developing economy currencies such as the offshore Chinese renminbi, the Australian and New Zealand dollars, the Mexican peso, and the Russian rouble.
  • Two other safe haven currencies — the Japanese yen and Swiss franc — rose 0.3% and 0.2% against the dollar.
  • Sizable equity market declines have occurred of 2.0% in Japan, 1.8% in Indonesia, 1.0% in India in Asia and so far of 2.1% in Great Britain and France, 2.2% in Germany, 1.6% in Italy, 1.4% in Switzerland, and 1.5% in Spain.
  • The price of gold climbed another 0.7% and is near a 7-year high, while West Texas Intermediate oil slumped over 2.5% and is around a 5-month low.
  • Ten-year sovereign debt yields, which move inversely with bond prices, are down six basis points in U.S. Treasury futures,  and at 1.63% the yield has slipped 30 basis points since December 23rd and to a 3-1/2 month low. Yields on British gilts, German bunds and 10-year Japanese JGBs are down today by 4, 3, and 2 basis points.

The market drama stems from three dismaying developments. Foremost, the Chinese coronavirus epidemic continued to spread exponentially over the weekend, bringing the number of stricken patients above 2700 and the death total to above 81. Xi Ping’s government has quarantined more cities and extended the New Year business holiday to February 2nd.

Second, the monthly German business climate index compiled by the IFO economic institute in Munich yielded disappointing results for January. A six-month high in December was followed by a 0.4-point decline to a 2-month low in January that also lay 1.1 points below analyst expectations. Perceived current conditions continued to improve, but expectations declined a full point. Service-producing industries were at a 2-month low, and the construction sub-index sank 3.9 points to a weaker level than in any month of 2019. Officials at IFO concluded that businessmen remained in a cautious mood.

Thirdly, leaked excerpts from the forthcoming book by President Trump’s former national security advisor, John Bolton, allegedly confirm that Trump had confided to him that congressionally-authorized aid to Ukraine was absolutely conditional upon that country’s president publicly announcing a corruption investigation into the Bidens. Although it is highly remote that even this revelation will change the adamant and universal opposition of senate Republicans to hear testimony from Bolton and other extra witnesses in the Trump trial, it casts the global image of American democracy as even more broken. In a separate political development, new polls in Iowa just a week before that state’s caucus put the love-him-or-hate him senator from Vermont, Bernie Sanders, either tied for the lead or alone in commanding a significant plurality of voter support. Democrats are seemingly falling into the same trap as in 2016 of selecting a very polarizing candidate and thereby handing the presidency to the Republicans.

Mortgage approvals in the U.K., according to new British Bankers Association data, climbed to a 52-month high last month and exceeded the year-earlier level by nearly 19%.

The number of unemployed French workers fell to a 74-month low in December.

Finnish consumer sentiment weakened to a two-month low in January and was at its third weakest level in the past dozen reported months.

Danish retail sales in December fell 0.5% on month and by 0.6% on year. That was the first year-on-year decline since June’s 1.2% drop. In Cyprus, by contrast, a 6.6% on-year increase of retail sales in November was the most in 17 months.

Still to come: U.S. new home sales and the Dallas Fed manufacturing survey, plus the Conference Board’s Chinese index of leading economic indicators.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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