Coronavirus in China and the Snowball Effect
Coronavirus in China impacted stock markets to rally for a 3rd consecutive day. Expectations of more stimulus due from the PBOC (People’s Bank of China) fueled chart action. The Shanghai Composite index jumped to 2819. It recouped at least half of the losses suffered from the open of markets after the Lunar New Year holidays.
The initial fall was, of course, due to the continued growth in the outbreak of Coronavirus globally. However, Wednesday saw the first sign that the Coronavirus in China was losing momentum. Contraction numbers slowed for the first time. The slowdown saw stock markets globally surge with the Dow closing over 400 points higher.
Markets take a significant hit
On Monday and Tuesday, China’s central bank lowered interest rates on reverse repurchase agreements. This would add money to the cash flow supply to ensure adequate liquidity supply in the system. According to reports, the PBOC injected 1.7 trillion yuan (approx. $242 billion) into money markets. On Wednesday, the PBOC said it decided not to conduct open market operations for the day. The reason is that there was “adequate liquidity in the current banking system, which is sufficient to meet the market demand.”
USDCNH has seen some erratic downside movements despite the stimulus. The stimulus would typically lead to weakness in the home currency. The pair stalled in a range over the last few days, with no help by the extended holiday in China. The strength in the Yuan has left USDCNH looking to test the downside level at 6.9525. However, the more added central bank stimulus becomes an option, the more likely we are to see the pair settle back into a range.
Oil prices are hitting fresh highs
Oil prices also jumped higher on Wednesday. This is amid unconfirmed reports of a possible coronavirus treatment breakthrough according to a Chinese state TV report. There is potential that researchers at Zhejiang University have found an effective treatment.
WTI crude oil had seen consistent downside over the last few weeks. The news of a slight turnaround in fortunes has seen a retracement back above the key $50 level. However, in order to sustain the upside momentum, we will need to see the rumours turn into a hard fact, and the death rates begin to slow.