(Reuters) - 1/SCHLOCK AND AWE IN CHINA
Financial markets have gone swiftly from nonchalance to awe in reacting to the fast-spreading 2019-nCoV or new coronavirus https://graphics.reuters.com/CHINA-HEALTH-MAP/0100B59S39E/index.html.
Global stocks have been shaken in the past week by headlines of cases and deaths, countries telling citizens not to travel or businesses shutting in China - but all this has happened while Chinese markets have been on holiday. So there is some trepidation about how mainland traders will respond to the dramatic growth downgrades and business disruptions.
A 5% plunge in share prices in neighboring Taiwan and Hong Kong as soon as they opened after the Lunar New Year break has given markets a taste of what to expect from Shanghai on Monday. Eyes will also be on the People's Bank of China to see what monetary support it might stump up.
The virus's progression has been likened to a schlock science fiction movie, replete with conspiracy theories around symptomless transmission and super-spreaders. Some 60 million people at the center of the outbreak are living under virtual lockdown. A shock to China's economy this quarter, which then reverberates through global supply chains, is a foregone conclusion. It's just that no one can yet say how deep.
Graphic: China's GDP and markets - https://fingfx.thomsonreuters.com/gfx/mkt/12/6912/6843/Pasted%20Image.jpg
2/THE VIRUS AND THE WORLD
The coronavirus's repercussions are being felt far and wide, well beyond its starting point in China's Hubei province. Countries reliant on Chinese demand have seen steep drops in their currencies, with the Australian dollar down around 5% in January, its worst month since 2016. The Thai and Korean currencies, exposed to China via tourism and goods exports respectively, are also taking a battering.
Growth forecast downgrades for China, the world's No. 2 economy, are coming thick and fast, meaning estimates for other countries are being reworked too. Tellingly, 'Dr' Copper, the best-known gauge of economic health, is down 10% in little more than a week, and oil is headed for a fourth week of losses. World stocks have lost $1.2 trillion over the past two weeks and, depending on how the virus spreads from now, expect more to come. Selling may focus in particular on travel and leisure, with a European index of these sectors skidding to the lowest since October. The beneficiaries? The usual safe-haven plays: gold, for instance, has enjoyed its best month in five.
Graphic: Airline and hotel stocks slide on Coronavirus outbreak - https://fingfx.thomsonreuters.com/gfx/mkt/13/1644/1619/stocks.png
3/ARE EURO ZONE BANKS TURNING A CORNER?
Blowout performances by Wall Street banks, and bumper Q4 earnings from the Spanish lender Santander (MC:SAN), have fed hopes of a strong season for euro zone banks, a raft of which will post results in coming days. How heavyweights such as BNP Paribas (PA:BNPP), Intesa and ING fared in the last quarter of 2019 will shed more light on how they are riding the wave of negative rates.
Troubled Deutsche Bank (DE:DBKGn) reported a major loss due to one-offs, but shares rose nonetheless as investors turned their focus on the bank's turnaround potential. With higher interest rates still far off, banks are finding it challenging to grow. But after 20 straight months of downgrades, earnings estimates have started to stabilize.
The coronavirus scare, however, threatens to strangle Europe's economic recovery and therefore any banking revival. An index of bank shares has fallen 4% so far this year, underperforming the broader euro benchmark.
Graphic: Banks' earnings - https://fingfx.thomsonreuters.com/gfx/mkt/13/1604/1579/Bank%20earnings%20revisions.png
4/ WORK AND PAY
Friday's non-farm payroll data will show how the U.S. economy fared in the first month of the new decade. The report is expected to show a pickup from December, with a Reuters poll forecasting 156,000 were added, from 145,000 the month before. The previous decade hit a number of milestones. December's report was the 111th monthly scorecard in a row to show employment gains, while the 3.5% unemployment rate matched a low from half a century ago and is roughly a third of the level at the start of the decade. Worries of a trade-war-induced slowdown have faded since the Federal Reserve delivered three rate cuts in 2019. Recent data has largely shown the U.S. economy continuing to expand at a moderate pace, and the Fed has signaled that its monetary policy stance is unlikely to change this year. -U.S. employment growth slows; labor market tightening.-GRAPHIC-U.S. employment in the 2010s in 5 charts.
Graphic: U.S. Unemployment vs S&P index - https://fingfx.thomsonreuters.com/gfx/mkt/13/1610/1585/Pasted%20Image.jpg
5/RETURN OF VOLMAGEDDON
When a slight U.S. inflation uptick pushed stock markets lower on Feb. 5 two years ago, few expected it to turn into one of the biggest Wall Street shake-ups in recent years. That episode -- "Volmageddon" -- saw the VIX equity volatility gauge triple overnight to 50%, wiping out hordes of small punters who had piled into so-called inverse-vol investments.
These strategies, peddled via exchange-traded products and designed to profit from extended spells of market calm, yielded rich pickings as long as volatility stayed low. But as the VIX exploded higher, vehicles such as the ProShares Short VIX ETF tumbled over 80 percent in a day.
As we were reminded two years ago, volatility can spike spectacularly in quiet markets. As it happens, the coronavirus has sent the VIX to three-month highs and ProShares ETF, which had climbed back to the highest level reached since Volmageddon, has fallen again. But volatility gauges for bonds and currencies remain well below historic averages. Investors might be wise to brace for reversals.
Graphic: Euro-dollar vol - https://fingfx.thomsonreuters.com/gfx/mkt/13/1650/1625/vol.png