Whoever takes over as the new governor of the People's Bank of China faces a massive challenge. Photo: AFP
The People’s Bank of China conducted reverse repo operations of RMB500 billion by interest rate bidding on February 4, 2020.

Trade of the Day: Stocks rally across the board on Beijing’s assurances; yen, gold and US Treasuries dumped.

Quote of the Day: “Thank you, goodbye, and good riddance,” said Irena Andrassy, the Croatian ambassador, chairing the UK’s final meeting of EU envoys as a member state because her country holds the six-month EU presidency. She assumed “good riddance” was akin to “good luck,” said diplomats present in the room.

Stock of the Day:  Lee’s Pharmaceuticals rose as much as 158% after the company said one of its products had been included in a national emergency drug list. It said the drug had also been included in the preventive therapy drug list for the pneumonia associated with the latest novel coronavirus.

Number of the Day:. 500 billion yuan – the amount of funds released by China’s central bank through reverse repo operations which boosted liquidity. The central bank said it had made the move “in order to ensure adequate liquidity supply and maintain reasonable and adequate liquidity in the banking system during the period of epidemic prevention and control.”

Tip of the Day:  “We are constructive on the equity market in the Year of the Rat. 2019 was a good year for the A-share market, a mixed year for Chinese ADR and a poor year for the Hang Seng and H shares,” said analysts at DWS Group, an asset manager with 767 billion euro assets under management. “This year we are anticipating a more balanced performance between all the indices. The A shares and ADRs should lead as they are more geared to higher growth companies but the Hang Seng and H shares should pick up from oversold levels. The main driver of the market will be earnings growth.”

Financial markets recovered on Tuesday after China’s state-backed media ran opinion pieces assuring investors, although the death count from the coronavirus continued to mount. Securities Times said there was no need for investors to be anxious and highlighted the jump in inbound investment flow on Monday as a sign of confidence among the offshore investors . Expectations of more stimulus in China and the PBOC’s liquidity injection into the system also boosted sentiment with the CSI300 surging 2.6%. China’s central bank boosted liquidity with a 500 billion yuan injection into the system. This triggered investor optimism which had a knock-on effect throughout the region, with the MSCI Asia Pacific ex-Japan surging 1.88%. Earlier, Japan’s Nikkei 225 advanced 0.49% and Australia’s S&P ASX 200 climbed 0.37%.

Hong Kong’s Hang Seng index jumped 1.2% with technology, healthcare and basic materials posting hefty gains.

“Our assessment is that impact on global growth from the coronavirus outbreak will be significant but relatively short-lived. China has ample policy tools including fiscal, targeted easing and cuts in the required reserve ratio (RRR) to cushion the acute shock to real sector activity in the first half of this year,” said Desmond Soon, head of investment management, Asia (Ex-Japan) at Western Asset Management.

He said the healthcare sector is likely to be the main beneficiary as it was during the SARS period. This is borne out by the surge in companies which have any connection with producing inhibitors as there is no direct effective treatment for the Wuhan coronavirus.

“The treatment options include supportive care, steroids and Interferon alpha, which will likely benefit drug manufacturers with a portfolio of anti-viral therapies, the infusion fluid and vaccines players, and traditional Chinese medicine companies,” said Western Asset’s Soon.

European markets and US futures also felt the relief with the Stoxx Europe 600 climbing 1% and the S&P Futures adding 1.1%.

Still, the rapid spread of the coronavirus has triggered a wave of cuts by analysts of their growth forecasts for the world’s second-biggest economy.

“The shock to China’s economy from the coronavirus will likely be two to three times larger than SARS in 2003,” said DBS economist Chris Leung, who now estimates that growth may fall to 4.7% in 1Q before recovering to 5% in 2Q. He lowered China’s full-year growth forecast to 5.3% from 5.8%.

“The authorities will have to rely on fiscal and monetary policy easing to cushion the economy. Lower borrowing costs will help finance a proactive fiscal policy via bond issuances., the People’s Bank of China is expected to loosen monetary policy in a more aggressive manner,” he said while predicting a 60bps lowering of the one-year Loan Prime Rate and 300bps reduction in banks’ reserve ratio over the course of the year.

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