An industrial park in Chongqing, China, where the coronavirus outbreak has disrupted production. Photo: iStock

Trade of the Day: Stocks, oil weak as China reopens amid disruptions; gold and US Treasuries higher

Quote of the Day: “We think Asian central banks can cut without the Fed’s cover, and bond market reaction would be benign. Domestically, low inflation and positive real yields (China and India are exceptions) gives Asian central banks some cover/room to cut rates,” said DBS strategist Duncan Tan. “Externally, global liquidity is flush, global monetary stance is still accommodative and major central banks (Fed/ECB/BOJ) are still purchasing assets/injecting liquidity. In the current context where rate cuts in Asia are intended to cushion the economic shock vs leveraging the economy, we think bond markets will react positively.”

Stock of the Day:  Alibaba Health Information  rose as much as 14% after it said it had reached a deal for the use of various AGH Platforms to sell healthcare-related products and services to consumers and businesses.

Number of the Day:. 114% Fourth-quarter ticket sales for US films in India, which dwarfed the 34% rise in Bollywood film ticket sales. US studios are an emerging threat to local outfits which dominate India’s box office, the world’s biggest by tickets sold.

Tip of the Day:  “The significant amount of uncertainty related to containing the virus, as well as its economic impact, require an appropriately cautious stance on risky assets. But it is still too early to be too gloomy about equities,” said Jeroen Blokland, senior portfolio manager at Robeco. “There are three reasons to be cheerful: First, when compared to ‘similar’ events, economic activity that is lost during a viral outbreak is largely recouped once it is contained. Second, the global economy showed numerous signs of improvement prior to the outbreak. Finally, investors should bear highly accommodative central bank policy in mind.”

Financial markets were edgy on Monday as China reopened for business after the extended Lunar New Year holidays, with investors bracing for disruptions in supply chains and the movement of goods and people. Data published on Monday showed China’s CPI in January rose more than the market expected to the highest since October 2011 to 5.4% on the year, with the key drivers being pork and vegetable prices as supply disruption wreaked havoc in some regions amid the coronavirus outbreak.

“Headline CPI will likely be sustained at 5-6% YoY in the next 1-2 months, as supply disruption from the coronavirus outbreak could keep food prices elevated. That said, core CPI will likely remain subdued as consumers will likely cut back discretionary consumption due to public health concerns,” said Morgan Stanley in a research note.

“Should the outbreak continue for longer than a few weeks with an extended suspension of factories, policymakers could adopt more MLF and RRR cuts, temporary tax exemptions, and higher local special bond (LGSB) quota.”

The MSCI Asia Pacific ex-Japan index dropped 0.38%, Japan’s Nikkei 225 benchmark fell 0.25%, and Australia’s S&P ASX  200 edged down 0.14%. Hong Kong’s Hang Seng index slid 0.59% as the consumer cyclicals, insurance and technology sectors reeled under selling pressure. The Stoxx Europe 600 index dropped 0.3% and the S&P futures were flat.

Still, investors are looking at factory automation stocks, rate-sensitive sectors and China Internet and logistics companies to insulate their portfolios as the coronavirus wreaks havoc with travel schedules, trade movements and supply chains.

As more people stayed indoors and cities restrict human interaction, e-commerce and Internet-based businesses are thriving.

Meanwhile, analysts are expecting tectonic shifts in global supply chains. A survey of BofA analysts showed that supply chains for “global” sectors with market caps of $22 trillion or more are moving to Southeast Asia, India  and North America, which are seen as preferred destinations.

“Granted, most of these relocations are small compared to their installed base, but the breadth of the shift suggests to us that the trend of globalization to localization is real,” BofA Securities said in a note.“On the financial side, tariffs are obvious, but newer automation has also meaningfully narrowed the labor cost differential that made the original outsourcing so attractive, and, in addition, the tax arbitrage has narrowed. On the non-financial side, national security is a growing factor as are the ESG concerns of high carbon footprints associated with long supply chains and potentially problematic employment practices.”

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