Worshippers attend a fire festival at Furo-gu Shrine in Okawa, Fukuoka Prefecture, on February 10, 2020. Japan's culture is a tourism draw but heat is draining from the sector as the coronavirus spreads its chill. Photo: AFP/ Yomiuri Shimbun

Trade of the Day: Stocks tumble as the virus’ spread outside China gains traction; yen, gold and US Treasuries strong.

Quote of the Day: “With the number of confirmed infections of the new coronavirus rising in Japan, cancellation or postponement of this year’s Tokyo Olympics is becoming a possibility worth considering. The key point in terms of the economic impact of such a move is that most of the spending for the Olympics has already happened. Spending during the Games themselves is small, perhaps just 0.2% of GDP, and much of this is diverted from spending in other areas of tourism and recreation,” said Marcel Thieliant, an economist with Capital Economics, in a note titled “Olympic cancellation wouldn’t be an economic shock”.

Stock of the day:   Ping An Insurance trading volumes surged after it reported a 37% jump in net profit. But the stock price fell because the profit was driven mostly by investment income and non-recurring gains indicating the inability to sustain surpluses.            

Number of the Day: 42% – the proportion of China’s GDP that could be affected by the coronavirus, according to Standard Chartered analysts. This is the economic activity driven by the nine sectors identified by the bank in China as suffering the largest losses in demand because of the outbreak: electronics, automobiles, construction, retail sales, transportation, accommodation, catering, real estate and recreation.

Tip of the Day: “Forbearance may keep reported Chinese bank NPLs at around 2% of gross loans, but the peak questionable loan ratio may almost double in the aftermath of the coronavirus outbreak, in the worst-case scenario,” said S&P Global analysts in a note. “We estimate banks will apply forbearance to about 4% of problem loans. Adding this to S&P Global Ratings’ 6.5%-7.5% questionable loan ratio of gross loans that we estimated before the coronavirus outbreak, China’s questionable loan ratio may peak at about 10.5%-11.5% in the aftermath of the epidemic, in our baseline scenario.

Global markets retreated as the escalating virus threat engulfed countries outside China as infections approached the 77,000 mark and the death count rose to 2,247. South Korea, Japan and Singapore overtook Hong Kong in the infection count, with the World Health Organization warning that the spread outside of China may become a wider threat. But mainland stocks added to gains posted after China cut interest rates to battle the virus’ impact on Thursday.

Prospects of more easing in China have brightened with Beijing abandoning its deleveraging campaign, analysts said.

“Through 2020, we expect the one-year LPR to fall by a cumulative 60bps and expect a 300bps reduction in banks’ required reserve ratio. The resultant liquidity injections should help to spur credit expansion,” said DBS strategist Nathan Chow, who now expects the general budget deficit target to widen from 2.8% of GDP in 2019 to 3% this year.

“This marks a shift in gears from its previous focus on reining in debt to promoting growth.”

The Shanghai Composite index rose 0.31%, outperforming the rest of the region with the MSCI Asia Pacific ex-Japan index tumbling 0.99%, Australia’s S&P ASX 200 index retreating 0.33% and the Nikkei 225 benchmark off 0.39%. Hong Kong’s Hang Seng index slid 1.09% as losses in technology, healthcare and property weighed.

Europe was trading weak and US markets are likely to open on a soft note. The Stoxx Europe 600 index fell 0.4% and futures contract on the S&P 500 Index was down 0.5%.

Traditional safe havens like US Treasuries, gold and the Japanese yen strengthened as investors shed risk. However, forex analysts believe the market was being too pessimistic on the yen.

“Indeed, we expect policymakers to lean on fiscal rather than monetary policy to counter the coronavirus outbreak. The market may also be underestimating the economic impact of the coronavirus. These reasons are not enough for us to maintain our previously bearish outlook for USD/JPY,” said Credit Agricole analysts in a report on Friday.

“We are revising up our USD/JPY forecasts and expect the exchange rate to finish 2020 at 109 (previously 105) after dipping to 107 (previously 104) in mid-2020.”

Umesh Desai

Umesh Desai is Asia Times Finance Editor. Prior to his current role he was at Reuters for 19 years before which he was a credit ratings and equity research analyst. A chartered accountant by training, he is based in Hong Kong.