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Significant divergence increases market risks

Significant divergence increases market risks

The risks of a potential coronavirus epidemic has dominated market thinking this week. However the pricing of that risk varied across and within asset classes, and the divergence continued overnight. This could see sharp adjustments as the magnitude of the threat becomes clearer.

Crude oil and Chinese stocks are significantly lower over the week. Industrial metals have largely followed, and the pricing of a drag on growth echoed through bond markets. US ten-year yields are 10 points lower. In contrast the US S&P 500 index is up more than 1% since last Friday’s close after recording another modest rise overnight.

Curiously, gold and currency markets are largely unmoved, although the Yuan has weakened

Uncertainty about the impact of the coronavirus means there is room for differences of opinion. As the impact of Lunar New Year travel on the spread of the virus in China becomes clearer, there will be re-pricing of this risk. While it is impossible to say which markets are correct at the moment there is potential for strong moves as markets realign.

Asia Pacific futures indicate a mixed opening, with indices in Japan and Australia pointing higher and those in China lower. Japanese inflation numbers and European PMIs due tonight could influence trading over the next twenty-four hours.

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