By Han Tan, Market Analyst at FXTM
Hong Kong’s Hang Seng index plummeted 3% after returning from the Lunar New Year break before paring losses, although most other Asian assets are advancing on the day after US equities rebounded from their worst selloff since October.
Risk sentiment is being given some reprieve from concerns over the novel coronavirus outbreak. The positive surprise in Apple’s latest earnings overnight and Tuesday’s better-than-expected US consumer confidence reading for this month served as distractions from the coronavirus gloom that has beset investors since mid-January.
Gold prices eased off the $1580 handle, USDJPY is now trading back above the 109.0 psychological level, while 10-year US Treasury yields’ dip into sub-1.60% levels has proved short-lived.
Outbreak fears could trigger more losses in risk assets
Markets will be yearning for signs that the outbreak is stabilising. Investors are cognisant of the $2.6 trillion in market cap that have been erased from global equities since January 20 and the start of the virus outbreak, with more losses potentially in the pipeline for risk assets considering the persistent uncertainties surrounding the virus.
However, historically, markets tend to rebound after such outbreaks, provided that the toll exerted is not too damaging. That said, a meaningful recovery in markets could be months away, as health authorities around the world continue efforts to contain the virus which has already claimed 132 lives and infected thousands, mainly in China.
Fed unlikely to rock defiant Dollar
The Federal Reserve is widely expected to leave US interest rates unchanged later Wednesday, which should help buffer the Dollar Index’s 1.6% year-to-date gain.
The Greenback has managed to defy expectations for weakness in 2020, aided by a series of unforeseen events such as the US-Iran conflict and the ongoing coronavirus outbreak, which have elevated demand for the safe-haven currency.
Signs that the US economy is poised to extend its record expansion, judging by the better-than-expected US consumer confidence in January, should also bolster the Dollar’s recent trajectory while allowing the US central bank to keep its policy settings unchanged for the time being.
However, should downside risks such as the ongoing coronavirus outbreak leave a major dent in economic conditions around the world, central bankers may have to resume policy easing in order to sustain the still-fragile prospects of a global economic recovery this year.
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