(28 January 2020)DAILY MARKET BRIEF 1:Oil sell-off slows as Libya threatens to halt production, futures hint at positive

Slowing China story continues taking a toll on the global stock markets, this time not because of the trade war but the spreading coronavirus which has taken more than 100 lives thus far as confirmed cases rose by 65% to 4515 in mainland China.

Chinese markets remained closed for the Chinese New Year break, but stocks elsewhere in Asia were mostly down for another day. Nikkei (-0.79%), ASX 200 (-1.35%) and Kospi (-3.22%) led losses, while stocks in Thailand (+0.51%) recovered a part of heavy losses recorded yesterday.

The fall in oil prices loses momentum on news that production in Libya could completely stop as a result of a conflict with the OPEC members. WTI crude steadies near the $53 a barrel – after having lost 20% since the January pick of $65 a barrel following the signature of the phase one deal between the US and China. Supply-side disruption could help keeping WTI above the $50 level, but the upside will likely remain limited by fears of slowing Chinese, and global demand.

Gold finds buyers around $1580 per oz. But solid offers below $1600 will likely cap the upside potential in this market, unless things in China get ratchet up another notch, which we doubt.

Futures in US and Europe point at a brighter start on Tuesday. The FTSE and the DAX may brush off some of yesterday’s losses.

The pound trades under a mounting selling pressure before Thursday’s Bank of England (BoE) meeting as the uncertainties regarding Carney’s next move sent the probability of a 25-basis-point cut from nearly zero to 60% according to the activity on MPC SONIA futures. While analysts expect that a 6-3 vote in favour of status quo should hold, we stand ready for a dovish surprise and even a rate cut at this week’s meeting. Last week has seen the net long speculative positions in Sterling spike to a six-month high. Hence, there is potential for a deeper Sterling unwind in the coming days. The 1.30 mark is where bears and bulls will probably be fighting into the BoE decision.

In the US, the 10-year yield tanked to the lowest since October as risk-off capital poured into the US government bonds over the past weeks. The Federal Reserve (Fed) starts its two-day meeting today and despite mounting anxieties in the market, the Fed is broadly expected to maintain its policy unchanged. The interest rates will be kept in a range between 1.50% and 1.75% and the Fed’s balance sheet will likely continue expanding at the speed of 60-billion-dollar-a-month of Treasury bill purchases to continue giving support to the markets. A technical hike on IOER rate could be on the menu, but it is unsure whether the latter would even trigger any market reaction.

Due today, the US durable goods orders may have grown 0.4% in December versus 2.1% contraction printed earlier. Encouraging data could bolster the US dollar purchases and send the euro below the 1.10 mark versus the US dollar.

By Ipek Ozkardeskaya