The rally in U.S. equities took a pause and the strong dollar got even stronger rising to a three-year high against a basket of currencies, after a steep slide in the Japanese yen called into question its safe-haven status. Since August 2019, the Japanese Yen has been weakening against the USD while other “up-and-coming” safe-haven currencies like the Swiss Franc or the Canadian dollar have been performing better against the greenback. The dollar has surged about 2% against the yen since Tuesday, reaching its highest in almost 10 months, and it climbed near three-year highs against the euro. The main instrument for risk-adverse investors remains gold which hit 1633.7$, its highest in seven years. The dollar hit also record levels for the year against China’s offshore yuan. A host of reasons were cited for the dollar’s move, ranging from outperformance of the U.S. economy and corporate earnings to potential recessions in Japan and the euro zone.
Japan’s factory activity suffered its steepest contraction in seven years as the widening fallout from the coronavirus outbreak in China reinforced the risk of a recession in the world’s third-largest economy. The manufacturing downturn offers the clearest evidence yet of the epidemic’s damaging effects on global growth and businesses and is likely to ramp up pressure on Japanese policymakers to increase stimulus. The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 47.6 from a final 48.8 in January, its lowest since late 2012. The index stayed below the 50.0 threshold that separates contraction from expansion for a 10th month, the longest such stretch since June 2009. The PMI survey showed that new orders are declining at the fastest pace in more than seven years, while other indicators such as overall output and backlogs of work have also dropped. Data last week showed the economy shrank at its fastest pace in nearly six years in the December quarter, stoking talk of a recession, as the virus added to the impact of a sales tax hike on consumer and business spending.
A rally that had lifted major U.S. and European stock indices to record highs this week lost steam, as investors fretted about the spread of the coronavirus outside of China. MSCI’s gauge of stocks across the globe shed 0.49% and emerging market stocks lost 0.76%. EUSTX 50 index fell to 3815.85 while Paris’ main index fell 0.8% as luxury stocks, which derive a chunk of their demand from Chinese customers, registered losses. The Dow Jones Industrial Average fell sharply and is now trading under 29100. The S&P 500 reversed from its upward trend losing 27.92 points to 3,358.23 and the Nasdaq Composite dropped to 9,570. MSCI’s broadest index of Asia-Pacific shares slipped 0.5% overnight, led by drops in Hang Seng and KOSPI.
Oil prices fell amid concerns over fuel demand as the coronavirus epidemic spread further beyond China, while major crude producers stood pat on any early action to cut output to support the market. Brent is down to 51.15$ while U.S. crude was off by 48 cents at $53.40 a barrel. South Korean authorities confirmed 52 new coronavirus infections in what authorities described as a “super-spreading” event. In China itself, the world’s biggest importer of crude oil, new cases also rose. Adding to pressure on oil prices was the strength of the U.S. dollar as investors looked for safe havens. Meanwhile prices were little changed by tensions in the Middle East after Saudi Arabia said it had intercepted and destroyed several ballistic missiles launched by Houthi militia towards Saudi cities.