Once again, markets are concentrated  on risk sentiment and the coronavirus outbreak this week, beginning the week with some relative calm, as we mentioned yesterday, which continued today as well in the morning, turning even more risk-on, on virus treatment hopes. We saw two separate reports being released today about possible drugs which would help fight coronavirus, one from China and one from UK. they were released around the same time but either way, risk jumped on the headlines as European stocks turned losses to gains and Treasury yields also spiked higher across the curve.

The two drugs are Arbidol and Darunavir, both of which are said to inhibit the new coronavirus, according to researchers at the Zhejiang University. Lead scientists are recommending the drugs to be used in China’s National Health Commission’s official protocol although the commission warns that so far, there is no confirmed effective treatment still. So, headlines regarding virus drug treatment were sort of positive, but the details not so much, as a cure is still to be found, as Chinese officials confirmed a while ago. Safe havens turned bearish earlier, but the decline has stopped now.

The European Session

• ECB Rhetoric – ECB governing council member, Pablo Hernandez de Cos, speaks to Financial Times
  • 2% inflation target would bring ‘clarity’
  • Says that a ‘simple point’ inflation target is “good for me”
  • People currently have different interpretations of the ECB’s inflation target
  • ECB president, Christine Lagarde, speaks in Paris
  • Short-term uncertainties are mainly related to global risks
  • Risks include trade, geopolitical and now the coronavirus outbreak
  • Forward guidance on rates and asset purchases act as an effective automatic stabiliser
  • Climate change will be a key part of our ongoing strategy review
  • Comments by ECB chief economist, Philip Lane
  • Low rates are helping Germany get through slower growth period
  • Firmly believes that rates will be higher in the future because of easy policy now
  • Sees improvement for inflation in the coming years
  • But not all the way to the ECB’s target
• Eurozone Retail Sales – The retail sales report for December was released a while ago from the Eurozone and it looked pretty bad. In October, sales declined by 0.6%,but we saw a decent increase of 1.0% in November. Although, that was revised lower today to 0.8%. The report for December was horrible though. Below are the figures:
  • Eurozone December retail sales -1.6% vs -1.1% m/m expected
  • Prior +1.0%; revised to +0.8%
  • Retail sales YoY +1.3% vs +2.3% expected
  • Prior +2.2%; revised to +2.3%
• UK Services PMI – The service sector which makes up about 80% of the UK economy fell in contraction again in November, bu it improved in December, falling flat at 50 PMI points. In January, things improved further to 52.9 points, as the initial reading showed.  But, the final reading today came in even better, with the PMI indicator increasing to 53.9 points.
• Coronavirus Updates – Early this morning, we heard comments from UK and China that laboratories in both countries were close to finding a cure for the virus. But a WHO spokesman said that there are no known effective therapeutics against this coronavirus. China’s president Xi Jinping added that coronavirus prevention and control is at a crucial stage. Must strictly carry out virus control and prevention measures and will crack down on coronavirus-related rumour mongering.

The US Session

• US ADP Employment Change – ADP employment change gave a scare to USD buyers in December, when that report showed a major cool off in new jobs for November, of 67k. But, December’s number was alright, shoing 202k new jobs for that month, which was revised a bit lower today to 198k. Today’s report was expected at 157k, but it jumped higher to 291k. This is the best reading since 2015.
• Coronavirus threat Declining From Now On? – The China Global Times is spinning positive news on the coronavirus tweeting, saying that coronavirus may have reached its inflection point. 
• US ISM Non-Manufacturing PMI – US non-manufacturing PMI was released a while ago. This sector improved more than expected, beating expectations of 55.1 points and coming at 55.5.
  Details:
  • Business activity 60.9 vs 57.0 last month
  • Employment 53.1 versus 55.2 last month
  • New orders 56.2 versus 54.9 last month
  • Prices paid 55.5 vs 58.5 last month
  • Supplier deliveries 51.7 versus 52.5 last month
  • Order backlog 45.5 versus 47.5 last month
  • Export orders 50.1 versus 51.0 last month
  • Imports 55.1 versus 48.0 last month
  • Inventories 46.5 versus 51.0 last month

Trades in Sight

Bearish WTI Crude Oil

• The trend has been bearish for a month
• The sentiment is still negative in markets
• The 50 SMA is standing above, ready to provide resistance
• The retrace seems complete on the H4 chart

The 20 SMA was broken today

Crude Oil has turned quite bearish. it moved higher in December, after OPEC+ decided to place further production quotas for an additional 50k barrels/day. The year end cash flows which weakened the USD also helped crude Oil and on top of that, the tensions between US and Iran increased fears for an Oil production/supply disruption in the Middle East. That helped Oil further in the first week of this year, but it started retreating lower, as the sentiment improved. But, the coronavirus breakout scared the hell out of everyone and the sentiment turned massively bearish for risk assets, such as crude Oil.

US WTI crude lost around $16 from top to bottom and moving averages turned from support into resistance. OPEC+ was thinking about cutting production further by an additional quotas of 500k, But Russia doesn’t like that, since it would decrease their revenue. So, Oil has remained bearish, but today it has made a retrace higher, as the sentiment improved on coronavirus comments.  Crude Oil broke above the 20 SMA (grey) on the H4 chart, as shown above. But, the retrace seems complete now and the price is retreating back down as the 50 SMA (yellow) approaches. We decided to open a sell signal below the 50 SMA, so now we are bearish again in Oil.

In Conclusion

The sentiment turned positive earlier today on comments about coronavirus drugs. But, the headlines were more optimistic than the details of those reports, so the sentiment has turned risk-off again now and commodity dollars are sliding lower.