A man walks past an electronic display showing Asian markets indices outside a brokerage in Tokyo. Picture: REUTERS
A man walks past an electronic display showing Asian markets indices outside a brokerage in Tokyo. Picture: REUTERS

Sydney — Asian stocks extended a global sell-off on Tuesday as China took more drastic steps to combat a deadly new coronavirus, while bonds shone on expectations central banks would need to keep stimulus flowing to offset the likely economic drag.

As the death toll reached 106 in China, some health experts questioned whether Beijing can contain the virus which has spread to more than 10 countries, including France, Japan and the US. No deaths have been reported outside China so far.

China has already extended the Lunar New Year holiday to February 2 nationally, and to February 9 for Shanghai. On Tuesday, the country’s largest steelmaking city in northern Hebei province, Tangshan, suspended all public transit in an effort to prevent the spread of the virus.

With Chinese markets shut investors were selling the offshore yuan and the Australian dollar as a proxy for risk. Oil was also under pressure as fears about the wider fallout from the virus mounted.

MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 1% in early Asian trading on Tuesday. Japan’s Nikkei was 0.9% down, Australian shares stumbled 1.4% and South Korea’s Kospi index skidded 3%.

“The wildcard is not the fatality rate, but how infectious the Wuhan virus is,” Citi economists wrote in a note. “The economic impact will depend on how successfully this outbreak is contained.”

Analysts said travel and tourism would be the hardest-hit sectors, together with retail and liquor sales though health care and online shopping were seen as likely outperformers.

On Monday, indices for British, French and German equity markets slid more than 2%, as did pan-European markets on worries about the potential economic effect from the deadly virus. Stocks on Wall Street fell more than 1%.

E-Mini futures for the S&P 500 reversed some of the losses after slumping 1.6% overnight for their biggest single day percentage loss since last October. They were last up 0.25%.

Investors were still trying to figure out the potential effects from the coronavirus, given it would be at least a couple more months before official economic data is released.

“How do we fully price risk, if we have such limited visibility on how bad this could get, not just in terms of contagion, but the impact this will have on economics?” said Chris Weston, strategist at broker Pepperstone.

Analysts at JPMorgan said the coronavirus outbreak was an “unexpected risk factor” for markets though they see the contagion as a regional rather than a global shock.

“The rise in risk aversion and worry of a region-wide demand shock means the knee-jerk market reaction will likely be to richen low-yielding government bonds,” JPMorgan analysts wrote in a note.

“Concerns about coronavirus contagion has driven yields lower and is the latest risk of a series that have driven US Treasury (UST) yields far below what fundamentals indicate. We remain short 30-year UST.”

Treasury 10-year note yields dived as deep as 1.598% on Monday, the lowest since October 10. Yields on two-year paper also fell sharply while Fed fund futures rallied as investors priced in more risk of a rate cut later this year.

Futures imply around 35 basis points of easing by year end. The Federal Reserve is widely expected to stand pat at its policy meeting this week, but markets will be sensitive to any changes to its economic outlook.

Australian and New Zealand bonds gained on Tuesday as did Japanese government bonds (JGB) with yields on 10-year JGBs set for their fourth straight day of losses.

JPMorgan said they it has yet altered its developed or emerging markets forex forecasts though it is taking profits on its “bullish” EUR/USD positions and remains “considerably long” on Swiss francs which benefits from safe-haven demand.

Short build-up in the Aussie was another risk hedge. The currency was last down 0.1% at $0.6752, on track for its third straight day of losses.

The euro was steady at $1.1018.

The yen, which has been rising for the past five sessions, dipped slightly to 108.98 per dollar.

In commodities, Brent crude was off 27c at $59.05 while US crude eased 22c to $52.92.

Spot gold was flat at $1,581.60.

Reuters

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