Stocks shake off China virus worries, dollar stays strong

LONDON (Reuters) - World stock markets regained strength on Wednesday, as swift updates from China about the spread of a new flu-like coronavirus raised hopes the outbreak would be contained.

Worries about contagion of the virus, particularly as millions travel for upcoming Lunar New Year festivities, have knocked the world’s top equity markets off record peaks.

The outbreak has revived memories of the Severe Acute Respiratory Syndrome (SARS) epidemic in 2002-03, a coronavirus outbreak that killed nearly 800 people.

This time, China’s response and candour — in contrast to the SARS spread — have helped reassure traders concerned about the possible global fallout.

China’s National Health Commission said on Wednesday there were 440 cases of the new virus, with nine deaths so far, and though Hong Kong confirmed its first case, measures are now in place to minimise public gatherings in the most-affected regions.

Europe cheered a fresh record high for Germany's DAX .GDAXI but things had started flag by early afternoon.

A stronger pound dragged down London's exporter-dominated FTSE .FTSE, talk of U.S. tariffs on European goods was doing the rounds again and political stress struck in Italy once more, causing a near 2% drop in bank shares. [.EU]

According to party source, the leader of Italy’s co-governing 5-Star movement, Luigi Di Maio had resigned.

Italian government bonds saw their biggest sell-off in a month with yields — a proxy of the country’s borrowing costs — rising as much as 8 basis points as investors wondered whether it could ultimately collapse the country’s fragile coalition.[GVD/EUR]

“The initial reaction was to sell because of the heightened political uncertainty,” said Luca Cazzulani, a strategist at UniCredit in Milan. “But there is no outright link between de Maio’s resignation and a collapse of the government.”

Despite Europe’s spluttering noises, S&P 500, Dow Jones and Nasdaq futures ESc1 were still up 0.2%-0.6% and pointing to another record open for Wall Street.

IBM (IBM.N) was expected to lead the charge after better-than-expected full-year profits, while streaming giant Netflix (NFLX.O) also reported strong international growth, though it did warn the next few months would be tougher. [.N]

Overnight, the coronavirus developments had seen Shanghai stocks .SSEC recover from an early 1.4% drop to end higher. Japan's Nikkei .N225, South Korea's Kospi index .KS11 and Hong Kong's Hang Seng .HSI had all risen by more than half a percentage point and Australia's S&P/ASX 200 hit a record high.

SARS FLASHBACK

With markets generally rising, safe plays such as gold and the Japanese yen were weaker. The dollar .DXY was shuffling towards the highs it reached in December against the other top world currencies. [/FRX]

The coronavirus outbreak has spread from its origin in Wuhan, China, to the United States, Thailand, South Korea, Japan and Taiwan. The World Health Organization meets later on Wednesday to consider whether the outbreak is an international emergency.

Only five such emergencies have been declared in the past decade: the H1 virus that caused an influenza pandemic in 2009, West Africa’s Ebola outbreak 2013-2016, polio 2014, Zika virus in 2016, and the current Ebola outbreak in the Democratic Republic of Congo.

“The call here is not that the virus is done or nipped in the bud by any means,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets. “But there have been no big further reported outbreaks, and the response from the Chinese authorities has been very, very positive”.

Airlines, other travel-exposed stocks and retailers vulnerable to shifts in consumer sentiment have borne the brunt of selling in the past two days, along with the Chinese yuan.

MSCI’s airline industry index .dMIWO0AL00P posted its biggest daily drop in more than three months on Tuesday. Airline shares were still falling on Wednesday.

“While details on the coronavirus are scant, we reckon that the SARS period could offer some clues as to how markets could pan out,” analysts at Singapore’s DBS Bank said. “The trends are clear: Yields and stock prices fell in the first few months of the SARS outbreak and rebounded thereafter.”

So far, the yield on U.S. 10-year government bonds has stabilised after Tuesday’s drop, sitting at 1.78% US10YT=RR in European trading. [US/]

Spot gold XAU= gave back some gains to trade at $1,555 per ounce and the yuan eased in the onshore market CNY=CFXS to 6.8997 per dollar.

Oil prices also settled back as traders figured a well-supplied global market would be able to absorb disruptions that have cut Libya’s crude production. [O/R]

Brent crude LCOc1 was down 0.9% at $64.01 a barrel and U.S. crude CLc1 fell 1% to $57.77 a barrel.

Additional reporting by Tom Westbrook in Singapore and Dhara Ranasinghe in London; editing by Larry King, William Maclean

Source: www.reuters.com