ThinkMarkets UK Open: A Bad Day For Mainland China

• China reopens to some horrific scenes.
• European equities set for relatively unscathed open.
• UK Johnson and EU Barnier kick off transition proceedings.
• Alphabet earnings up ahead.

China plunges as pandemic fears turbocharge

It was a dirty day for residents of Mainland China as just about every Chinese domiciled financial instrument plunged to its biggest decline not seen since the Global Financial Crisis. Much of this, though, was expected given extended Lunar New Year holidays and the unprecedented response garnered from governments worldwide in terms of quarantine measures and travel bans.

While the PBOC injected net liquidity to the tune of $21.7bn, alongside a raft of support measures in increased equity limits for insurance companies, a cut to interbank lending rates and halted night trading sessions; they weren't enough to shore up several spot fires that burned through till the end of Asia.

The Shanghai composite (SSEC) saw just about every stock limit-down, plummeting ~8%. While CSI 300 (-8.9%), Dalian Iron Ore (-8%), Shanghai Rebar (-7%) and other commodities went into free fall.

Compounding matters, China December industrial profits did little to inspire confidence after falling 6.3% to make the full-year number negative 3.3%. USDCNY onshore Yuan was a stark outperformer on reopen, striking the 7 handle after jumping 1%.

Collateral damage mostly regional

The spillover from China into other parts of Asia wasn't nearly as excessive. But still warranted concerns about the region's proximity to the epicentre of the deadly nCoV. ASX found easy sellers at the open but slowly clawed back losses to settle 1% down. Nikkei (-1%), Taiex (-1.3%), PSI (-0.6%) and KLSE (-0.5%) also edged lower amid the broader risk-off move.

In FX, USDIDR (+0.6%), USDMYR (+0.4%) and USDSGD (+0.3%) came off second best, with SGD trading volumes double the historical 30 day average. Indonesia inflation y/y also missed expectations 2.68% vs 2.86% est. and should be accounted for. Most G10 currencies were largely unfazed however, as the USD appeared marginally higher.

The spread of the virus within China has been so severe – termed a global health emergency by WHO – that tens of millions of Chinese residents, cities vital to global supply chains and trade flow, are in complete lockdown. This clearly weighed on oil demand expectations and saw Brent Crude open 3.5% down.

European equities point higher

Europe and US benchmarks look robust and are just about unscathed in the face of severe risk-off moves in China. In fact, according to futures, FTSE eyes a positive open to the tune of 32pts, while DAX points higher 32pts. A flood of final Markit manufacturing PMI numbers are due out for Spain, Italy, France, Germany and the UK. But don't expect too much reaction unless drastically different from flash numbers.

Expect jitters on Johnson speech

With the UK having formally withdrawn from the EU as of Jan. 31, investor attention now turns to how the UK navigate around a potential cliff-edge exit looming on Dec. 31, 2020.

Boris is due to speak at 11am GMT and is likely to confirm his readiness to model any future UK-EU relationship on a Canadian-style free trade deal model. While simultaneously, Michael Barnier as part of the EU negotiation team, will divulge details of the EU's draft mandate likely aimed at keeping the relationship on a level-playing field.

Brexit noise should start to play into GBPUSD and EURUSD price action as investor expectations begin forming around transition period soundbites.

Alphabet reports

The dominant tech giant Google, a significant mover of Nasdaq, is due to report earnings after US market close. Focus will again be put on Search and Youtube, Google's biggest revenue drivers, while Cloud services should also garner eyeballs given its increasingly important contribution to top-line revenues.

Mean Q4 EPS: $12.53

Mean Q4 Revenue: $46,943m

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