Chinese stock markets crashed on Monday, with authorities restricting short sales due to extreme selling bias and possible overreaction. More than three thousand shares reached the daily fall limit in what is the markets worst performance for many years. Mainland yuan lost more than 8%, trading above 7 yuan per dollar, amid record-breaking government monetary interventions.

Despite the shocking measures to combat the outbreak of coronavirus, it cannot be said that the situation is under control. A growing number of countries are restricting civilian flights with China, which is another shock for the global economy and expectations.

The key points in understanding the difference between the actual process of the viral spread and the data that we have:

  • Whatever the speed of the virus spreading, the statistics that we observe are only confirmed cases. The rate of detection of infected people has a certain limit, since the "throughput" of medical places and staff is limited, as is the speed of production of medical tests.
  • Delay in obtaining test results may have played a key role in the spread of the new virus. The fact is that only a special test (RT-PCR) allows detecting coronavirus, and at the first stage of the outbreak it was carried out only in laboratories in Beijing. Transportation of biological samples, conducting tests and obtaining results took time (ideally 3-5 days) and it is now clear that in order to avoid uncertainty with suspicious cases at that stage, the best solution was to put the whole Wuhan under lockdown. Later, tests on coronavirus began to be carried out in the province of Hubei, however, obtaining the results still takes time - at best, it is 1-2 days.
  • From the point above we can conclude that the “quarantine effect” will appear in the data (i.e. confirmed cases) gradually just because of limited testing capacities and delays. From the fact that the number of confirmed cases continues to increase, one should not prematurely conclude that quarantine does not work. Because of lack and delays in getting the data the bet on this runs the risk of being late, as clearly markets are now likely to start to look for risk-off catalysts.

Oil prices stabilized after the fourth week of declines. The market is responding to rising fears that part of the demand for aviation fuel due to flight restrictions in China will be irretrievably lost this year. OPEC and partners of the organization announced that they will move the meeting scheduled for March to February. Obviously, further output cuts will be discussed, and this is now a strong counterargument to bearish oil bet.

WTI will probably defend support at the level of $50 per barrel in the short term as the market can now start to trade the idea that the peak of the "panic reaction" has passed.

Gold is trading in neutral mode near the $1,580 mark, an ebb wave swept the yellow metal after the attempt to climb to $1,600 last Friday. It seems that some fears for the weekend did not materialize.

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