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COVID-19 risks to set the market tone

23 Feb 2020 12:35 PM

We have seen a week full of economic events and developments regarding the COVID-19, but this week may not be any less important than last week, as we wait for many economic data that will prove the  trends of the major economies amid global health crisis threatening the global economy.

And with the Coronavirus crisis, we have noticed European, British, and US political tensions, all of which have been a driver of change in the stock market trends and precious metals.

The European Union failed to reach an agreement on the long-term budget for the Union, in light of strong opposition from countries to reduce government spending. Angela Merkel invited the 27 European Union countries to the meeting to try to resolve differences last Friday, but the meeting failed after many countries rejected the agreement. The Brexit had a significant impact of 75 billion euros on the budget, and Denmark, Austria, Sweden, the Netherlands and others refused to set a budget in excess of 1% of the gross national income of the European Union.

A handful of macro reports will be the main focal point for US markets over the coming week

Q4 GDP revision: The US will be publishing the second estimate of fourth-quarter GDP on Thursday, with markets expecting the 2.1 percent expansion to be confirmed mainly due to a positive contribution from net trade amid a sharp decline in imports.

PCE price index; Will the core PCE inflation remains stuck at 1.6% y/y? the Core CPI inflation held unchanged at 2.3% y/y in January which might imply that January’s core PCE reading will also hold steady.  Headline PCE inflation should follow gas prices and overall CPI higher toward 1.8% y/y. Modest consumption growth should follow the already-known retail report.

Durable goods: Thursday`s orders are seen falling in January, after rising the most since August 2018 the month before. Key will be whether core orders excluding defense and air can rebound from the 0.8% drop in December and the flat reading in November. It may well be that data over the coming months will reflect fresh headwinds to global supply chains and appetite for capital goods

Pending home sales; Case-Shiller home prices; Chicago Fed National Activity Index; Dallas Fed Manufacturing Index; Chicago PMI; the advance estimates of goods trade balance and wholesale inventories; and the final reading of Michigan consumer sentiment.

Other notable publications include: Case-Shiller home prices; Chicago Fed National Activity Index; Dallas Fed Manufacturing Index; Chicago PMI

China; The hot topic is still CoVid-19 and its impact for Asia and the global economy as a whole

We’ve now been through two iterations of the methodology for reporting the number of cases which now, on the face of it, appear to be slowing, even though a bit of skepticism is creeping in among observers. We are waiting for WHO comments on the latest change.

It seems that the People's Bank of China will continue to cut interest rates to counter the impact of the Krone virus on the economy, after it reduced the loan interest for one year by 10 basis points, and reduced the interest of five-year loans by 5 basis points. Despite statements from China and others that the impact of the COVID-19 will be limited, all of these expectations embrace the idea that control will be controlled within a short period, but if the spread continues, the outlook will probably deteriorate further for the entire global economy.

Europe; Lower Inflation Lies ahead

Monday will bring the release of Germany’s IFO business survey for February, before preliminary inflation numbers for that month come into focus Friday. Inflation will be the main focus of the coming week alongside spillover the coronavirus effects on export market prospects.

By week’s end, we’ll have the ingredients to firm up an estimate for Eurozone inflation that is due the following Tuesday. Headline inflation readings are expected to be flat to possibly lower. The single currency has taken a beating lately, as the Eurozone and especially German manufacturers rely on Chinese demand to absorb their exports. Thus, a severe hit to Chinese growth might translate into weaker growth for the Eurozone, which is barely growing already.

Business morale is expected to deteriorate as the coronavirus outbreak hits the global supply chain. Investors will also keep an eye on final estimates of fourth-quarter GDP for several European countries, including Germany. Preliminary data showed Europe’s largest economy stalled amid a fall in exports and weak manufacturing sector.

Meanwhile, monetary policy is executed to as the ECB can’t do much more to support the economy and it seems that a recession could be on the horizon before the eurozone governments finally take actions to spend more to boos the economic growth

Until markets get strong signals that a big spending package is on the way, there’s not much to stop the euro’s epic downfall. Supporting this view, while euro/dollar has collapsed already, speculative positioning on the euro is far from extreme short, so there’s room for further declines as more leveraged funds come aboard the euro pain train.

It should be noted on how much and how fast euro/dollar has plunged already, any piece of positive news for the euro or negative news for the dollar could trigger a bigger-than-usual corrective rebound, as several traders take profits on their prior short positions.

Aussie and kiwi the biggest virus losers

In Australia, the main releases are fourth quarter estimates on construction work done on Wednesday and private capital expenditure on Thursday, which should give clues on what to expect from forthcoming Q4 GDP figures. In New Zealand, quarterly retail sales will be watched on Monday, as well as trade data and the ANZ business outlook survey for January on Thursday

Unfortunately, these figures could not play a huge part as it could be outdated data even if fourth-quarter data were stellar. The fact these two countries are “export-heavy” economies, and with China, the biggest commodity consumer, is being paralyzed in recent week. Hence, investors might wait for February data to get a clearer picture of how these economies are faring.

As for the battered “Aussie and kiwi, as long as markets remain so focused on virus epidemics, any recovery in both currencies will probably remain short sighted. Investors are currently revaluating the impact of COVID-19 on China, increasingly pricing in a more prolonged slowdown that would inevitably hurt Australia and New Zealand, two of China’s biggest suppliers of raw materials. For any sustainable upward rally to materialize, markets might need concrete signs that this epidemic has come under control.

Japan: Can the Yen Suffer more?

The traditionally safe-haven Japanese yen came under unexpected selling pressure lately, dropping to near 10-month lows against the US dollar amid fears that Japan’s economy might take a much bigger hit from the virus epidemic than initially projected. Recent economic data has been dire. The GDP contracted by a shocking 1.6% on a quarterly basis in Q4. while exports declined year-on-year for the 14th straight month in January.

Traders will turn their attention to January's industrial production and retail sales; both of which are key indicators of Japanese growth. Another set of dismal numbers could add fuel to concerns that the world’s third-biggest economy is headed for a technical recession, and by extension, raise speculation that the Bank of Japan might resort to more unorthodox stimulus measures to support growth.

Gold: The Yellow metal is heading for its best week since August 2019

Gold is heading for its best week since August as it capitalized on growing insecurity in the stock market to charge through its $1,600 resistance and burst higher. Gold prices rose during the past week by more than 3.7% over the week, and the rise continued for four consecutive sessions without stopping, with increasing concern about the future of the global economy after the outbreak of the Coronavirus. However, with India announcing the discovery of new gold fields which could yield an excess of 3,000 tons, some fluctuation should not be ruled out.

The yellow metal is now testing $1,650 and packing a punch. With investors growing ever more fearful about the corporate fallout of the coronavirus, the path of least resistance for gold looks upwards. It’s been quite a strong week though so a little profit taking in the near-term wouldn’t be outrageous, with $1,650 possibly offering a logical zone for this.

USD remains the King

The US dollar index came within touching distance of 100 on Thursday, spurred on in recent weeks by everything from safe haven flows to the outperformance of the US. Whatever is happening, dollar is king. It’s fallen just short of that psychological barrier though at the first time of asking but still finds itself at a near-three year high.

OIL: With No OPEC+ Meeting, could the Black metal drop again?             

Oil prices edged higher during the previous week as it has already dropped for 21 sessions from early January until mid-February. The black metal stopped it recent rally on Friday with concerns about the impact of the Coronavirus on the global economy has re-established. This week, Concern remains regarding the impact of the COVID-19 epidemic on the global economy and we may witness further decline in oil prices, unless more facts emerge verifying an OPEC + meeting taking measures to reduce the potential surplus.

US stocks are at risk of depreciation unless the COVID-19 is controlled

The latest virus readings show a significant decrease in the number of existing cases infected with the virus (exceptions that have been cured or died) to approximately 53 thousand cases. Despite this, the Coronavirus continues to spread, and the total number of cases since the beginning of the epidemic reached nearly 79 thousand cases.

The Virus reached countries such as Iran, Lebanon and Egypt, and the increasing number in Japan and North Korea, as well as Singapore, all of which may weigh on confidence in the markets and put pressure on US stock indices. The main reason that equity markets are affected by this epidemic is that it may reduce the demand on product for many companies.

Apple and others were quick to warn about the economic consequences of the last month, although few details were given at the time. More will likely follow in the coming weeks which may continue to spoil the party for investors, all-too used to records at this point.

It’s election year in the US and while we’re all already looking to November, we first have to find out who US President Trump is going to be facing first. On Tuesday, the candidates will go head-to-head once again, and Mike Bloomberg will be hoping to come away with a few more plaudits this time.

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