LCG MARKET WRAP: Bonds rally, Dow turns negative for 2020 & a deadcat bounce

28 januari 2020

Financial markets remain in the grip of a huge flight to safety because of the coronavirus outbreak in Wuhan China. The death toll in China has risen to 106 with 4193 total cases according China’s People’s Daily Newspaper while Germany has reported its first case. Several Western countries have issued travel warnings regarding flights to China, and Facebook has advised employees not to travel to China unless urgent. The UK, along with the United States and other countries are planning to evacuate citizens out of Hubei province, home to Wuhan city.

Reports are also starting to emerge about the low quality of healthcare being received by potential victims of the coronavirus in the Communist-controlled country. Unavailable testing kits, inadequate quarantine conditions and not monitoring those suspected of contracting the virus could all have contributed to its spread.

EQUITIES

The Dow Jones nosedived into its biggest daily drop in four months, going negative for the year. You would expect some let-up after such a big move lower and indeed futures are indicating a higher open. Whether we’ve seen an end to the correction already or today is a dead-cat bounce might hinge on fourth-quarter earnings from Apple this evening.

Energy and material sectors are getting hit the worst in the sell-off since oil and industrial commodities are falling too. There is a flight to safety and a corresponding shift into utilities as rates move lower. Bonds are rising on expectation central banks will need to keep easy policies going to mange the economic fallout from the virus. We have a close eye on 2% in 30-year US treasury yields. A move below there has been a sign of wider panic and a bigger selloff in equities.

It makes sense to compare and draw some inference between now and the performance of markets during SARS. European equities saw a 20-25% drawdown during SARS. The FTSE 100 is down just under 4% from its recent peak and the DAX has lost under 2.5% so there is plenty of downside risk. Is that size correction likely? The lower mortality rate of the Wuhan virus is a reason for optimism it won’t. But extra caution is needed because China is now much more important to the global economy than it was in 2003.

We think it is better to wait for the rise in the number of cases to slow before getting positive about the markets again. We know there is an incubation period of 14 days and the virus can be passed on when the subject is not showing symptoms. Putting that together, we could be on the cusp of a plateau or a massive escalation in the number of cases.

FOREX

The Australian dollar and Chinse yuan have been hardest hit in forex markets as proxies for the coronavirus outbreak in Asia. The Japanese yen, the Swiss franc and to a lesser extent the US dollar have all been attracting haven flows. A generally risk off tone has seen EM currencies tumble to fresh 2020 lows.

COMMODITIES

Oil is lower for a sixth day and as might be expected sources say OPEC is considering deeper cuts to production. Brent crude oil hit a three-month low at $58.50.

Gold is still at risk of a double top reversal which might explain some of the hesitation and why it finished off yesterday’s high. We like that there has been no sign of the “throwing the baby out with the bathwater” selling in gold that happened during some other equity market corrections. People on those occasions were taking profits after a rally in gold to pay for margin calls in other weak positions. This time, so far at least, they are holding onto gold.

Opening Calls

FTSE 100 is set to open 23 points higher at 7437

DAX is set to open 84 points higher at 13,288

S&P 500 is set to open 20 points higher at 3,263

Dow Jones is set to open 183 points higher at 28,718