Virus outbreak prompts unusual market moves

The coronavirus outbreak prompts some asset prices to move together in odd ways, a sign that investors may get prepared for a global slowdown.

U.S. stocks, gold, Treasuries and the dollar have all surged in 2020. Such synchronous moves are not typical, as investors usually have different reasons for buying each asset class.

The S&P 500 is up 3.3% in 2020 and stands just off a record high. Gold is up 8.3% and near its highest level in seven years. The U.S. Dollar Index is up 3% and hovering near a three-year high.

Meanwhile, the 10-day rolling correlation between the dollar and gold stands at 0.6. This is higher than it has been more than 99% of the time over the last decade. Typically, a stronger dollar tends to pressure gold.

Investors are preparing their portfolios with haven assets such as gold, bonds and the dollar in case the virus outbreak accelerates.

The virus has spread to some 28 other countries and territories, with a death toll of around two dozen. Italy, South Korea and Iran posted sharp rises in infections over the weekend. South Korea now has more than 760 cases, Italy more than 150 and Iran 43 cases.

The World Health Organization is now worried about the growing number of cases that have no clear link to the epicentre of the outbreak in China.

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Most analysts see the U.S. economy as relatively well shielded should the coronavirus hurt global growth significantly.

After sharp declines for two straight weeks, EUR/USD paused and had a quiet week. The euro remains under pressure. With confirmed cases of coronavirus in Italy and Germany, the investor sentiment could head towards safe-haven assets. Further, the U.S. economy continues to outperform the eurozone.

GBP/USD continues to show strong swings, as the pair declined 0.7% last week. The pound gained ground last week and crossed above the 1.30 line supported by better-than-expected economic data. But with the British economy not in the best of shape, the British currency may have trouble holding its own against the greenback.

The Dollar/yen jumped 1.6% last week. Japanese GDP declined by 1.6% in the fourth quarter, a sharper drop than the forecast of -1.0%. The China coronavirus has spelled trouble for the Japanese yen, as the pair closes in on the 112 level.

The AUD/USD posted significant losses last week, falling 1.2%. The coronavirus outbreak prompts Chinese economy disruption. This is not good news for the Aussie, as China is Australia’s largest trade partner. The Aussie slide could continue into next week.

The USD/CAD posted slight losses last week. The coronavirus has dampened risk appetite and sent oil prices lower, so the Canadian currency will likely remain under pressure.

Gold prices regained the bullish momentum last week. As a result, gold settled near a new seven year high into Friday’s close.

LQDFXperts – The week ahead – Virus outbreak prompts unusual market moves

The coronavirus shakes up the global economy and continues to weigh on investor risk appetite.

On Monday (24.02) the German Ifo Business Climate survey is expected. The survey showed a drop in sentiment among businesses in January. The data comes following a weak patch of economic performance during the month of December and January. The forecast for February is a fall to 95.0.
On Tuesday (25.02) the CB Consumer Confidence figures for February due out. Also, eyes are on the final release of German GDP which is projected to confirm that the German economy was stagnant in Q4.
On Wednesday (26.02) the focus for Australia shifts to Construction Work Done. This construction indicator has reeled off five successive quarterly declines, pointing to contraction in the construction industry. Another decline is projected for Q4, with a forecast of -1.0%.
On Thursday (27.02) data from the US will see the durable goods orders and second GDP revised figures coming up. So far, the U.S. economy is witnessing a modest rebound in activity. The durable goods orders will show how orders fared during the month of January. Elsewhere, the second revised GDP estimates are forecast to show a 2.1% increase in the GDP figures for the fourth quarter of 2019.
On Friday (28.02) all eyes are on Canada GDP figures. The Canadian economy has been somewhat resilient. Canada’s GDP reports continue to hover around the zero level, pointing to weak economic growth. Weaker oil prices could dampen the outlook.

Follow this week’s economic calendar.

PLEASE NOTE The information above is not investment advice.

Sources: Reuters, CNBC, FX street