Bears Rampant as Markets Succumb to Coronavirus Fears

Bears Rampant as Markets Succumb to Coronavirus Fears

Published: February 28th, 2020

Wall Street's primary indexes began the week on a low note as investors continued to factor in the coronavirus outbreak’s impact on the global economy. There has been a daily upsurge in reports about confirmed cases outside of China – particularly in Europe.

Major developments:

  • Italy said 17 people had died from the illness with cases exceeding 650 in the Northern provinces of Lombardy and Padova – a massive jump from single figures reported the previous week.
  • Switzerland saw its first infection.
  • Around 1,000 people were quarantined at home in the west German town of Heinsberg.
  • European stocks were poised for their worst week of performance since 2008.

World Health Organization statements counting the growing number of coronavirus cases without a direct link to China have spooked forex and other financial markets, driving support for assets like gold.

Gold prices continued to benefit as investors moved to protect portfolios with more safe-haven investments. The greenback benefited from similar sentiment through the week, though Dollar-denominated gold products were the primary beneficiary.

Gold has already seen two solid months harkening back to all-time highs last recorded 2011 and 2013. The coronavirus outbreak has added more than $150 to the price of an ounce of gold, lifting it above the seven-year highs set in Q4 2019.

While the gains may subside if there are signs that governments are getting to grips with coronavirus’s global spread, that seems unlikely to happen in the near term.

Oil prices plunged deeper into bear territory as fears spread about the economic impact of the fast-spreading health crisis, with economists warning the outbreak could set off a severe, broad-based economic slowdown.

Reports are also suggesting that Saudi Arabia and Russia are in deadlock over potential agreement to scale back production in response to the outbreak. The breakdown in talks is adding to market uncertainty.

Things to watch for next week

1. Non-Farm Payrolls Report

Despite coronavirus worries, following January’s impressive addition of 225,000 jobs, economists still expect a modest but still healthy gain of nearly 200,000. Annual wage growth is also expected to stay above 3%.

Overall, upbeat figures from the world's largest economy may settle nerves somewhat. The release of data for February will cover the first full month of coronavirus fears – potentially soothing worries and setting the stage for a dollar correction.

In the febrile atmosphere that has dominated this week; even a small negative surprise could push the Fed to cut rates in March, sending the dollar lower.

2. Chinese February PMIs

While attention has shifted from China to Europe and beyond, the world's number two economy is still coronavirus’s ground zero. Nearly 50 million people are still under severe lockdown in Wuhan province where economic activity has ground to a halt, and factories in nearby Hubei province have yet to fully reopen.

With the country’s annual lunar new year holidays underway, assessing China's growth in Q1 has been difficult. The outbreak’s spread was well-known by mid-January, but its real impact is only being seen now. The country’s Purchasing Managers' Index (PMI) for February should deliver the answers markets are looking for in terms of business outlook.

Economists expect a drop in PMI with figures at well below 50 – indicating a significant slowdown in services and outright industrial contraction.

3. US Manufacturing PMI

Traders will also be looking to the USA next week to see if similar PMI trends have taken hold in the world's largest economy, or if there is any divergence from Chinese figures where American figures prove to be different.

Economists are looking for a hold in sentiment above 50 points – which would indicate a second consecutive month of expansion. Anything sub-50 could take the lid of market concerns about the outbreak’s impact on US growth.

If the numbers from Beijing are downbeat, but America’s figures are satisfactory – markets can be expected to recover. Conversely, if Chinese PMIs show optimism where the signals from the US suggest contraction, markets may head south.

The most significant impact will be if both sets of figures point in the same direction. Negative data from the world's two biggest economies would weigh heavily on the dollar. The Fed would be under pressure to cut rates.

4. US Non-Manufacturing PMI

While Chinese and US manufacturing PMIs will paint a broad picture of investor confidence, at ca. 70 percent of the economy, America's services sector could have the final word.

The preliminary read for February from Markit's Services PMI fell to 49.4 points, reflecting contraction in a sector that has seen years of robust growth.

ISM’s figures tend to carry more weight. However, the sensitivity markets displayed in response to Markit's release makes ISM’s Non-Manufacturing PMI numbers more critical than usual.

5. US Politics and ‘Super Tuesday’

Democratic Party members will vote to select their preferred presidential candidate in 14 states on Tuesday – including California and Texas. It will be the biggest contest following votes in four smaller states. Progressive Bernie Sanders is currently considered the frontrunner and the 14-state ‘Super Tuesday’ could create the momentum for a Sanders win.

Centrist and conservative candidates like Former Vice President Joe Biden, billionaire Michael Bloomberg, and former South Bend, Indiana Mayor Pete Buttigieg will see Super Tuesday as potentially their best chance to stop Sanders and/or push themselves into first or second place.

The emergence of a clear winner after Tuesday could move markets. Investors would prefer a centrist like Biden or a businessman like Bloomberg. Sanders' plans to for a national health service and large scale debt forgiveness for students have sent shivers down Wall Street.

Should Sanders strengthen his lead, the dollar may head south. A strong showing or victory for a moderate candidate could prompt movement in the opposite reaction.

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