US markets underwent one of the worst declines in two years, while markets in Europe fared little better yesterday, with the FTSE 100 undergoing its worst one-day fall in four-and-a-half years, dropping 3.3%. If anything, UK stocks got off lightly with the FTSEMib plunging 5.4% and the DAX falling 4%.
The weakness from Monday continued in Asia markets today, with the Nikkei 225 falling sharply as Japanese investors returned from their long weekend, after Japanese authorities admitted that they were on the brink of a rapid spread of the virus. Despite this, markets in Europe look set for a modest rebound as investors start to reassess the declines of the last few days.
While new cases of coronavirus have continued to come down in China, a rise in cases in South Korea, as well as Europe and the rest of the world, roiled global markets as fears of a pandemic and extended economic disruption saw some of the biggest declines in years for some sectors of the market.
Airlines and other travel sector stocks saw huge declines as cases in Italy went from 3 on Friday to over 200 in the space of three days, prompting large scale lockdowns of certain parts of the country. New cases were also being reported in the Middle East, and in particular Iran, which prompted a number of countries including Turkey to close their borders, or place restrictions on border movement.
The ensuing sell-off also saw bond markets surge, sending the US 30-year yield to a record low, while gold prices hit a new record high against sterling, and also hit their highest levels against the US dollar since 2013.
Concerns about falling demand also clobbered crude oil prices which sank sharply, as markets speculated that a prolonged economic slowdown would lead to oversupply.
There is no question financial markets are coming round to the realisation that this particular crisis is likely to have a slightly longer shelf life than many thought was the case a couple of weeks ago, however flu outbreaks are hardly anything new. They happen every year and according to the World Health Organisation flu kills up to 650,000 a year, yet markets are reacting to an outbreak that has so far only affected a fraction of that number.
That is not to downplay the seriousness of the coronavirus outbreak, given how little we know about it, but it could be argued that the reaction of governments to the outbreak in closing borders and restricting movement is actually making things worse, as well as sowing confusion and fear amongst their populations.
For now, there appears little prospect that financial markets look likely to settle down in the short term, which means investors will have to get used to an extended period of uncertainty and volatility.
This morning’s German Q4 GDP number looks set to be confirmed at 0%, a timely reminder of the economic weakness across Europe and that looks set to spill over into Q1 as possibly continue into Q2, in light of recent events and the disruption caused by this outbreak.
The flu outbreak doesn’t appear to be having too much of a negative effect on the US economy at the moment, but consumers are a fickle bunch, and the latest consumer confidence numbers could well be a decent indicator to a shift in sentiment. Today’s consumer confidence numbers for February are expected to show an improvement to 132.6 from 131.6.
EURUSD – the euro appears to be finding a modicum of support in the April 2017 gap between 1.0730 and the 1.0780 area, as it edges towards the 1.0880 level. A move through 1.0880 could well see further gains towards 1.1000. A fall through the 1.0720 opens up the prospect of a slide towards 1.0340.
GBPUSD – currently struggling to rebound with any conviction with support still at last week’s low at the 1.2850 area. We need to move above 1.3050, which is the 50-day MA and trend line resistance from last December’s highs. A move below 1.2850 opens up the prospect of 1.2780.
EURGBP – continues to edge higher with a break of the 0.8410/20 area opening up the 200-day MA at 0.8480. Support remains down near the 0.8280 level and last week’s lows.
USDJPY – sank like a stone yesterday after last week’s big surge higher but crucially has so far managed to hold above the break out level at 110.20. This is now a key support and if we hold above here then we can see a return to the highs of 112.25 last week. A break below the 110.20 break out area opens up the 108.50 area.