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Europe set to plunge as new coronavirus cases climb

CMC Markets

With more new cases being reported outside China, than inside, the centre of gravity as far as the coronavirus has shifted towards Europe, and the rest of the world.

This shift has prompted real concerns about the longer-term economic impact of this virus on trade, on ports, on supply chains, and on consumer confidence.

These concerns have resulted in a rollercoaster last 24 hours for global stock markets, with European markets managing, with the exception of the DAX managing to close yesterday in positive territory, as attempts were made to try and  ascertain whether we had managed to find a short term base, after some precipitous declines over the last few days.

Whatever the longer-term effects of what could well turn out to be a pandemic, some stocks have taken an absolute caning in the past week or so with airlines amongst the hardest hit. For example, Easyjet has seen its share price lose 20% of its value since last Thursday’s close, though that pales into insignificance to Norwegian Air which has seen a 38% decline in its share price.

While this might seem excessive for a virus that the World Health Organisation (WHO) says 80% of people only experience mild symptoms of and recover quite quickly, it nonetheless speaks to a mindset on the part of investors which has completely switched from excessive optimism to outright pessimism in less than a week.

These losses in airline stocks now appear to be translating across the Atlantic with big falls yesterday for United Continental, American Airlines and Air Canada as early gains in US markets soon disappeared, while Microsoft became the latest US company to announce that it would miss its guidance for the quarter due to coronavirus, in a statement released after the closing bell.

Last night’s US close saw the S&P500 and the Dow close lower for the fifth day in succession, its worst losing streak since last August, though on the plus side the Nasdaq managed to finish the day higher.

The sharp reversal in US stocks, as well as a report from the US Centre for Disease Control of a new case of the virus in California in a person that hadn’t been to China, has seen Asia markets follow suit with similar declines, as well as on the back of a further surge in cases in South Korea.

These rises in cases, along with German health minister Jens Spahn, claiming that Germany is at the beginning of coronavirus epidemic, looks set to herald a sharply lower open for European stocks this morning, as investors gear up for the prospect of further weakness in the days ahead, as more and more cases of the virus get reported, and more companies break cover with guidance downgrades.

Yesterday Danone and Diageo became the latest European companies to report that the coronavirus was hurting their business, and they surely won’t be the last.

Against this backdrop we look set to see further heavy falls as positive sentiment collapses further, starting this morning as this stock market correction continues. On the other side of the ledger safe havens have continued to gain including bond markets where US treasury yields have continued to make new record lows, while gold has started to edge higher again.

These types of correction generally take the form of moves between 10% and 20%, which means, based on last nights close, we still have plenty of room to fall further, and that looks set to continue this morning.  

EURUSD – moved up through the 1.0880 area yesterday, with the next resistance at the 1.0920/30 area, and 1.1000 behind that. Key support remains in the April 2017 gap between 1.0730 and the 1.0780 area. A fall through the 1.0720 opens up the prospect of a slide towards 1.0340.

GBPUSD – failed to follow through above the 1.3000 level before slipping back again. 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 – the break above the 0.8410/20 area opens up the 200-day MA at 0.8480. Support remains down near the 0.8280 level and last week’s lows.

USDJPY – has started to slip back again after yesterday’s rebound back above 110.30 and looks set to retest this week’s lows above 109.80 We have resistance at the 110.80 level in the short term. A move below the 109.80 area opens up the 108.50 area again.

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