A Bumpy Road Ahead

Looking at the new daily infected cases and death toll from Spain, Italy, Germany and France, all of those countries seem to be heading into a downward trajectory. Meanwhile, in the US, the governors of New York, Louisiana and New Jersey pointed to cautious signs that the virus outbreak may be starting to flatten.

It saddens me to use a ‘death’ indicator as a financial market tool, but that’s what’s driving investors at the moment. The declining number of deaths registered due to COVID-19 suggests that we are winning the fight against this horrible virus. Total death rates had decreased from 13% at the start of April to 7% yesterday. That’s the first time we have seen a single-digit number since March 14.

The drop in newly infected cases and death toll sparked a sharp rally in equities, with US stocks registering its best day in a fortnight – and its eight best day since the end of the second world war – as the S&P 500 and Dow Jones Industrial Average both rallied more than 7% on Monday. At this stage, markets are repricing the worst-case scenario due to the virus outbreak, but in my opinion, it’s still too early to justify a prolonged move higher.

Investors moving into risk assets at this stage believe that we’re heading into a V-shaped recovery. Attractive valuations, ‘fear of missing out’ and extraordinary stimulus packages also exaggerate the upside moves in prices. However, no one yet knows the exact damage this virus has already done to the global economy, corporate earnings, and what kind of exit strategies countries will follow in the weeks ahead. Without proper treatment or vaccination, lockdowns could be reimposed and the global economy will then continue to suffer. The corporate earnings outlook is also very murky as the dispersion of analysts’ forecasts are near a record high. Hence, the road ahead won’t be a smooth one, especially as investors still need to digest a mountain of negative economic data and possibly many bankruptcies.

In my opinion, the best-case scenario is likely to be a U-shaped recovery and not a V-shaped one. The world post-coronavirus is not going to be the same for a long time to come. Social behaviour needs time to return back to normal which means the service sector will continue to feel the pain. For now, let’s hope that we beat the coronavirus and it becomes just a memory of the past.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Market Turmoil Resumes As Virus Fears Deepen

It seems most of the global fiscal and monetary stimulus measures have been priced in and the things that matter most at this stage are the infection and death rates of Covid-19.

Psychology has a great impact on asset prices, and with more people realizing that the virus could reach them in some way or have already infected someone they know, that’s a good enough reason for explaining why risk assets are unloved.

The upward move in equities we’ve seen over the past week may prove to be a temporary recovery, a dead cat bounce or a bear market rally. Call it whatever you like, but as long as infection rates continue to grow at the current pace, this more or less guarantees weak economic performance going forward and a collapse in earnings.

With global infections likely to reach one million later today and deaths surpassing 50,000, investors are focusing on capital preservation and are looking to return to cash. That suggests another leg lower in equity prices over the next couple of weeks, until investors have a better understanding on how the current crisis will end.

Of course, no one knows with certainty how bad this pandemic will impact global economies and corporate earnings. But it is obvious that corporate buybacks, a major component of the past decade’s bull market, will be missing in 2020 and probably in 2021 depending on how long the crisis persists. These buybacks have been by far the greatest course of demand for stocks since the 2008 crisis.

While some investors may want to take this opportunity of extreme pessimism to begin accumulating stocks, they may soon realize that we haven’t reached the capitulation stage yet. That is when investors surrender or give up trying to recapture lost gains as a result of falling stock prices and is generally considered to be a sign of a bottom in prices.

Today’s US weekly jobless claims release for the week ending March 28 is going to be of more importance than Friday’s non-farm payrolls report. That’s because the NFP will only include data through March 14, so it doesn’t reflect the impact of the last two weeks when millions of Americans filed for unemployment benefits.

Jobless claims may have risen 3 – 5 million in the past week, and we could even see a higher revision of the last week’s 3.28 million print. That suggests April’s NFP may show job losses in 8 digits, which could turn out to be the darkest day ever in the US job market.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

After a Great Rebound, Now What?

The return to risk has been due to the US Senate’s negotiations of a $2 trillion package designed to cushion the impact of the virus on the US economy, which finally got approved late Wednesday and passed the House overnight.

US stocks recorded their first back-to-back daily gains since February 6, when the index was hovering near its record highs. While such a move may be considered a positive signal to risk assets and welcomed by many, investors need to treat it with caution.

Following Lehman Brother’s collapse on September 15, 2008, US stocks saw similar moves after steep falls. On October 10 of the same year, the Dow Jones Industrial Average rallied from a low of 7,882 to a high of 9,794 in two days. That was a 24% recovery following a 31% decline from September 15th. However, it then took the index 98 more trading days to find the bottom at 6,469, after which the longest bull run in US history occurred.

The $2 trillion package along with the Federal Reserve’s unlimited stimulus plans, and the ECB made a historic announcement overnight that there will be no limits to their QE program, these measures will undoubtedly ease financial conditions for now and prevent a credit crisis. That might also be translated into less volatility in asset classes. But, history tells us it may only offer short-term relief.

Today’s biggest test is likely to be at 12:30 GMT following the release of the weekly initial jobless claims figures. Economist expectations are varying widely, with some anticipating up to four million new claims which would comfortably be the highest on record. This is expected to be just the start of a streak of terrible economic data to come in the following weeks. Depending on how bad the numbers are, we may see a sell-off of the same magnitude in stocks.

At this stage, it doesn’t seem all the bad news is already discounted and the latest rally in US stocks was irrational with the most beaten-up stocks rallying the most, a sign of irrational behavior and not smart stock picking. While the upcoming data in the next two weeks will begin reflecting the economic damage due to the virus spread, investors still need to assess the impact on corporate earnings.

Until we get a clear assessment of the damage to the economy and earnings, it’s difficult to make rational investment decisions. That’s why the most critical factor in this crisis is still when the peak in infections becomes evident and the pandemic ends.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Navigating The Upcoming Economic Crisis

Nowadays, there’s no other topic to talk about other than the coronavirus. The vast population across the globe is now sitting at home, trying to protect themselves and their family members from this deadly disease. Some are not even worried about losing their jobs as much as surviving this health crisis.

We are certainly living in an unprecedented time. The most watched indicator for investors has become the number of coronavirus cases, which has now topped 339,000 at the time of writing and continues to go higher. Many countries have reached, or are about to reach, a critical inflection point where things get out of control, as we’ve seen in Italy.

Navigating this crisis isn’t an easy one. To make an investment choice, you need to know whether the economy will go through a mild recession, a deep one or in the worst-case scenario, a depression. So far, it’s almost impossible to know where we are heading towards. Everything depends on when the coronavirus infections peak and begin to slow down.

US economic growth estimates from the biggest investment banks are becoming increasingly dire. Last week, JP Morgan expected GDP to shrink 14% in the second quarter of this year, Goldman Sachs sees a 24% fall, while the latest forecast by Morgan Stanley is even gloomier anticipating a 30% drop. However, the worst projections are coming from a well-respected Fed official, James Bullard, who said unemployment may hit 30% and GDP decline 50% in the second quarter.

Within the next couple of weeks, we will get to know how severe the upcoming economic crisis will be. The scariest scenario is that it turns into a credit crisis that will break the financial system. Leverage has skyrocketed over the past several years with inflows into US corporate and emerging market debt at very high levels. With most investors trying to withdraw their money from these asset classes, it could soon turn into a very deep financial crisis.

Those trying to pick a bottom on the S&P 500, should not get over-excited at this stage. The index has so far declined 32% from its February record high, and if we follow the current 5% decline which futures are indicating for the open, that will bring the losses to 37%. This would still be far less than the 57% decline of the 2007 – 2009 financial crisis and the 50% fall of the 2000 – 2002 dotcom bubble burst. And of course, that number is not even close to the 1929 – 1932 decline of 86%.

While it is tempting to buy stocks at their current cheap valuations, investors need to keep in mind that we still don’t have a clear picture of how the situation will evolve from here. The worst-case scenario of a prolonged recession is still not priced into equity markets. The right moment to begin accumulating equities is when all hope is lost, which could be months away unless a miracle happens and the virus suddenly disappears or a vaccination is discovered. Until then, expect demand for US dollars to remain high especially against emerging markets currencies.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Multitrillion Dollar Intervention Fails to Calm Investors

Countries are shutting down their borders, governments are taking drastic approaches to limit the impact of the virus spread on their economies and central banks are using all their tools to calm financial markets. However, none of these measures seem to be calming investors’ nerves.

With fears over the spread of coronavirus intensifying, it’s reasonable and justified to see risk assets being sold aggressively. After all, the consequences on the global economy and corporate earnings may be enormous, depending on the duration of the pandemic. People are afraid they will lose their jobs, won’t be able to pay their bills and so are cutting expenses on all non-essential needs. But what’s interesting in the current market turmoil is that even the safest assets in financial markets, US government bonds, are being sold-off.

In a bear market, traditionally investors have flocked to US Treasury bonds which historically have been inversely correlated to stock markets. In fact, we did see tremendous inflows into Treasuries at the beginning of the coronavirus outbreak. From mid-February to early March, yields on the 10-year Treasury bond declined by 80% to reach a record low of 0.32%. However, over the last several days this pattern has changed, with the sell-off in US Treasuries intensifying, especially on Tuesday and Wednesday with yields now standing at 1.25%.

This kind of market behaviour is scary. It shows that investors are selling whatever they can to raise cash and this also explains why the Dollar is soaring to record highs. Investors are clearly being forced to build their cash reserves in order to survive a prolonged period of the current pandemic.

The Federal Reserve and other major central banks are using all their tools to provide liquidity to markets. Whether it’s through cutting rates, currency swap lines, repurchase operations or asset purchases. Unfortunately, none of these tactics are preventing the hoarding of Dollars, as the huge amount of Dollar debt that companies need to fund gives rise to a “Dollar squeeze”.

This kind of market behaviour is likely to remain if the growth in virus infections remains high. That’s going to be problematic, especially for Asia, where Dollar dominated debt has reached record highs over the past several years. The risks of the global health crisis transforming into a debt crisis is extremely high and that would lead to an even worse crisis than that seen in 2008.

At this stage, it seems only one solution can prevent an ugly financial crisis – that is, finding a cure to the coronavirus and very quickly – which we all hope can be achieved very soon.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Fed is All in, But US Stocks Still Hit Limit Down

In another surprise move, the US Federal Reserve slashed its interest rates to zero on Sunday and added a sweetener by expanding its balance sheet by $700 billion to purchase Treasuries and mortgage-backed securities.

China’s PBOC also made a surprise move on Friday with a fresh round of liquidity injections. The central bank cut its reserve requirements for banks to free up $79 bn in funds to support companies hit by the outbreak. Meanwhile, the Bank of Japan was the last to join central bank action by announcing several measures to ease monetary policy.

It’s becoming evident that the major central banks across the globe are using all their available tools to prevent a crisis, but it seems the fear of the pandemic is taking control of investors.

At the time of writing, all three major US indices were trading at their lower pre-open limit, a decline of 5%.

When stocks futures reach their limit down in pre-market trading, they leave investors wondering how bad it can get when the market resumes normal trading hours. Markets will continue going through this phase of extreme volatility until they are able to assess the scale of damage caused by the virus outbreak.

The longer the outbreak persists and countries stay in emergency status, the harder the global economy will be hit. A recession seems almost impossible to prevent at this stage, but the question remains, how bad is it going to be? Equity strategists, especially bottom-up ones, will not be able to provide meaningful targets for stock prices. That’s because even companies themselves cannot project revenue targets in such situations.

From a macro perspective, economic data released by China today has provided a snapshot on how bad things could turn out to be. Industrial production plunged 13.5% in the first two months of the year; that’s the worst reading ever for the sector. Retail sales fell 20.5% as consumers were locked at home, fixed income investments dropped 24.5% and the jobless rate rose to a record 6.2%.

While China has started to recover from the epidemic, we do not expect to see a V-shaped recovery. The simple reason is that the rest of the world is sick now, with the majority of infections outside China. That means demand for Chinese products will remain low for the foreseeable future. Whether US and Europe will receive a similar economic hit remains to be seen. However, the biggest risk is if this health crisis turns out to be a debt crisis. The answer largely depends on the time and scale of the outbreak.

Confidence is exceptionally low at this stage and that suggests selling market rallies like the one we saw on Friday, may be a profitable strategy. However, traders should be aware and prepared for another week of extreme volatility.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stocks in Freefall as Oil Price Crash Increases Global Recession Risks

We have ended up with an all-out price war, after Russia refused to participate in additional cuts. In turn, Saudi Arabia has decided to return to its 2014 strategy of defending its market share. It announced massive discounts to its official prices for April, and there are expectations that it will ramp up production to above 12 million bpd, when global demand is expected to slump by more than 3 million bpd this year.

The combination of a supply surge with plummeting demand has led oil prices to fall by more than 30% overnight, the biggest one-day fall since 1991 when prices declined by 35% after the Gulf War allies sent hundreds of planes on bombing raids into Iraq.

The collapse in Oil is being felt across all asset classes today. Commodity currencies are experiencing their worst sell-off since the coronavirus outbreak. The Australian Dollar tested its lowest level since March 2009 against the US dollar, recording a low of 0.6318 before recovering 200 pips later in the Asian trading session. The Norwegian Krone fell to a three and a half decade low of $9.67. Meanwhile, the safe haven Yen is the best performing currency, having jumped to its strongest level against the USD since 2016.

US equities are threatening to see the end of their longest ever bull market. S&P 500 futures went limit down with declines of 5% in Asian trading hours. If the index falls another 5%, it will only take a further 3.6% drop for the market to fall into bear market territory. It means this week will probably experience the fastest slump into a bear market, which is defined as a 20% decline from the latest peak.

Over the past three weeks, investors have been revisiting their portfolio’s asset allocation to adjust for the coronavirus impact. Now, they also need to take into consideration the free fall in oil prices which could accelerate recessions risks.

In this environment, the ‘Fed put’ is not likely to function as it previously did. Markets are already pricing in a 54% chance of zero interest rates by April, but this will not be enough to counter the risks of the virus spreading and collapsing oil prices.

Credit spreads are already widening and we expect to see more tightening in liquidity. If Oil prices remain low for a longer period, companies in the shale industry will go out of business and layoffs will spread beyond the oil industry.

That’s where the real risks lie. It’s when the panic in Wall Street spreads into Main Street and recession becomes a situation you can’t escape from. Unless a miracle happens, expect this panic sell-off to continue dominating investors’ behaviour.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Is The Correction In Stocks Over?

The Dow Jones Industrial Average soared 4.5% to close above 27,000. The S&P 500 and Nasdaq Composite also climbed 4.2% and 3.8% respectively. All three major US indices are now out of correction territory and the key question investors are now asking is whether this rally has further room to go.

Before attempting to answer this question, investors need to know that extreme volatility has become the new norm. We may continue to see daily moves of 2% to 4% in either direction until the dust settles. However, yesterday’s surge in equities was supported by several factors:

  1. US Presidential candidate, Joe Biden, performed strongly in the Super Tuesday Democratic party’s primaries. He is considered as the most market-friendly candidate compared to his opponents, Bernie Sanders and Elizabeth Warren. That has been evident in the rally of the healthcare sector, which climbed 5.9%.
  2. The US Congress approved a bipartisan $8.3 billion emergency funding bill to tackle the coronavirus crisis. Part of this funding will go to research and development of vaccines, therapeutics, and diagnostics.
  3. The IMF unveiled a $50 billion package of emergency financing for developing countries hit by the virus.
  4. The Bank of Canada followed in the Fed’s footsteps by reducing its Benchmark rate by 50 basis points.
  5. The US services sector activity accelerated to a one-year high last month, suggesting strength in this part of the economy, despite the coronavirus outbreak.

While all these factors encouraged risk-taking, the higher moves in stocks may prove to be temporary. When looking at other asset classes such as bonds and currencies, they do not reflect the same enthusiasm we’ve seen in stocks. The safe-haven Yen remained near its 5-months high against the USD. Meanwhile, yields on US 10-year treasury bonds are barely trading above 1%.

The number of people infected by the coronavirus is likely to increase rapidly over the next couple of weeks and by the weekend, it’s expected to hit more than 100,000 globally, a headline that would have a negative impact on investors’ sentiment. More people will be sent to work from home, schools will continue to close and more events will be canceled around the world. The panic mode is clearly evident when you go to grocery stores and find many shelves empty. This is not just in Asia, but across Europe, US and Australasia. Consumers are stocking up as they prepare for the worst. Such behavior will start appearing in economic data this month and hence on asset prices further out.

We still don’t know the full impact on corporate earnings for 2020 and US companies will be lucky if they achieve zero earnings growth. That’s yet to be priced in by equity markets, but the shape of the recovery is essential for the next move. Whether it’s a V, W, or U-shaped recovery is still unknown. It all depends on when this health crisis will be solved and until we get there, expect monetary and fiscal stimulus to only have little impact on asset prices.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Equities Fall Across The Globe As The Coronavirus Outbreak Spreads

US stocks are pointing towards a sharp fall today, with the Dow futures declining 400 points, and European markets are also expected to kick off the week sharply lower.

Investors are no longer just worried about China’s economic health. The coronavirus has clearly become a global economic threat, with infections spreading to dozens of countries. The worldwide death toll has now climbed above 2,600, with 27 reported outside China. Italy’s number of confirmed cases surged from three on Friday to 152 on Sunday. Meanwhile, Iran has confirmed 43 cases, including 8 deaths. However, this is being questioned as the number of infected cases should be above 400, when the average mortality rate of the virus is around 2 percent.

It seems the risks over the past several weeks have been understated; that’s why the US and some European stocks were testing new highs. Investors have been betting on a V-shaped recovery, supported by central bank easing. It now looks like the easy money won’t be enough to offset the impact of the virus.

Last week, we mentioned in an article that asset correlations are no longer making sense, as all asset classes, whether they are stocks, bonds or precious metals, were moving in one direction, which is higher. Now, investors seem to realise that the risks of prolonged economic damage are higher than previously estimated, and this will undoubtedly have a severe impact on corporate earnings in the first quarter of 2020.

Gold tests a new seven-year high

Gold saw a sharp upward spike early Monday, rallying 2% to test a new seven-year high. It only looks like a matter of time before we see the precious metal breaching $1,700. While part of the rally is being based on speculative positioning, there are strong fundamentals supporting this move higher. Money coming out of equities has few other options to go to at this stage, especially given the low yield environment in fixed income.

US 10-year bond yields are currently hovering around 1.47% and 30-year yields have tested a new record low below 1.9%. This suggests that real interest rates are currently in negative territory, even the longer maturity ones. The deeper real rates fall, the more persistent the rally in gold can be, despite a strong Dollar. Expect to see the negative correlation between gold and the Dollar disappear, until the situation returns to normal.

Strong Dollar

The Dollar continues to be the traders’ favourite currency. While the US economy is not bulletproof against the spreading virus, it is still considered a stronger one compared to Europe or Japan. With Japan expected to fall into a recession and several European countries struggling even before the virus outbreak, the Dollar is a safer bet than the traditional safe haven Yen and Swiss Franc.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Asset Correlations Are No Longer Making Sense

Investors who were sitting on the sidelines anticipating a 10-20% correction in stocks after the coronavirus outbreak have been left behind. What is driving this rally? It is monetary policy expectations, pure and simple. The US Federal Reserve and the European Central Bank are committed to keeping interest rates low, and extra liquidity may still come from reviving bond-buying programs. The Bank of Japan is ready to cut rates even further, while the People’s Bank of China and other emerging market central banks are already in the process of further loosening their monetary policies.

While valuations are extremely high, we’re not yet near the highs of the late 1990’s dot.com bubble. However, the ‘FOMO (fear of missing out) rally’ may soon lead markets to the euphoria stage.

Investors buying equities at current levels are not anticipating better economic conditions or higher corporate earnings. In this scenario, US Treasury prices and gold too, would be much lower . When assets perform in such a way, it is clearly an environment that suggests irrational behavior by investors. They still want to participate in the equity bull market, but at the same time, buy safe haven assets to protect their portfolios from a potential downturn.

What we are clearly missing in this equity rally is solid fundamentals. The impact of the coronavirus on the global economy may well be underestimated. A drop in newly infected cases doesn’t immediately translate into an end of this pandemic. Many factories in China remain closed and the global supply chain has been disrupted already.

Apple has been one of the few large companies which issued a revenue warning and market participants should expect many more to follow. Similarly, expect to see global growth and the earnings outlook revised lower for the first quarter of 2020. When equities are priced to perfection, it’s hard to escape a market correction.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Data This Week to Start Revealing Coronavirus Impact

The index has now recovered all of its losses since trading resumed after the Lunar New Year holiday, rising 10.9% from a low of 3,639 recorded on February 3. China’s PBOC lowered the rate on its medium-term loans to financial institutions to 3.15% from 3.25%, after earlier lowering rates on reverse repurchase agreements by a similar amount. The central bank also announced an injection of 100 billion Yuan of reverse repo to financial institutions. These actions are likely to be followed up by lowering the country’s benchmark rate later this week, as they continue to fight the spread of the coronavirus.

Fiscal policies are likely to play a significant role in the current situation with the virus outbreak, with authorities in China pledging to reduce taxes on corporations. But whether this will lead to faster production and get the business cycle running at full capacity again, still depends on how soon the virus gets contained.

Monetary stimulus is currently not helping to boost investment or encourage consumers to spend, but it is inflating asset prices. At this stage, companies’ capital expenditure will not rise because of the cheaper cost of money, similarly spending by consumers on housing, cars and other durable goods. The contagion needs to be controlled to bring confidence back and that’s what we should be monitoring going forward.

This week, we’ll get to see how German institutional investor’s sentiment has been affected by the outbreak of the coronavirus. After reaching a four-year high in January, Tuesday’s German ZEW is most likely to have declined in February, but Euro traders will be monitoring the scale of any fall in the sentiment index.

Eurozone companies will reveal how they are coping with the deadly virus on Friday when IHS Markit releases its February manufacturing and services activity for the region.

A worsening economic outlook may lead to further pressure on the Euro, which fell to a three-year low on Friday, with data from before the coronavirus already showing weakness. Industrial production in the Eurozone dropped 2.1% in December, while the Germany economy stagnated in the fourth quarter of 2019 and the wider Eurozone is growing at its weakest pace since 2014.

Traders will have a better understanding of the Federal Reserve’s outlook on Wednesday, when it releases its minutes for last month’s meeting. Whether Chair Powell’s warning about the impact of the coronavirus outbreak on the US economy will potentially justify a further cut in interest rates remains to be seen, with speculators already pricing in a 43% chance of a rate cut by mid-year.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Oil Prices Set to Decline Further if OPEC+ Doesn’t Act

The spreads in the futures markets are signaling weaker demand, with the discount on spot prices widening further. This year, Brent crude has dropped by more than 18% and by 25% from its January peak of $71.75.

2020 was supposed to put an end to the global manufacturing slump after the US and China reached their “phase one” trade agreement. It was expected that Europe would begin to shine again due to renewed Chinese demand after the signing of the trade deal. But no one expected a coronavirus outbreak that would interrupt economic activity in China and spread globally.

Now it’s no longer a question of whether the coronavirus epidemic will lead to an economic slowdown, but how painful this slowdown will be. The scale of the impact can only be determined when the spread of the virus begins to slowdown and the outbreak gets under control, which is not the case at the moment.

Chinese companies were supposed to return to work on Monday, but many car plants and other manufacturers have remained closed following the new year holiday. State refiners such as PetroChina, Sinopec Corp and CNOOC have all announced cuts to their refinery runs totaling approximately 940,000 barrels per day. In fact, this number will be much bigger if you take into account independent refiners.

Given that China’s oil demand has fallen by more than three million barrels a day, the country may need to cut imports for several months to come. Until then, supertankers may need to store oil, which means inventories will begin to build-up excessively.

That’s why OPEC+ may need to make a quick decision very soon to prevent prices from slumping further. Russia seems to be the main obstacle against cutting production at this stage. But if the coronavirus continues to spread and we don’t see a response from the cartel, expect oil prices to remain in a freefall.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stocks Rally on Easing Monetary Policy Assumptions, But For How Long?

All three major US indices made new record highs on Thursday with the S&P 500 up 3.2% for the week, its best performance since June 2019. It wasn’t just Wall Street that saw solid gains, similar patterns were seen in Europe and Asia.

It seems investors have returned to risk assets, despite the spread of the coronavirus showing no evidence of abating. This clearly reflects their trust in central banks, in particular the Federal Reserve, who they believe will always step in when the global economy shows any signs of weakness.

This kind of way of thinking is alarming, as central banks cannot influence the supply side of the economy, especially when it’s hit by uncontrollable factors. If the coronavirus doesn’t get contained, the supply chains will be severely disrupted, not just in China but across the globe. While it is difficult at this stage to measure the effect on global growth and corporate earnings, there will definitely be a significant impact.

Even if the spread of the virus is controlled and we avoid hitting the tail risks, the cost of recovery is going to be high. Some economists are now fearing the global economy may experience it’s first quarter-on-quarter growth fall since the global financial crisis. When risk assets are priced for perfection, it’s difficult to believe they can hold for so long.

The Dollar’s value had been steadily appreciating even before the coronavirus outbreak, but it strongly rallied at the beginning of February taking it’s year-to-date gains to 2.3% against a basket of major currencies. Emerging market currencies followed a corresponding downward trajectory with the MSCI emerging market currency index lower by 1.6% since mid-January. This may complicate issues for many emerging economies who have huge borrowing in US Dollars. It will also have a negative impact on US corporate earnings as a stronger dollar leads to currency losses from foreign sales and also makes products less competitive.

That said, investors do not need to panic and liquidate their equity portfolios, but it may be a good time to review their asset allocation, current positions and whether to consider buying insurance against a 10-15% drop in prices. Growth stocks will likely be hit the most in case the global economy slows significantly in Q1. Meanwhile, gold remains one of the preferred assets in difficult times so if it’s not a part of the investor’s portfolio it’s still not too late to add it.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Equity Markets Attempt to Erase Coronavirus Sell-Off, is The Panic Over?

Interestingly though, no vaccine for the coronavirus which triggered the sell-off has been discovered yet, with the death toll jumping to 563 as of Wednesday night. Infections also continue to be on the rise with 2,987 new confirmed cases. So what is driving risk assets?

Multiple factors may have been attributed to the change in investors’ mood over the past couple of days. The latest economic data has highlighted a pick-up in global manufacturing and services activity, particularly in the US. State-owned Chinese companies are likely to intervene through buying stocks if markets experience a massive meltdown, hence preventing big investors from selling their holdings. But it is the expectation that central banks and governments are ready to ease monetary and fiscal policies which is contributing the most to the latest surge in risk assets. The People’s Bank of China has already pumped billions of Dollars into the financial system and Thailand’s central bank was the first to cut interest rates on Wednesday in response to the virus outbreak.

China’s announcement overnight that it would halve tariffs on more than 1,700 US products was the latest factor that pushed equities higher in the Asian session today. Whether this will translate into a “phase two” US-China trade agreement remains to be seen. However, this action was sufficient enough to lift investors’ sentiment.

Despite all the positivity seen in financial markets, risks remain high. We still do not know the exact impact of the coronavirus outbreak on the Chinese or global economy. If China’s growth drops by 1-2%, the shock will ripple globally and will definitely be reflected in corporate earnings.

While the yield on US 10-year Treasury Bonds has surged 17 basis points over the past three days after touching 1.5%, it is still well below where it started the year. Bond investors require clear evidence that the worst is behind us to begin forecasting higher growth and it’s clear we’re not there yet. Copper is another leading indicator of the economic cycle and it remains 10% below mid-January levels. These asset classes need to see a significant recovery to reflect true optimism, otherwise we would expect to see further shocks to equity prices.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Chinese Stocks in Freefall After Traders Return From Lunar New Year Holida

This comes despite the central bank’s announcement it would provide $171bn in additional liquidity to money markets and took further steps to lower its reverse repo rates, in efforts to contain the sell-off.

Such actions by the central bank seem to have had minimal effect on investors’ behaviour. The real concern now is that China’s growth will be heavily impacted by the deadly coronavirus outbreak. With the number of deaths in mainland China overtaking the 2003 SARS epidemic and the number of cases infected reaching more than 17,000, it is unknown when this epidemic will come to an end.

Economists are now expecting growth to fall below 5% in the first quarter of 2020, but the question is how quickly the economy will rebound once the outbreak is under control. China’s GDP growth dipped from 11.1% to 9.1% in the second quarter of 2003 after the SARS outbreak. But it recovered quickly to 10% in the following quarter. However, it’s very difficult to compare the current situation to 17 years ago due to a number of reasons. First, we still don’t know when the outbreak will be officially under control. Second, China represented less than 5% of global output in 2003, whereas this now stands at 17%. Third, the service industry in China makes a greater contribution to the country’s growth compared with 2003.

The sell-off in China’s market today, despite looking ugly, is only a catch-up following the tumble in global equities over the past several days. This means investors will not react on today’s news, with S&P futures holding steady at the time of writing.

However, as mentioned in my previous report, investors who are looking to buy the dips should wait for signs of a peak in the rate of virus infections, and we are not there yet.

Crude oil requires intervention to put a floor on prices

After losing 12% last month, Brent prices continued to remain under pressure. China’s demand for oil is expected to have dropped by three million barrels a day, which is 1.3 million barrels more than OPEC’s combined output cuts. Add to this a global cancelation of airline flights to China and you get an extremely oversupplied market.

The OPEC+ Joint Technical Committee has scheduled a meeting on Feb 4-5 to evaluate the impact of recent developments on Oil demand. The market needs assurances that the supply/demand equation remains in balance for prices to hit a floor. This suggests a commitment from OPEC not just to extend oil supply cuts, but even implement deeper ones beyond March. Without such assurances, expect to see further declines in Brent with the only major support now seen at the December 2018 lows of $49.93.

A busy week ahead

While investors continue to monitor updates on the coronavirus closely, there’re a lot of market-moving events. The earnings season remains busy with 96 S&P 500 companies due to announce their quarterly results this week. Alphabet, Twitter, Walt Disney, General Motors and Ford are among the most-watched companies.

Currency traders have a busy economic calendar, which includes manufacturing and services PMI’s from Europe and the US, and China will release its export and import figures on Friday. But for USD traders, all eyes will be on Friday’s non-farm payrolls report that could lead to big moves in currencies.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Virus Fears Drag Down Asian Equities, Safe-Havens in Demand

However, it’s the rising concerns over an outbreak of the deadly coronavirus that is currently dictating market moves. The number of confirmed cases has spiked to almost 8,000 and the death toll rose to 170 as of January 30. While we’re still in the early stages of the outbreak, it remains unclear whether the economic impact is going to be smaller or larger than the 2003 SARS outbreak.

Despite the Wuhan virus so far showing a lower mortality rate (below 3%) compared to SARS (10%), the number of confirmed cases has already overtaken SARS inside mainland China. Even though the country has acted much faster in limiting the transmission compared to previous episodes, evidence shows that the disease can be transmitted before a person shows any signs of illness, and that is making it a more frightening type of virus.

Several international retail and fast-food chains have closed in many cities across China, including H&M, McDonald’s and Starbucks. Google also announced yesterday that it is temporarily closing its China offices.

China today is a far larger economy than it was in 2003. Back then, it represented 5% of global output, now it’s almost a fifth of GDP with much more integration within the global economy. Chinese nationals have also become the main driver of global tourism and every luxury retailer is targeting them. More than 30% of European luxury brand revenues come from Chinese consumers and that is why they have been hit hard over the past several days.

While markets in China remain closed on Thursday for the Lunar holiday, the rest of Asian markets have seen their indices decline sharply. Taiwan’s Taiex plunged more than 5.75% as many shares reached their 10% limit down decline, including shares of major Apple supplier, Foxonn. Hong Kong’s Hang Seng fell 2.2% taking its two-day losses to more than 5%.

Expect to see further declines and more volatility in risk assets in the coming days. Investors who were waiting for the dips to buy may need to wait a little longer, until we see signs of a peak in the rate of virus infection. Meanwhile, gold and Treasuries are likely to remain in demand.

Traders split ahead of BoE rate decision

Today’s BoE interest rate decision is likely to be more interesting than yesterday’s Fed which kept rates unchanged and stressed the US economy is in ‘a good place’.

Monetary Policy Committee members have a tough assignment today on deciding whether the UK economy has recovered strongly enough post-election to justify keeping rates unchanged. While most economists predict rates to remain at 0.75%, swap traders are pricing more than a 40% chance of 25 basis point rate cut.

Given this market confusion, expect to see strong moves in the Pound in the event of either decision. If the BoE holds steady and only two members vote for a rate cut like in previous meetings, Sterling will likely see a strong recovery towards the 1.31-1.32 range. Meanwhile, a rate cut could see the currency drop below strong support at 1.29.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Coronavirus Remains Investors’ Top Concern For The Week Ahead

  • Global equities decline as coronavirus continues to spread
  • US earnings season in full swing with 145 S&P 500 companies announcing results
  • The Fed and BoE will conduct their first policy meetings of 2020

The spike in the Volatility Index (VIX) on Friday is starting to reflect fears about the spread of the deadly coronavirus. It has already killed 80 people in China, infected more than 2,700 globally and is showing no signs of retreating. The latter issue is leading investors to sell risk assets and flee to safe havens.

Whether the market reaction to the coronavirus will be short-lived or extended further remains a guessing game for now. The bottom line is how much global economic output will be wiped out, and so far, no one knows the answer.

Many investors prefer to increase their cash allocation and overweight safe havens, such as Treasuries, Gold and the Japanese Yen, until we have a clear assessment on the degree of economic impact. However, if the mortality rate continues to rise with no cure to the virus, investors will move to panic mode, so expect to see further downside in risk assets. That’s why investors are advised to keep a close eye on the VIX index.

While the coronavirus is set to grab all the headlines, this week is shaping up to be a busy one on many fronts. Earnings season gets into full swing with 145 S&P 500 companies reporting results, central banks in the UK and US decide on monetary policy, President Trump’s impeachment trial enters its second week and key economic data are due to be released.

Earnings

Tech giants will be under the spotlight with Apple, Microsoft and Amazon among the names to be reporting results on Wednesday and Thursday. Those big tech firms contributed to a large chunk of the S&P 500 rally in 2019 with Apple rising 86%, Microsoft 55% and Amazon 23% last year. For these companies to sustain their upside momentum, we need to see not just earnings surprise to the upside, but upcoming quarters projections as well.

Exxon Mobil, Chevron, Facebook, Tesla, Pfizer, General Electric, Boeing, Caterpillar, and United Technologies are among the big firms reporting this week.

Central Banks Meetings

The Federal Reserve and Bank of England will be holding their first meetings of 2020. The Fed is widely expected to remain on hold when delivering its statement on Wednesday. We also anticipate very little changes to their economic projections. With a robust labour market and moderate inflation, we don’t expect to see any amendments to monetary policy in the near term. Market participants still need to know how long the Fed will remain on the sidelines, but the only answer they’re likely to receive is “we are data-dependent.”

However, the BoE’s rate decision is likely to be much more interesting with markets split 50/50 on whether we’ll see a rate cut on Thursday. MPC members have been talking up the case for lower rates so far this year, but the positive PMI releases last week will likely lead to more of a wait-and-see approach. Whatever the outcome from the meeting, expect to see volatility in the Pound.


Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Asian Equities Edge Higher as US and European Stocks Hit New Records

  • Central Banks expected to keep policies unchanged this week
  • Oil prices rally on supply disruption from Libya

Three weeks into the new year and equity bulls remain well in control. Wall Street continued to post new all-time highs with the S&P 500 up more than 3% year-to-date. Meanwhile, in Europe, the Stoxx 600 managed to break above recent resistance to close at a new record high on Friday.

Several factors have played a role in this bull run, including the US-China trade deal, better than expected economic data from the US and China and most importantly, the addition of short-term liquidity to the financial system by the Federal Reserve.

While it makes sense to be worried about high valuations in equity markets, as long as monetary policies remain loose, bond yields stay relatively low and economic data remains solid, we can still see further gains in global equities.

One ingredient that has been missing in the bull run is corporate earnings. The S&P 500 is expected to report its fourth consecutive quarter of year-on-year earnings declines, but many observers hope that Q4 will mark the end of the US earnings recession. Equity analysts are anticipating 4.3% earnings growth for Q1 2020 and for this to improve significantly in the quarters ahead, to reach 15% in Q4 2020. Given that markets are forward-looking, the recent weakness in corporate profits has been ignored.

After the large US investment banks delivered an upbeat start to the earnings season last week, 44 companies will announce their results this week. The list includes IBM, Netflix, Baker Hughes, Johnson & Johnson, Texas Instruments, Intel and Procter & Gamble.

Central banks meetings

Currency traders will be more interested in central bank meetings this week as The European Central Bank, Bank of Japan and Bank of Canada all hold their first monetary policy meetings of the year.

The ECB rendez-vous will likely be the most interesting one as new President, Christine Lagarde, launches only the central bank’s second strategic review in the euro’s two decade history. However, we do not expect to see any changes to interest rates or asset purchase program.

The BoJ and BoC are also expected to keep policy unchanged, given that the recent easing in trade tensions and improvement in economic data will buy them some time, before deciding on whether further rate cuts are required. That said, the tone of the statements may still have an impact on their currencies.

Oil jumps on supply disruption

Oil was the only asset class that saw significant moves early Monday. Brent was more than 1.2% higher at the time of writing, after two production bases in Libya were shut down. Although markets seem to be well supplied, such events remind investors that geopolitical risk remains an important factor in oil pricing. It is estimated that 800,000 barrels of crude supplies have been halted and if they don’t return fast, we may see a further rally in the days ahead.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Corporate Earnings & US-China Trade Deal to Dictate Markets’ Direction

That shouldn’t be a surprise given that the search for “World War III” reached a record high on Google trends over the last week. Oil also experienced volatile moves, but the action was short-lived after the geopolitical situation de-escalated. Traders monitoring the developments may have profited from the volatile price action, but long-term investors who moved to a more defensive position have lost the opportunity after a strong rally in equity markets in the latter part of the week.

With Brent prices falling back below $65, traders seem convinced that Iran will not block the Strait of Hormuz or carry out attacks on shipments. That’s because Iranian exports to China are a significant source of the government’s revenue and without it, the economic crisis will only exacerbate. President Trump has also backed away from military confrontation, as increased tensions in the Middle East and higher Oil prices will hit both consumers and businesses which is the last thing he wants before the November Presidential Election.

A 10% correction in US equity markets can never be completely ruled out, especially given the rich valuations. But with the Fed and other central banks increasing asset purchases and pumping in more liquidity, they are putting a floor to prices and directing investors toward risk assets. The latest US jobs report, despite missing headline expectations and wage growth, is still the best formula for a further rise in equities. The US economy continues to add enough jobs to absorb new entrants to the workforce, and with year-to-year wages dropping to 2.9%, the Fed can be relaxed that inflationary pressures are still far away, suggesting no imminent need to tighten monetary policy.

Investors will now turn their attention to the fourth-quarter earnings season that gets under way this week when JPMorgan Chase, Wells Fargo and Citigroup report on Tuesday. According to Factset, year-over-year earnings are expected to decline 2% for S&P 500 companies, while revenues grow 2.6%. However, the forward outlook for 2020 is brighter than last year with earnings expected to grow in the high single digits.

Wednesday should see the signing of the “phase one” US-China trade deal. While much of the positive news has already been priced in, some details may still move markets either way. However, the most important factor in this deal is that the US and China are heading towards de-escalation in trade tensions and not the opposite way around.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Oil and Gold Surge as Investors Await Iran’s Retaliation

  • Oil trading above $70 on fears of supply disruption
  • Gold approaching $1,600 as investors flee to safe havens
  • Equities across the globe to trade in the red on Monday

Events over the last week have undoubtedly put this outlook at risk. The US killing of a top Iranian military commander in Iraq is not likely to stop a war as President Trump claims, instead this act could set off new conflicts in the Middle East that may have global consequences.

Over the weekend, Iraq’s parliament voted to expel US troops, Iran announced it will no longer adhere to the 2015 nuclear deal limits and three Americans were killed in Kenya in an attack on a military base by a jihadist group. While no one knows what will happen next, investors have pushed oil above $70, up $4 since the conflict started, and gold has surged to its highest levels in more than six years.

In September, a drone attack on Saudi Arabia’s Abqaiq crude-processing plant sent Brent prices 20% higher, but those gains were rapidly reversed as production was quickly restored and markets saw it as a short-term risk event. In the current environment, it’s hard to tell whether we’ll see a larger disruption in oil supplies that could send prices much higher.

Interestingly, we note some investors are buying call options near $100 to insure or profit from massive price spikes. They are predicting that Iran will target shipping in the Strait of Hormuz, which is responsible for a fifth of the world’s oil supply flow. If this strait is blocked, even for a short period, it will lead to prices skyrocketing. At $70-$80 a barrel, the global economy is not likely to feel much impact from this rise in prices, but as we get closer to $100 there will be severe consequences, which would trigger steep selloffs in equity markets.

Another asset benefiting from escalating Iran-US tensions is gold. The yellow metal has breached last year’s high and resistance level of $1,557 and looks to be heading towards the psychological level of $1,600. In times of political and market uncertainty, there is no better alternative to buying gold and despite looking overbought on the charts, the rally will continue as long as uncertainty stays high.

Investors will remain on the defensive today and expect equities in Europe and the US to follow Asian markets lower as everyone now awaits a possible retaliatory response by Iran. This may not be an immediate one, but rather a protracted event which investors need to carefully calculate when determining their portfolio’s risk.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.