The market selloff that everyone was waiting is here. The US stock market rally was overextended, and investors will use the coronavirus epidemic as the trigger needed to deliver a pullback.
The weekend news had no shortage of headlines. Much of the American press focused on the tragic death of Kobe Bryant and his daughter Gianna. Bryant and his daughter were among 9 who passed away in a helicopter crash in Calabasas, California. The CEO’s of Apple, Nike, and Disney all tweeted condolences to his family and fans of the NBA legend.
The key driver to the risk-off environment remain coronavirus fears. The numbers behind the coronavirus are startling. Beijing have confirmed that 81 are dead, nearly 3,000 people have contracted the disease, and 5 million people had left the city of Wuhan before travel restrictions took place. The virus is spreading, and China is scrambling to deliver better prevention and control measures. China will extend the Lunar New Year holiday a few days till February 2nd. In the US, the CDC confirmed five cases, but reiterated the risk to the US general public is low at the time.
The global growth reacceleration story will be tempered because of the coronavirus impact will weigh on Chinese growth for possibly the first half of the year.
On the impeachment front, former national security adviser John Bolton reportedly has information that implicates President Trump. Even if Republicans decide to hear more witnesses, it is still expected the President will be acquitted.
This week should have been all about earnings season as we will see Apple report on Tuesday, Microsoft and Facebook post results on Wednesday, Thursday sees numbers from Amazon and Verizon, and Caterpillar and Exxon close things out on Friday.
Stocks
US stocks are off to a terrible start this week as virus concerns grow. S&P 500 and Dow futures are both down 1.6%, with Boeing leading the way lower after a senior Afghan official said a Boeing passenger plane has crashed. In the short-term S&P 500 futures could see further pressure towards 3,170, that would be a 5% pullback. US stocks were ripe for a selloff as valuations were getting out of hand, but now fear that the coronavirus will have a tremendous negative impact on Chinese growth will derail outlooks for many multinationals. The coronavirus may not be as lethal as SARS, but the incubation period is worse. This virus can be spread anywhere from a day to two-weeks and even if a patient is not showing signs of being sick.
A lot of Wall Street was heading towards the sidelines before the virus and we could see longer-term investors wait to jump back in if we see a 10% pullback.
FX/Treasuries
The Japanese yen and US Treasuries are seeing strong safe-haven flows as the coronavirus continues to spread globally. The Japanese yen is on a one way street and keeps rallying across the board on fears the coronavirus will spread even further and as many investors fear this will have a much greater impact on risky assets. The yield on 10-year Treasuries fell 6.6 basis points to 1.618%. US Treasuries are back in style and we could see bond yields once again make a run towards the record lows of 1.358%.
Oil
Oil prices are in freefall on concerns that China did not deliver prevention and control measures in time and that will ultimately lead to an extended drop in crude demand in the short-term. Brent broke below the $60 threshold and West Texas Intermediate crude seems poised to test last summer’s low of $50.52 a barrel level.
It seems Saudi Arabia’s energy minister Abdulaziz might be overly optimistic that the coronavirus will be contatined. OPEC this morning is scrambling and will likely announce they will keep their production cuts in place for the remainder of the year. Oil is stubbornly heavy now and will likely see limited strength on the announcement of enhanced cuts by OPEC + or any geopolitical risks that brew in the Middle East region.
Gold
The gold bulls are back in town. Treasuries are in freefall and the global stock market rout are making gold the favored safe-haven trade. Gold prices are going to benefit from flight-to-safety flows, rising expectations the bond markets might force the Feds hand and as global investors head for the sidelines. This is also the peak week for earnings season and we could see a cloud of uncertainty destroy the outlook for many global companies. Buying gold and Treasuries will likely be the favored trade this week. Investors are exiting stocks, but will eventually want to jump back in the short-term.
Bitcoin
Bitcoin is benefiting from safe-haven flows even if it really isn’t a traditional flight-to-safety trade. Bitcoin and most of the crypto space are higher as Asian investors have renewed interest in trading cryptocurrencies with much of their markets closed for the Lunar New Year holiday. Bitcoin over the past year had some correlations with being a safe-have trade but that has not stood the test of the time in its brief time of trading. Bitcoin could see the coronavirus fears provide it with a catalyst to target the $10,000 level, but it might struggle to breakout much further from there.
