Equity markets smashed, gold rallies on coronavirus anxieties

The week started with heavy losses in Asian markets as the number of coronavirus cases outside China surged, spurring worries that it could become a global pandemic. At least ten cities in Northern Italy are quarantined and the Venice Carnival was closed.

Stocks in Korea (-3.43%) recorded the heaviest losses, the ASX 200 (-2.25%) tanked as WTI crude slid more than 2%. Hang Seng (-1.47%) and Shanghai’s Composite (-0.31%) edged lower. Japan was closed for bank holiday.

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US and European equity futures were offered as well, on fears that the spread of coronavirus will hamper growth prospects worldwide. If the market mood changes so fast, it is because no one can really tell the real impact of the virus on economies. But it is certain that the disruption in economic activity will translate into lower company earnings and softer growth figures at least during the first half of the year. Time, and data, will show how bad the economies have been impacted.

With all this in hand, the actual historical high levels seem rather exaggerated for the US stock markets. There is a risk of sharp downside correction, yet we do not rule out the possibility that prospects for more monetary support from the central banks would sustain the US stock rally after a potential downside shock, in which case, only investors with very solid nerves would be rewarded.

FTSE (-1.26%) and Euro Stoxx (-2.06%) futures point at a deeply negative start. The FTSE will likely test the 7300p mark on the downside.

Gold rallied to a fresh seven-year high as risk-off capital poured into the yellow metal. The price of an ounce surged to $1680 for the first time since January 2013. Technical indicators point that gold is overbought for at least three weeks now, but the risk appetite is so fragile that even sky-high prices don’t discourage capital from feeding into the precious metal.

The US dollar eased on Friday, following an unexpected and sharp fall in February flash PMI figures. The data pointed that activity among US businesses shrank this month, as the coronavirus outbreak disrupted supply chains. But the greenback was better bid in Asia, as risk-off sentiment pushed investors to find refuge in US dollar.

In Europe, however, the Eurozone PMI figures were mixed. French services surprised on the upside, while the manufacturing unexpectedly slipped in the contraction territory. Shrinkage in German manufacturing surprisingly slowed, however. As such the Eurozone flash manufacturing and services PMI both pointed at a surprise improvement in February, reviving hopes that the impact of the coronavirus outbreak may not be as bad as many feared. Due later this morning, the Ifo report from Germany could hint that the business climate further deteriorated in the Eurozone’s growth engine, and dash hopes.

The euro was better bid against the US dollar, but sellers are tempted to jump in at 1.0830/1.0850 to strengthen their downside bets.

Cable met solid offers before the 1.30 mark, as the pound made a positive attempt after the British manufacturing PMI advanced to a 10-month high on Friday. Meanwhile services PMI readjusted to the downside, slightly but not alarmingly lower than expected, hinting that the post-election optimism eased on new Brexit challenges, but the sentiment change has not been dramatic.

We have a slow day in terms of data flow. The risk-off trades will likely determine the mood in Monday trading session.