European markets gauges PBOC's action - Gold likely to surpass 1600

The DAX index is set to open lower again today after suffering from a heavy massive sell-off on Friday. The Index lost nearly 1.33% of its value. Traders are taking their clues from the Asian markets where stocks plunged. Investors sold the riskier assets and prices plummeted over 7% in mainland China due to the higher death rate of Coronavirus. Both, the Shanghai Composite index and the Shenzhen index dropped by 8.13% and 8.27% respectively.

Having said this, one should not read too much into this sell-off and because the Chinese markets have been closed for an extended period for holidays. The market reaction was bound to be brutal upon their open. More than 300 individuals have lost their lives due to the outbreak of Coronavirus in China.

The panic in the markets demanded a reaction from the central bank. Hence, the People Bank of China has intervened yesterday and assured investors for their support—the bank is going to inject 12 trillion yuan via its open market reverse repo division. The reaction is no short of a jaw-dropping moment because, at its core, it is the biggest reaction from the PBOC since 2004. This kind of action is usually designed to target liquidity issues.

European Data

Closer to home, investors are going to keep a close tap on the upcoming German industrial output and factory data. It is important to gauge the health of Europe's biggest economy. Speculators are still betting that the economy hasn't reached its bottom and, subdued business survey numbers are going to impact the data. German manufacturing PMI number is expected to hit the reading of 45.2, the same as the previous number.

The battle begins between the UK and the EU to negotiate a new future today. The UK's prime minister, Boris Johnson, is likely to stick to his tool of tactics — threatening to walk away from talks with the EU and Brusells will keep on pressing the UK with its demand. All of this is going to bring higher volatility for Sterling. The currency is also going to feel the burden of the ill economy. We have anemic growth and wage stagnation due to the weakness in production activity.

Commodities

The black-gold is facing the music of lower demand and we anticipate that it is likely that prices will fall further. The Brent price is down by 25.54% YTD and Crude has lost 15.48% of its value YTD. Investors are expecting the demand equation to be impacted adversely because China is the largest importer of oil in the world. Airlines are consistently canceling their flights to China and this is causing a direct disruption to the supply chain equation.

On the other hand, the prices for the shining metal have eased off from their 4-week high. We believe it is highly likely that the prices are going to surpass the level of $1600 this week if fear keeps mounting around Coronavirus.

The current sell-off mainly due to the reason that speculators have booked some profit from their trades as the PBOC intervened. The injection is only a temporary fix if that. There is no doubt that the Chinese economy is going to see some serious scars caused by this virus. The knock-on effect on global growth is likely to be even more detrimental. Thus, the PBOC's antidote isn't strong enough to heal these wounds.