February 12, 2020

Investors Should Be Cautious About The Market

Coronavirus is bound to have an impact on the global economy, and for anyone who thinks otherwise, they are in for a surprise. Recent measures by the People Bank of China include support from their monetary policy and cutting the tariff rates in half on the U.S. imports, this may take some sting from the inevitable blow, but the Coronavirus is still going to hurt badly.

To date, Coronavirus has claimed over 1000 lives, a number that is likely to increase before the situation comes under control. China and other infected countries are actively taking steps to limit the contamination.

Market pundits are immensely positive about the health of the U.S. economy, believing it to be bulletproof at this stage. I do not deny that the U.S. NFP number was a blow out number, I am merely pointing out that the Coronavirus isn’t reflected in the US stock markets.

Here are just a few things to consider before going full steam.

Money Flow In Gold Market

After the strong reading of the US NFP data, the Fed doesn’t need to move the needle anytime soon concerning their interest rate, regardless of how much pressure Donald Trump applies. However, if we look at the fund flow for the largest gold ETF, we still see a mammoth inflow. Clearly, gold doesn’t provide any dividend, and it is the most famous instrument to hedge risk. This indicates that investors are preparing their portfolio for the worst time ahead.

Oil Demand is Reflected by Price

Saudi have pushed the OPEC+ to cut the oil supply; they understand the supply equation is feeble, and it will continue to weaken as we get more data from China. The fact that oil has only experienced a mild rally on the back of the optimism of oil cuts strengthens the argument that one should be more modest with their upside targets.

Volatility Index Isn’t plunging

The volatility index for the S&P500 index, VIX, and the volatility index for the European Stoxx, V2X are still up 27% (from January 17th low) and 25% (from January 16th low), respectively. Again, if the risk-on rally is going to continue with no fear, we should see this risk measure drop further.

Treasury Market Not Indicating Risk-On Mode

Treasury yields aren’t indicating that the risk-on rally is the main game. The market actions of the US ten-year Treasury yield and the five-year Treasury yield are not convincing enough to go in full steam unless the yields touch the level they were at before.

Warnings From Companies

We have seen major corporates issue severe warnings about their next quarter. Burberry last week said it’s not anticipating a strong quarter because its stores are closed in affected areas which will influence the earning numbers. Similarly, Apple’s iPhone’s leading supplier, Foxconn’s production factories are closed, resulting in a lower shipment of Apple’s iPhone and other devices. The critical thing to note is that these are major companies, and if they are issuing warning signs, then there is bound to be an impact on the global stock markets. So far, only a few companies have issued this type of warning, but realistically, I expect this message to echo among other corporate companies and to see similar declarations in the coming weeks