February 11, 2020

Optimism Back In Town

Investors over in Europe are ready to push the markets higher and pick up the momentum from Asia. Most of the Asian indices traded in positive territory shrugging off the concerns related to the outbreak of Coronavirus. Speculators do believe that the impact is going to be limited, which is really difficult to digest.

The misleading number, for some, is the reported infection rate which is being viewed out of context. The fact is that a large labour force is unable to work as a result of the spread of this virus.

We know that at Foxconn, one of the largest supplier of Apple parts, only 10% of its workforce has returned since the factories have reopened. We have no idea when the other such factories will return to 100% capacity. If we see the labour force back at work as early as March, then we could say that a bullish case does have strength for the equity markets, but in the absence of this, buying equities just on the back of some hope would be a dangerous gamble.

Gold Continues Its Decline

Gold prices are on the back foot today as investors didn’t get what they wanted from Fed officials yesterday when they downplayed the risk associated with Coronavirus. If we look at the fund flow of GDX ETF, one of the largest gold holding ETF by Vaneck, it shows that the total net money flow has been negative as of yesterday and this confirms the fact that the downward move in the gold price is also backed by institutions.

Moving forward, gold traders are going to be listening to the Federal Reserve Chairman’s comment very closely today and they will gauge his concerns about the outbreak of the virus. Among the gold bulls, the hopes are that he will acknowledge the fact that the outbreak is going to have an effect on the US economy. The fact is that the world supply chain is heavily disrupted and this is going to shave some serious basis points off global growth.

Given that the economic numbers coming out of China have not given us the actual picture about the health of the Chinese economy, Central Bank officials around the globe are not considering the virus impact as a major threat. I am not saying that this is going to halt the world’s global growth but we need to be very careful when we think about the impact of this virus.

UK GDP Ahead

As for the currency markets, Sterling is in focus among traders and it is the UK’s GDP growth which has engaged speculators. Sterling has been under tremendous pressure for the past few days and the 4th quarter’s GDP numbers are expected to be soft. A soft number may push the currency even lower but the blow could be ameliorated if we were to see  industrial production showing some sign of confidence. The GDP number q/q is expected to come in at 0.0% against the previous reading of 0.4% while the industrial production m/m data is expected to print 0.3% against the previous reading of -1.2%.