Dow Jones, Gold Prices Fall as Yen Soars on Virus Fears. Where to Now?

March 2, 2020

London (Mar 2)  Declines of -11.49%, -12.36% and -10.97%, these are last week’s performance in the S&P 500, Dow Jones and Nasdaq respectfully. We have not witnessed such an aggressive decline in sentiment on Wall Street over a 5-day period since 2008. The fragility of the U.S. housing market was at the epicenter of the previous episode, this time around it is the ongoing outbreak of the coronavirus.

The anti-risk Japanese Yen stood tall, seeing its best average performance against the US Dollar, Australian Dollar, British Pound and Euro since June 2016. The Greenback flipped from gains to losses. On the one hand, its haven-linked appeal is an asset during times of market pandemonium. On the other hand, it has room to lose its relatively high yield advantage.

Anti-fiat Gold, which is typically associated with a “safe-haven” status, underperformed against all odds. Do not underestimate the premium for liquidity during times like these, of which the precious metal loses out against its fiat competitors. Though in the medium-term, it remains high on historical terms. The yellow metal could have room to benefit from what is appearing to be even looser credit conditions ahead.

Sentiment-linked crude oil prices extended the aggressive selloff from the beginning of this year as the commodity closed at its lowest since the beginning of 2019. The Canadian Dollar likewise largely underperformed this past week. Oil is a key source of revenue in Canada and lower energy prices can exhibit domestic deflationary pressures, perhaps fueling monetary easing expectations.

Central bankers are taking note of the situation, with Fed Chair Jerome Powell alluding to an imminent rate cut on the horizon. Yet, room for maneuver is constrained as most major central banks were not able to unwind easing efforts successfully in the aftermath of the Great Financial Crisis. This places the weight on fiscal response to counteract downside economic threats.

Most new coronavirus cases are now being reported outside of China, with places like South Korea and Japan being closely watched. More reports risk further dampening sentiment on top of next week’s key event risks. These include both economic and political. The incoming “Super Tuesday” from the United States will likely reveal who could be Donald Trump’s challenger in November.

OPEC officials will be meeting in Vienna with the coronavirus epidemic threatening global demand further. The Bank of Canada meets to set rates. All eyes at the end of the week turn to the U.S. jobs report. The EU and UK continue with ongoing trade talks to see if both can progress towards a deal. Keep a close eye also on the latest economic outlook update from the OECD.


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