Abu Dhabi, UAEThursday 20 February 2020

Expect equities to suffer further as the coronavirus outbreak develops

The virus could also weigh down oil prices, says Gaurav Kashyap

A tourist wears a face mask near the Eiffel Tower in Paris, France. Several travel-related stocks such as airlines have weakened on anticipation of a hit on earnings because of the virus. EPA
A tourist wears a face mask near the Eiffel Tower in Paris, France. Several travel-related stocks such as airlines have weakened on anticipation of a hit on earnings because of the virus. EPA

As if 2020 didn’t throw up enough uncertainty and risk, we now have markets dealing with the spreading of the coronavirus. With more than 4500 reported cases in China as of this week, we are seeing a significant impact on global markets.

Oil prices now find themselves at more than three-month lows as markets fear the spread of the deadly virus could hurt global energy demand

Gaurav Kashyap

Several travel-related stocks such as airlines, for example, have weakened over the course of the week on anticipation of a hit on earnings. The Russell 2000 and S&P 500 suffered their biggest losses since October while risk assets also lagged. While historically markets tend to bounce back from similar virus outbreaks, such as SARS (severe acute respiratory syndrome), it was the discovery of two related cases in the US which have hurt risk sentiments. Expect equities to suffer further as the ferocity of the coronavirus outbreak develops and this will also weigh down oil prices.

Crude oil prices have suffered in January; the Crude West Texas Intermediary contract for March delivery is down around 8 per cent since the start of the month picking up downward momentum as the virus has picked up speed. Oil prices now find themselves at more than three-month lows as markets fear the spread of the deadly virus could hurt global energy demand. While we wait to see how the virus story plays out, crude will be susceptible to further downsides towards the channel of $50 a barrel where I expect buying support to come in. Opec, and Saudi Arabia's Energy Minister, Prince Abdulaziz bin Salman, have, have already committed that they are ready to prevent any destabilisation to oil markets.

Gold has been a big benefactor as a result of the risk-off sentiments. The precious metal peaked at $1,611 an ounce early on in the month and has comfortably stabilised above $1,550 levels. The Iran-US geopolitical developments led the initial rally, with the market uncertainty keeping it propped up. While it may be too premature to pile into the recent gold bull run, explore long opportunities in the precious metal at around $1,490 levels, with upsides capped at $1,611 in the month ahead.

Looking at the economic calendar, we have the US Federal Open Market Committee rate decision on Wednesday. No changes in lending rates are expected and I expect the Fed to maintain the balanced tones seen in their last meeting. While they may allude to contagion risk as a result of the virus outbreak, this effect should be muted, judging by previous historical outbreaks. The Bank of England announces rates on Thursday with no changes expected.

Looking further ahead, we await the ISM manufacturing data points from the US, due out on February 3. Expect to see some growth in that number, however, it should still come in within the contractionary range of sub 50 levels. Nonfarm payrolls in the US follow on February 7 with expectations for a positive reading of 150,000 while once again the Average Hourly Earnings will be a crucial gauge into US price pressures. Rounding off the economic calendar for the next two weeks is the overall UK gross domestic product figures due on February 11 and US inflation data due on February 13.

UK GDP is expected to be largely unchanged; expectations are for a reading of 0.4 per cent on the quarter-on-quarter figure while year-on-year growth is expected at 1.1 per cent. US inflation data, meanwhile, will be interesting and could see some intraday volatility at the time of release. Month-on-month Consumer Price Index data in the US is expected to grow to 0.3 per cent, from a previous reading of 0.2 per cent, while core prices — minus food and energy — are expected to grow to 0.2 per cent in January.

While my previous article noted downsides in the euro/ US dollar currency pairing, this is set to continue. I explored shorting the euro/dollar at $1.1150 levels and the trade call looks to have materialised even greater than expected. At the time of writing the pairing was trading just above $1.10 levels — expect some buying support to come in at $1.0980 levels after which we should see some small upward bounces in the common currency.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

Updated: January 28, 2020 01:18 PM

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