European open – Coronavirus, gold, oil

Europe Lower as Virus Fears Spread

Europe is heading for a weaker open on Monday, with traders rattled by the spread of Coronavirus over the weekend as China steps up efforts to contain it.

Source – Thomson Reuters Eikon

With most Asian markets closed around the Chinese New Year, it’s difficult to get an accurate gauge of how bad investors perceive the situation to be. That may become clearer as we make our way through the European and US sessions. But even in the thin trade we are seeing, it’s not encouraging and a 2% drop in Japan may just be the start.

With more than 2,700 people in China affected – possibly more by now – almost 500 critical and the death toll rising to 80, it’s obvious why people are so worried and why the authorities are taking such extreme measures to control the spread. Given the number of people travelling at this time of year, it’s hard to imagine these numbers not rising over the coming days, it’s just a question of by how much.

While I’m no fan of thinking about the economy and markets at times like this, it is clear that there are going to be knock-on effects. A 28.8% decline in travel numbers clearly highlights how severe the situation is and we’ll see plenty more numbers in the coming weeks that could be just as ugly, if not worse.

Investors at the moment are responding to the little information they have and we’re seeing clear moves into the traditional safe haven’s but with the vast majority of cases still contained within China, there’s no panic yet.

Gold seeing safe haven flows as numbers spike

Gold is the ultimate safe haven in times like these and as we’ve seen already in early trade, it’s popularity has spiked, just as it did earlier this year. We were already seeing evidence of it coming back into favour at the back-end of last week but interest has clearly jumped over the weekend as the situation has worsened somewhat.

Gold gapped on the open, rising as high as $1,586. It’s often difficult comparing situations but the yellow metal really struggled to maintain gains earlier this year above $1,600 as tensions between the US and Iran got out of hand. I expect we’ll see plenty of resistance around these levels again, should we approach them. We’re not far off now and that initial spike has already triggered some profit taking.

Gold Daily Chart

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Oil off 10% in a week as traders weigh up economic effects

Oil is taking another beating as economic concerns drag heavily on crude prices. Brent broke through $60 a barrel earlier in the session, down more than 2% on the day and around 10% from its peak a week ago.

Saudi Arabia has already sought to ease concerns about the impact on crude demand, highlighting the previous experience of SARS in 2003 and limited impact it had. That said, the supply/demand dynamics are not favourable right now so it was important the the Energy Minister stressed OPEC’s flexibility and capability to do more, should they need to. It may help stabilize prices which are now back at the lower end of where producers would like them to be.

Brent Daily Chart

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.