US Open – Carnage pause, Treasury yields remain heavy, Home Depot impresses, Oil looks vulnerable, Gold’s pullback, Bitcoin softens, LATAM under pressure

The day after the Dow’s worst drop in two years is showing a small bounce that is getting faded. It seems Wall Street is prepared to shift V-shaped recovery calls to U-shaped ones.  While China is showing progress with the coronavirus, the global spread continues as Afghanistan, Kuwait and Bahrain now have confirmed their first cases.  Optimism is growing in China as some regions end their travel bans and see a resumption of normal activities.  Financial markets however will not likely see a strong rebound until the virus stops spreading in the Middle East and Europe.  The Dow is down just over 5% from the record high that was made in the middle of this month.  Risk aversion could easily remain in place over the next couple weeks on pandemic fears and the investors may choose to wait to see if the selloff hits the 10% or 15% thresholds before jumping back in.

Treasuries/FX

Pandemic fears are fueling the safe-haven that could help the 10-year Treasury yields make a run toward 1.318%, the all-time low.  Even if the virus is contained in Italy, the damage has been done to sentiment.  Global recession fears will likely grow in the coming weeks and that should keep demand high for Treasuries. The dollar will play catchup and could shine against the euro and target the post-debt crisis low of $1.04.

JPY

Currency traders favorite risk aversion trade is getting complicated as Japan’s terrible outlook will likely see the Japanese yen struggle in delivering massive gains during severe risk-off moments. Japan will continue to see huge outflows in the coming the coming months as their growth outlook looks abysmal.

Home Depot

The largest home improvement chain bounced back after a few sluggish quarters of comp sales. Home Depot delivered a strong earnings beats, raised their dividend and affirmed their revenue forecast which implies they continue to expect a pickup this year. Home Depot’s results is the bright spot in today’s headlines and could provide other home improvements stores with a boost.

Lowes reports tomorrow and they could see a strong beat after targeted efforts to boost holiday sales.

LATAM

Developing nations remain vulnerable as the global growth outlook diminishes.  Investors in LATAM might start pricing in global weakness until the third quarter and that could spell significant downside in all the emerging markets.  The stronger dollar trade is likely to be supported as investors continue to buy US bonds.  A rally in Treasuries appears to be firmly in place as bond yields continue to slide even though other safe-havens, such as gold are pulling back a little today.

Mexico

This morning a couple key releases from Mexico shows the economy may have bottomed out in the fourth quarter.  Mexico’s economic activity in December came in slightly better than expected with the year-over-year reading climbing 0.68%, better than the analyst’s consensus of 0.5%.  On an annual basis, Mexico’s GDP dropped 0.5%, much worst that expected 0.4% decline.  With virus concerns firmly in place, expectations will be high for the Banxico to continue cutting rates.

Markets will pay a close look at tomorrow’s Mexico central bank inflation report.  Inflation is once again heating up and that will complicate calls for deeper rate cuts by central bank.  Downgrades to the growth outlook will not surprise anyone, but if the Banxico is overly concerned about higher inflation, rate cut bets could be pared back.

Colombia

Colombia’s economy is starting show chinks in the armor.  Fiscal consolidation has not gone as planned and nervousness could grow that they will not stabilize the debt to GDP levels.  The deficit is widening but when you look at the rest of Latin America, Colombia still remains attractive as they are still expected to post over 3% growth this year.

Oil

Oil prices remain fixated on concerns the coronavirus is slowly becoming a global pandemic.  Oil is somewhat stabilizing but remains very much at risk at breaking down again.  Yesterday’s drop was the worst one in seven weeks and with over week until OPEC’s next meeting, oil prices could remain stuck near yesterday’s lows.

Earlier in Riyadh, Saudi energy minister Abdulaziz reiterated no decision has been made on furthering cuts and markets will expect the Russians to wait until next week’s meeting.  If WTI crude breaks below the $49.25 a barrel level, not much support is there until lower mid-$40s region.

Gold

Gold prices are softer as markets take a day to process yesterday’s market carnage.  Just like in most bullish trends, pullbacks are healthy and today’s slide towards $1,650 an ounce could be viewed as a buying opportunity.  The Swiss have reported their first and concerns of the coronavirus will become a global pandemic will remain firmly in place.  If the $1,650 an ounce level holds, gold may not struggle too much to break the $1,700 an ounce level.

Bitcoin

It turns Bitcoin really isn’t a safe-haven asset.  The latest surge in new coronavirus cases outside of China has not seen Bitcoin be able to breakaway from the top end of its stubborn $6,500 to $10,500 range.  After a wave of positive headlines (renewed institutional interest, under 80 days till the halving event, optimism for improved mainstream usage possibly via Lightning Network), Bitcoin is suffering the fate of other risky assets.  If we see pandemic fears ease, Bitcoin could look to make another run at the top end of its range.

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.

Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya