Gold is trading below $1,600 despite the risk-off sentiment stemming from coronavirus fears.
Experts talking to Bloomberg have said that the yellow metal has been hurt by margin calls as several funds needed the cash amid the stock market crash. The metal is used to a liquid asset that occurs in the equity market, according to Standard Chartered.
Others say that overbought conditions have triggered profit-taking.
Beforehand, safe-haven flows have pushed XAU/USD to a seven-year high of $1,689.
Gold has reached hit a low under $1,585 at the time of writing. It is hitting the 200 Simple Moving Average on the four-hour chart, suggesting a potential bounce. However, the Relative Strength Index is still above 30, thus outside oversold conditions.
Nevertheless, after this sharp correction, XAU/USD has room to rise, especially if Covid-19 remains a scare.
See Gold may top $1,800 as coronavirus in Italy propels market panic – Interview with Kathleen Brooks
-- more to come
The World Health Organization has said that the coronavirus outbreak's risk impact is very high at the global level. It has said that the continued increase in Covid-19 cases in recent days is a concern.
The WHO also put Italy and Iran in the spotlight and added that no fewer than 20 vaccines are in development.
More and more countries have confirmed cases of the respiratory disease in recent days, with the focus shifting away from China to South Korea, Italy, Iran, and also Nigeria. Over 80,000 infections have been counted worldwide.
Stock markets have tumbled down throughout the week and are extending their drops on Friday.
Data released on Friday, showed consumer spending rose 0.2% in January and income 0.6%. Analyst at Wells Fargo highlight the core PCE deflator came in at 1.6%, which is below the Federal Reserve’s target
“Amid pandemic fears gripping financial markets this week, a run of solid economic news continued this morning with a report that personal income rose a solid 0.6% in January.”
“Personal spending was a little softer than expected in January, rising 0.2% compared to the 0.3% consensus expectation. After adjusting for price, real consumption rose a scant 0.1% in January, suggesting a slowing trend going into the first quarter.”
“The core PCE deflator came in at 1.6%, which remains comfortably below the Fed’s target. Inflation would not be an impediment to any potential Fed response to the current crisis.”
- Consumer sentiment in US improves in February despite coronavirus.
- US Dollar Index stays in positive territory near 98.60.
The University of Michigan's Survey of Consumers revealed that the Index of Consumer Sentiment in February improved to 101 (preliminary) from 99.8 in January. This reading came in slightly higher than the previous estimate and the market expectation of 100.9.
Commenting on the survey's findings, "the coronavirus was mentioned by 8% of all consumers in February when describing the reasons for their economic expectations," noted Surveys of Consumers chief economist, Richard Curtin. "However, on Monday and Tuesday of this week, the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices as well as the CDC warnings about the potential domestic threat of the virus."
USD stays resilient
Despite the fact that the 10-year US Treasury bond yield is at fresh all-time lows with a daily decline of more than 7%, the US Dollar Index is up 0.2% on the day at 98.59.
The Canadian economy sputtered into year with expenditure-based real GDP rising by a muted 0.3% in Q4, in line with the market consensus and projections from the Janaury MPR. Details were slightly downbeat on balance, according to economists at TD Securities.
“Q4 GDP printed in line with the market consensus at 0.3%, but industry-level growth for December outperformed at 0.3% m/m (TD: 0.2%, market: 0.1%) on broad strength in goods and services.”
“The soft Q4 data will do little to bolster confidence in the near-term outlook but the strong handoff from December should help offset some of the headwinds that will weigh on Q1. We're still tracking Q1 growth near BoC projections, and do not think this print gives the Bank further incentive to cut next week.”
“Global rates markets are pushing yields substantially lower this morning, and Canadian fixed income will continue to take their cue from outside forces.”
- Risk aversion continues to dominate financial markets on Friday.
- S&P 500 Financials Index falls nearly 4% on plummetting Treasury bond yields.
- All 11 major S&P 500 sectors lose more than 2% in early trade.
Major equity indexes in the US started the day sharply lower amid heightened fears over the coronavirus outbreak causing a global recession. As of writing, the Dow Jones Industrial Average was down 3.6% on the day while the S&P 500 and the Nasdaq Composite were erasing 3.65% and 3.25%, respectively.
Investors continue to seek refuge
Reflecting the intense flight-to-safety, the 10-year US Treasury bond yield was last seen erasing 7.7% at fresh all-time lows of 1.165%. Pressured by the plummeting yields, the S&P 500 Financials Index is down 4% on the day. In the meantime, the CBOE Volatility Index, Wall Street's fear gauge, is now at its highest level since February 2018 at 41 points.
Among the 11 major S&P 500 sectors, which are all losing more than 2% on Friday, the Consumer Staples and the Real Estate indexes are both down nearly 5%.
Earlier in the day, the data published by the US Bureau of Economic Analysis showed that Personal Income in January increased 0.6% on a monthly basis while Personal Spending only increased 0.2% in the same period.
EUR/USD has surged as coronavirus fears sent the dollar tumbling down. Early March's daily chart shows where this rally may end, Yohay Elam from FXStreet analyzes the technical outlook of the pair.
“EUR/USD has made an impressive recovery bounce from the lows of 1.0777, where the Relative Strength Index on the daily chart was below 30 – indicating oversold conditions.”
"The recent rise has lifted momentum – yet it still leans to the downside. EUR/USD temporarily topped the 50-day Simple Moving Average but was rejected at the 100-day SMA.”
“Support awaits at 1.0985, a low point in December. The former double-bottom from September, at 1.0940, is more significant.”
“Resistance awaits at 1.1050, the late February high which also converges with the 100-day SMA. The round level of 1.11 also held the pair down in January and converges with the 200-day SMA.”
- WTI drops and rebounds from $44.70, 2020 lows.
- OPEC+ could announce larger oil output cuts.
- US oil rig count coming up next in the NA session.
Prices of the WTI dropped to fresh lows in the $44.70 region earlier in the session, where appears to have emerged some contention.
WTI weaker on coronavirus, looks to OPEC+ meeting
Nothing new around crude oil prices, with rising concerns on the Chinese COVID-19 and its potential impact on the economy and the demand for the commodity keeping traders’ sentiment well depressed.
In addition, crude prices stayed quite sceptical after news cited that the OPEC+ could announce deeper oil output cuts (1M bpd ish) at its meeting in Vienna on March 5-6, all in response to revitalize prices amidst the coronavirus jitters.
It is worth noting that prices of the American reference for the sweet light crude oil are down more than 30% since yearly tops near the $66.00 mark per barrel (January 8th) to earlier YTD lows around $44.70
Moving forward, driller Baker Hughes will publish its weekly report on US oil rig count, closing the docket for the week.
WTI significant levels
At the moment the barrel of WTI is losing 2.38% at $45.09 and a breach of $44.68 (2020 low Feb.28) would ai for $42.20 (2018 low Dec.24) ahead of $41.83 (2017 low Jun.21). On the other hand, the next resistance of note emerges at $49.31 (low Feb.4) seconded by $50.66 (21-day SMA) and then $54.40 (monthly high Feb.20).
Markets have long priced some degree of easing by the Fed. Until recently much of this was priced to occur later in the year and was to a limited extent (around one and a half cuts by December). Now, markets are pricing three cuts in 2020, strategists at ABN Amro inform.
“In just the past week, markets have come around to fully pricing a cut as soon as April, two cuts by June, and three cuts by the end of 2020 – all of this driven by concerns over the coronavirus fallout.”
“The US government has yet to implement measures quite as severe as those affecting Asia and parts of Europe, but the economy will no doubt be affected by the reduced trade and tourism that results from measures taken elsewhere.”
“As the impact on growth becomes more tangible, our view is that the Fed will implement a rate cut in Q2, and the increasing downside risks to growth suggest that such a cut is likely to come sooner rather than later.”
- The S&P 500 is down more than 15% in only seven days.
- The S&P 500 is trading below the 200-day simple moving average (DMA).
- The Coronavirus spread is sending global markets into panic.
S&P 500 daily chart
Additional key levels
- 10-year US Treasury bond yield is losing more than 6% on Friday.
- US Dollar Index registers small daily gains near 98.50.
- Wall Street's main indexes opened more than 3% lower.
The USD/JPY pair extended its daily slide during the early trading hours of the American session and touched its lowest level since February 3rd at 108.46. As of writing, the pair was trading at 108.50, erasing 1% on a daily basis.
Although the macroeconomic data releases from the US helped the greenback gather strength, the flight-to-safety doesn't allow the pair to stage a rebound.
DXY looks to end the week on a strong note
The US Bureau of Economic Analysis reported that the annual core PCE inflation in January ticked up to 1.6% and Personal Income increased 0.6% on a monthly basis to surpass the market expectation of 0.3%. The US Dollar Index (DXY), which tested the 98 handle earlier in the day, was last up 0.2% at 98.60.
Meanwhile, St. Louis Federal Reserve bank president James Bullard on Friday said that a Fed rate cut was possible if the coronavirus were to turn into a global pandemic but added this was not the base case scenario.
On the other hand, the 10-year US Treasury bond yield id erasing more than 6% for the second straight day on Friday and Wall Street's main indexes are down more than 3% to reflect the dismal market mood, which helps the JPY preserve its strength.
Later in the session, the University of Michigan's Consumer Confidence Index from the US will be looked upon for fresh impetus.
Technical levels to watch for
Economists at ABN Amro remain of the view that the ECB will announce additional stimulus in the coming months as economic growth and inflation will likely disappoint ECB expectations.
“We now expect a package to be announced in June rather than the upcoming meeting in March. This is because ECB officials have signalled that it is too early to make a judgement about whether the medium-term outlook has changed in the face of the economic shock related to the spread of the coronavirus.”
“We expect the ECB to cut its deposit rate by 10bp, announce a step-up of net asset purchases to EUR 40bn and increase the maturity of TLTRO loans by another year at the June Governing Council meeting.”
“A full 10bp ECB rate cut is now priced in for the July meeting, while a week ago, only a 60% chance of a cut was priced in by the end of this year. This is only a little later than our updated base case for the ECB.”
- EUR/JPY collapses to the vicinity of the 119.00 mark.
- Persistent demand for safe havens supports the Japanese yen.
- German flash CPI came in better-than-expected in February.
The strong comeback of the Japanese yen has undermined the recent recovery in EUR/JPY, exposing it to another visit to the 119.00 neighbourhood, or weekly lows.
EUR/JPY focused on coronavirus
EUR/JPY is reversing two consecutive daily advances at the end of the week, returning to the 119.00 area after being rejected from weekly tops near the 121.00 mark on Monday and Thursday.
The Japanese yen appears to be investors’ preferred safe haven in the past couple of sessions in response to heightened concerns surrounding the fast-spreading (and still out of control) COVID-19, forcing both EUR/JPY and USD/JPY to recede from recent tops.
In addition, the cross remained largely apathetic on the better-than-expected flash inflation figures and results from the labour market report in Germany, while concerns over the possibility of the Japanese economy entering into recession in the next months now looks somewhat subsided.
EUR/JPY relevant levels
At the moment the cross is losing 1.18% at 119.08 and a drop below 118.46 (2020 low Feb.18) would aim for 117.07 (monthly low Oct.7 2019) and finally 115.86 (2019 low Sep.3). On the other hand, the next resistance lines up at 120.92 (55-day SMA) followed by 121.39 (weekly high Feb.20) and then 122.65 (monthly high Dec.13).
Q4/2019 GDP growth slowed to 0.3% as 'transitory' factors explain some but not all of the slowing. Early 2020 also likely to be soft, and BoC likely to cut rates, in the opinion of Nathan Janzen from RBC Economics.
“Headline GDP increased just 0.3% in Q4 2019. That was broadly in line with market expectations, and matched the Bank of Canada's last forecast.”
“Consumer spending was surprisingly solid in Q4 given earlier lackluster retail sales data, but business investment was softer than assumed and net trade was a larger drag on growth than expected.”
“There were some signs of stabilization in today's data but growing fears about the potential impact of the new coronavirus outbreak abroad, and another bout of disruptions to rail transportation from anti-pipeline protests mean growth is likely to remain weak, at least for the first half of 2020.”
“We continue to look for the Bank of Canada to cut rates at least once in the months ahead.”
- GBP/USD comes under some selling pressure amid persistent Brexit-related uncertainties.
- A modest USD rebound from multi-week lows further contributed to the intraday slide.
The intraday selling around the British pound picked up pace during the early North-American session and pushed the GBP/USD pair below mid-1.2800s or fresh YTD lows.
Persistent uncertainty about the future UK-EU trade relationship continued weighing on the sentiment surrounding the sterling and failed to assist the pair to capitalize on its early attempted positive move to an intraday high level of 1.2920.
GBP/USD weighed down by a combination of factors
It is worth recalling that the EU's mandate on the post-Brexit negotiations emphasized on the need for a 'level playing field' while the UK threatened to walk away from trade talks on WTO rules in June unless there is the "broad outline" of an agreement.
Apart from the Brexit-related jitters, the pair was further pressurized by a modest US dollar bounce from multi-week lows. However, the ongoing slump in the US Treasury bond yields to all-time lows might cap the greenback and help limit losses.
It will now be interesting to see if the current leg down marks a fresh bearish breakdown of the pair is able to find some buying at lower levels as the focus now shifts to the start of the crucial UK-EU Brexit negotiations, starting next week.
Technical levels to watch
- Canadian economy recorded a 0.3% growth in January; expanded 0.3% in Q4 2019.
- The data, a modest bound in oil prices did little to provide any respite to the loonie.
- US bond yields bounce off all-time lows and extended some support to the USD.
The USD/CAD pair edged lower during the early North-American session, albeit maintained its strong bid tone near nine-month tops post-Canadian GDP report.
The pair added to its weekly gains and continued scaling higher for the third consecutive session on Friday amid the ongoing slump in crude oil prices, which tend to undermine demand for the commodity-linked currency – the loonie.
Bulls remain in control
The Canadian dollar failed to gain any respite from better-than-expected domestic GDP growth figures, showing that the economy expanded by 0.3% during the first month of 2020 as compared to a modest 0.1% expected and previous.
Meanwhile, the growth for October-December quarter matched consensus estimates and stood at 0.3% annualized pace, albeit was largely negated by a downward revision of the previous quarter's growth to 1.1% as against 1.3% reported earlier.
The readings marked a further deceleration from a strong growth of 3.7% recorded in the second quarter of 2019 and did little to provide any meaningful impetus to the major. The pair held steady just below mid-1.3400s and was further supported by an uptick in the US dollar.
A modest recovery in equity markets allowed the US Treasury bond yields to stall the recent slump and bounce off all-time lows. This eventually extended some support to the greenback and remained supportive of the bid tone surrounding the major.
Technical levels to watch
GDP growth slowed further in the quarter from the upwardly revised print of 5.1% (from 4.5% earlier) in Q2 FY20. This marks the third consecutive quarter of moderation, economists at ANZ Research brief.
“At 4.7%, India’s Q3 FY20 GDP print slowed, compared with an upwardly revised print of 5.1% (from 4.5% earlier) in the previous quarter.
“The slowdown was led by a sharp decline in investment while government spending moderated. Private consumption and net exports contributed positively to growth in the quarter.”
“Today’s muted growth reaffirms the continuation of unconventional monetary policy. We expect a rate cut once ongoing inflationary pressures subside.”
Escalating geopolitical tensions related to Syria had a strong impact on the lira, which plunged to the lowest level versus the dollar since September 2018, strategists at Rabobank report.
“33 Turkish soldiers were killed in an airstrike in the northwestern Syrian province of Idlib. ‘Assad and regime forces (supported by Russia) will pay a heavy price for this heinous attack,’ Turkey’s Vice President Oktay said.”
“Despite a clear escalation of tensions it is encouraging that President Erdogan and President Putin discussed the latest developments in Syria that was ‘devoted to the need to do everything to fulfil the original agreements on the Idlib de-escalation zone,’ Russia’s Foreign Minister Lavrov said.”
“USD/TRY has reached another crucial technical juncture in the form of a resistance area around the 6.25 level. State banks may defend it by selling USDs, but as long as global markets are in a panic mode and geopolitical risk remains elevated, they may not be able to prevent a break higher in USD/TRY.”
The spread of the coronavirus continues to keep its grip on global markets to end the week, although base metals have held their ground relatively well, all things considered, in the opinion of analysts at TD Securities.
“The combination of fiscal stimulus and monetary stimulus in China to temper the virus' effect, along with the growth in new cases now taking place outside of China, suggest the worst may be behind the Middle Kingdom and offers base metals a semblance of support.”
"The renewed weakness in markets has seen CTAs turn sellers in copper, although the selling program is coming to a close, while it is also important to note that funds in our China Smart Money Index remain comfortably long the red metal. Meanwhile, systematic trend followers are set to add more meaningful downside flow in lead should prices close the week below $1828/t.”
- USD/JPY is dropping sharply below the 110.00 figure as the market is nearing the 200-day SMA.
- The level to beat for bears is the 108.25 support.
USD/JPY daily chart
USD/JPY four-hour chart
Additional key levels
The Federal Reserve could possibly opt out for rate cuts if the coronavirus outbreak intensifies and turns into a global pandemic, St. Louis Federal Reserve bank president James Bullard (non-voter) said on Friday but added it was not the base case scenario.
"The base case is that the Fed policy is in a good place, with insurance cuts from last year helping buffer against shocks," Bullard further explained. "The economic impacts of the outbreak will be noticeable in China but will be on a smaller scale elsewhere with temporary disruptions to global supply chains.
Following these comments, the US Dollar Index stays in the positive territory near the 98.50 mark.
In terms of the CEEMEA currencies, the Russian ruble remains on track to end February as the weakest currency amongst its EM peers, strategists at Rabobank apprise. USD/RUB is trading at 67.308.
“The precipitous fall in oil prices squeezed USD/RUB from around 61 at the beginning of January to the August/September top at 67.00.”
“It is a classic parabolic move that will be at some stage at least partially reversed, but at the time when the markets are driven by fear USD/RUB may extend its gains towards the 2019 high at 69.8181.”
“Apart from the sharp fall in oil prices, escalating geopolitical tensions related to Syria also weighed on the ruble.”
Fresh rumours about a fiscal impulse in Germany, according to a Bloomberg report, ‘an official familiar with the plan’ had signalled that Germany’s finance minister Olaf Scholz was considering to temporarily suspend Germany’s debt brake rule to allow for extra investment spending by municipalities, economists at ABN Amro report.
“The news was well-received by financial markets as Germany has been put under a lot of pressure by the ECB to ease fiscal policy, considering that it is one of only a few countries that has a surplus on the budget balance and a debt ratio of below 60%.”
“According to the current plans, fiscal policy will be modestly expansionary in Germany this year and the next. The current projections are for a decline in the structural budget surplus from around 1% in 2019 to 0.5% in 2021. This means that there is room for extra stimulus of at least 0.5% GDP (around EUR 18bn) in 2020-21.”
“There have been rumours in the press about significant extra spending by Germany’s government before, while Germany’s finance minister has repeatedly said that he would only consider this in case of an economic crisis. Therefore, we remain cautious in forecasting an investment boost that would considerably improve the eurozone economic outlook.”
- DXY regains poise and challenges the 98.50 region.
- Decent support emerges in the boundaries of the 98.00 mark.
- US Core PCE rose below estimates 0.1% MoM and 1.6% YoY.
The greenback, when tracked by the US Dollar Index (DXY), has regained the positive ground and is now holding on to the 98.50 region.
US Dollar Index ignores data, looks to coronavirus
The index has managed to not only reverse the initial pessimism that dragged the buck to lows near 98.00 the figure, but also to regain traction and return to the upper end of the range near 98.50, all amidst alternating risk appetite trends and despite unabated concerns around the coronavirus.
In the data space, inflation figures measured by the PCE showed prices rose 0.1% on a monthly basis in January and 1.7% from a year earlier, while prices gauged by the Core PCE gained 0.1% inter-month and 1.7% on a yearly basis.
Extra data showed Personal Income rising above estimates 0.6% MoM and Personal Spending expanding less than forecasted 0.2% MoM. Later in the day, the final U-Mich index is due seconded by the Chicago PMI and the weekly report on US oil rig count by Baker Hughes.
What to look for around USD
The index charted the largest single-day drop since late August 2019 on Thursday, as markets remain in panic-mode in response to the advance of the COVID-19 outside of China, which at the same time re-ignited speculations that the Fed could move on rates in the very near-term. The outlook on the buck now looks somewhat compromised: despite further retracements are not ruled out, its outlook still appears constructive and bolstered by the current “appropriate” monetary stance from the Fed (once again confirmed at the FOMC minutes last week) vs. the broad-based dovish view from its G10 peers, the “good shape” of the domestic economy, the buck’s safe haven appeal and its status of “global reserve currency”.
US Dollar Index relevant levels
At the moment, the index is gaining 0.04% at 98.43 and faces the next support at 98.02 (weekly lows Feb.28) seconded by 97.83 (200-day SMA) and then 97.75 (61.8% Fibo retracement of the 2020 rally). On the flip side, a breakout of 99.09 (23.6% Fibo retracement of the 2020 rally) would open the door to 99.91 (2020 high Feb.20) and finally 100.00 (psychological barrier).
Silver and platinum continue to feel the worst pain of the precious metal complex, as they lack the same beta to safe-haven and monetary policy flows that support gold, economists at TD Securities inform.
“Silver and platinum are suffering from industrial demand worries, via the spread to South Korea and Europe in particular, on top of having skewed positioning in the same manner as gold.”
“The outsized down moves have seen momentum signals firm to the downside for both silver and platinum, turning CTAs sellers.”
“While algo selling in silver is only marginal above $16.92/oz, platinum could well see a heavier round of CTA selling, into net short territory, should prices fall below $872/oz.”
Despite the turmoil in markets, and the worst week for equity markets since the financial crisis, gold and its precious metal peers have joined the selling party, analysts at TD Securities report.
“We believe the sell saw in gold is due to extremely stretched positioning, as both the number of long positions and the number of traders long are at record levels, which elevated the risk of a meaningful pullback off the highs.”
“As observed in previous episodes of market turmoil, gold will often be sold to generate liquidity and cover margins.”