With markets reeling and the yen acting curiously trades look for the ultimate safe haven, which could be gold, writes Adam Button.
Major U.S. indices sustain their fourth biggest percentage daily decline since 2011 as the escalating outbreak of the Coronavirus in Italy and rapidly rising numbers in South Korea emphasize the gravity of the situation.
Ten-year Treasury yields hit a fresh four-year low at 1.35%. The Cboe Volatility Index (VIX) jumped 50% today. The Japanese yen (JPY) was the best performer of the day, followed by the euro (due to unwinding of the euro funding carry trade), while the Canadian dollar (CAD) and British pound (GBP) are the worst performers.
New Coronavirus cases in China continued to sag with only 409 newly announced on Sunday, but the market has shifted its attention to other possible outbreaks. The situation in Iran remains murky and could be severe, but it's Italy and South Korea that have spooked the market.
Confirmed cases in Italy jumped from only three on Friday morning to 155 by Sunday and the country took dramatic action as it seeks to find the source, including banning public events in some areas near Milan. Italy's top football league canceled at least three games and schools have been closed for two weeks.
Similarly, cases in South Korea have jumped to 763 early Monday from just 31 on Feb. 18 and officials have raised the public alert system to its highest level.
The World Health Organization (WHO) said there was still a chance to contain the virus outside of China but that “the window of opportunity is narrowing”. What's particularly worrisome is the number of cases that have no clear link to China or other clusters of cases.
Many markets have seemingly ignored the risks around the virus until fears kicked up late on Friday. However, bonds have been consistent in flagging fears. The biggest losing shares of the day have been American Airlines Group (AAL) down 9.8%, Norwegian Cruise Lines (NCLH) down 9.2%, Carnival Corp. (CCL) down 8% and Royal Caribbean Cruises (RCL) down 8%.
Gold surged $30 to $1,689, hitting the $1,680 target signaled on Friday.
With virus fears and outbreaks widespread many market participants are struggling to understand what currencies to buy and avoid, especially in light of the squeeze in the yen last week. The U.S. dollar remains a solid bet but is subject to Federal Reserve risk. The more straight-forward trade continues to be gold as it breaks out technically and with central banks and fiscal authorities increasingly likely to loosen policy.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
