Another way of gauging the impact of a black swan event, like the coronavirus is by having a financial market watch list of price movements.
Capital flows in commodities, emerging market currencies, and the debt market could give you a heads up on the severity of the coronavirus, albeit in the short term.
After all, if the official data is questionable at best, if the media is sometimes misleading, then why waste time analyzing it. Junk input data is going to give junk output analysis.
“Another way of gauging the impact of a black swan event, like the coronavirus is by having a financial market watch list of price movements”
What should we have on our financial market watch list to catch the next wave?
The currency market, particularly the US dollar index (DXY) should be on our financial market watch list.
The greater the severity the coronavirus poses to global supply chains and the global economy the greater will also be US dollar repatriation flows. In other words, the US dollar appreciation could unfold in a worsening coronavirus scenario.
The chart of the DXY shows the US dollar appreciating since mainstream announced the coronavirus outbreak in early January.
Although the DXY is heavily skewed towards the euro it gives us a good indication of how the US dollar is performing compared with other currencies.
Haven currencies, like the Swiss-franc, have also rallied since the beginning of January.
“The currency market, particularly the US dollar index (DXY) should be on our financial market watch list”
Emerging market currencies are also worth adding to the financial market watch list
Many emerging market currencies are currently testing key levels and are starting to breakdown. So emerging market FX is set for more pain if coronavirus worsens.
Emerging markets, most of which export raw export materials to China are at risk of weakening further in the short term if capital flows continue flowing to havens.
JP Morgan Emerging Currency Index, a basket of emerging market currencies, is testing key lows.
“Oil and copper have seen big moves, since the coronavirus announcement, based on demand shock being deflationary” – Win Investing
Emerging market stocks, the MSCI Emerging market Index, should also be on the financial market watch list
The MSCI, priced in US dollars is used to measure equity market performance in global emerging markets.
The ratio of the S&P 500 to the Emerging market Index has had a significant move over the last few weeks in favor of US markets.
So the virus spreading would favor US market and the USD compared to emerging equities and currencies
The commodities market should also be on the financial market watch list
Oil and copper have seen big moves, since the coronavirus announcement, based on demand shock being deflationary.
West Texas Spot has big support around 50USD if that breaks then the next support will be around 40 USD.
Moreover, demand shock could put pressure on the high yield corporate bond market, bearing in mind that highly indebted oil companies dominate the sector.
Copper has followed a similar pattern to oil.
Keep on your financial market watch list the 10y treasury yield as when the yield falls it is indicative of a risk-off environment
That lowers the opportunity cost of holding gold, thereby sending gold prices higher.