Coronavirus outbreak revives economic fears

4 mins read

By Lukman Otunuga, Senior Research Analyst at FXTM


“When China sneezes, the world catches a cold.” It’s worth resurrecting this old (modified) adage as the coronavirus outbreak has revived economic fears and rattled equities across the world.

A wave of risk aversion is flooding financial markets, with Asian shares flashing red on Tuesday as concerns over the economic cost of China’s coronavirus drain investor confidence. It remains unclear how much the virus has disrupted consumer spending and business confidence in China. However, the tourism sector remains directly in the firing line.

We expect the negative sentiment from Asia to spread to European markets Tuesday morning and possibly trickle down to Wall Street later in the day. Rising fears around the virus spreading further is forcing market players to distance themselves from riskier assets with destinations like the Dollar, Japanese Yen and Gold becoming increasingly better bid.


US consumer confidence in focus


Elsewhere, the Dollar held steady against a basket of major currencies on Tuesday ahead of the Conference Board consumer confidence report scheduled for release later in the day.

King Dollar is in a position of strength and remains attractive to investors based on the improving US economic outlook and its safe-haven status. Buying sentiment towards the Greenback should jump if the confidence data meets or exceeds market expectations.

Focusing on the technical picture, the Dollar Index is trading around 98.00, just above the 100-day moving average. Upside momentum may open a path towards 98.50 in the short term.


Oil plunges deeper into the abyss on virus fears


Oil prices were treated without mercy on Monday, tumbling more than 3% to hit levels not seen in three months as concerns jumped over China’s coronavirus outbreak reducing demand for fuel.

Although the commodity is trying to stabilise on Tuesday, the path of least resistance points south as long as the virus concerns remain a dominant theme. China is the world’s second largest oil consumer, so a slowdown in demand has the potential to disrupt oil markets in the medium to longer term.

The technical picture paints a heavily bearish setup for WTI Oil with prices trading around $53.15. A solid daily close below $52.00 may open the doors towards $51.00 and $49.50.


Commodity spotlight – Gold


Gold has entered the week with an attractive glow thanks to the market caution.

Investors are seen avoiding riskier assets with safe-havens like Gold becoming popular destinations as virus fears intensify. The precious metal could challenge $1600 this week as uncertainty remains a major theme. A solid daily close above $1580 should encourage a move towards $1589 and $1600, respectively. Alternatively, if $1580 proves to be unreliable support, prices could journey back towards $1555.


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