How Has The Coronavirus (COVID-19) effected the financial markets?
News of the outbreak of the deadly Coronavirus (COVID-19) disease in Asia has stolen the majority of headlines this week. Global markets were savaged on Monday 9th March 2020 with many people nicknaming the day as ‘Black Monday’. Just for some context, Investors were also alarmed after U.S. Treasury yields declined to record lows, with the benchmark 10-year yield falling below 40 basis points and the entire yield curve below 1% for the first time ever.
Furthermore, £130bn was wiped off the value of the FTSE 100 yesterday morning. These are some of the biggest crashes we have seen since the financial crisis in 2008. This has caused a major amount of volatility in the Forex markets, with traders making money from the large swings that are currently occuring. Lets have a look in more detail below about what is happening in the financial markets due to the Coronavirus (COVID-19) and how you can capitalise on these movements.
Current Market Patterns & Safe Havens Assets
Yesterday (09.03.2020) trading on Wall Street was suspended as the recent outbreak of Coronavirus (COVID-19) sent the Dow Jones industrial index plummeting by more than 2,033 points as it opened on Monday. This huge drop triggered an automatic ‘circuit breaker’ which suspended all trading on the Dow Jones for 15 minutes in a bid to avoid further economic damage to America’s top 30 publicly listed companies. This on its own shows the general feeling in the market at the moment. There is a large fear of a potential financial crisis due to the nature that the Coronavirus (COVID-19) consists.
For now, the damage has been done and today (10.03.2020) we witnessed a recovery in the markets. Oil recovered by 10%, and the FTSE 100 has rebounded. This is inevitable after such a drop. However, if the situation worsens and the mortality rate increases, then we should see further slippage in equities prices as risk-off trading takes hold and it should test the lows once again. This would be added confirmation for an impeding bearish market.
The story is similar for safe havens assets. Safe haven assets are investments that investors turn to during times of market volatility and instability, such as what the markets are currently experiencing. They do this to ‘weather the storm’. As you have probably guessed, safe haven assets are perceived to be ‘safe’ from market turmoil as they are somewhat negatively correlated to the overall performance of the financial market. This means that the value of safe haven assets usually increase and the market faces bearish pressure (a decrease).
Examples of safe haven assets include;
• US Government Securities (Bonds)
• Defensive Stocks
Currently, major banks are increasingly transferring investments from stocks into safe haven assets. This why we can see gold reached a new 7-year high on Monday (10.03.2020) to a level of US$1,703.32, as you can see below.
The Chinese Yuan has seen a general fall in its price against the US Dollar since 20th January, when the Coronavirus really started to become a global issue, focused in Wuhan, China. We expect to see the Chinese Yuan to further weaken against the US Dollar as expectations and delivery of further restrictions made by the People Bank of China (PBOC) put continued pressure on the Chinese economy.
However, with the recent fall in the NASDAQ, the USD:CHN has seen a decrease in its price after it experienced a sustained increase since 20.01.2020. You can see how this currency pair has moved, below.
Traders will be looking for confirmation of either further downside, or recovery. The true answer to this is down to how long all of this will last…
How should you trade in times like these?
From a trader’s perspective, the recent turbulence is seen as good news, as it produces volatility that can be capitalised upon. Indices globally are inherently Bullish on higher timeframes. We see numerous benchmarks such as the FTSE 100 and NASDAQ that are currently in slumps, but it is important to remember that this will only be temporary. We must be on our toes for the moment that the fear leaves the market and stocks start to recover. Eventually, they will reach the highs of previous situations barring any global financial crisis. Therefore, we will be looking for signs of a bullish run before entering any buys. These buys are likely to be longer holds as the target point will be greater. We would recommend to mainly trade major currency pairs, which are highly liquid and accompany an increase in fundamental indicators that you can utilise.
How long will this all last?
Regarding the duration of market impact, the most important factor will be how long the outbreak lasts. Dr Jenny Harries has recently said that new measures such as protecting the elderly and vulnerable are expected shortly, as the number of cases in the UK is expected to peak in around 10 days in the thousands. Despite this, Boris Johnson is so far refusing to follow Italy in putting any place any drastic measures in place. This could be due to the further negative effect it has on stocks and the economy. If governments can stop it before it reaches a SARS-type contagion level, the markets should continue to recover. The general feel for now is that this is just the start for Europe. For China, they recorded an increase of 40 cases yesterday which is the smallest increase for a while.
An opportunity to go short on the US Dollar will more likely be short-term trade, and will mainly derive from how much the Coronavirus (COVID-19) is spread in the near future. More importantly, it will depend on where the Coronavirus (COVID-19) spreads and how that affects that particular regions economy via things such as public closures and mass quarantines – such as the quarantine of 16 million people in Northern Italy (08.03.2020). As you can see in the chart below, this factor has had a large negative effect on the Euro which has seen recent bearish pressure.
Any form of public closure such as transport will negatively affect the economy and therefore related stocks. This will continue the fear factor in the markets and short positions will become more favourable due to the increase ‘risk-off’ nature of traders. The current situation is that 319 people in the UK have tested positive for Coronavirus (COVID-19), and five people diagnosed with the illness have died. The UK is currently experiencing an exponential increase in cases, therefore a continued downward pressure on the FTSE 100 and there GBP is expected to follow.
The Coronavirus (COVID-19) saga is not something we should ultimately fear just yet. We should look at it as opportunities to make money from the volatility it has caused by going short on the currencies that are linked to the economies that the virus is currently effecting the most. On the other hand, it is setting up some potentially lovely opportunities to go on these currencies for when the Coronavirus (COVID-19) starts to leave the front of all the newspapers, decreasing the fear factor that the world has currently been experiencing.
It is not going to stop just yet with cases expecting to peak in the UK soon. We should always trade carefully no matter what the situation, but our advice would be that trades should be monitored closely during times like this. Furthermore, these ‘choppy’ conditions can provide great opportunities to scalp the market.
Trade sensibly with the current news, make sure to set stop-losses and remember, WASH YOUR HANDS!