As equity markets recoil from the increasing spread of Coronavirus, it will become painfully obvious (in some cases) that a diversified portfolio of asset classes is a prudent strategy. Volatility creates opportunity!
Commodity and foreign exchange markets allow clients to efficiently establish (short) and (by definition) long positions with ease (e.g. Short USD- Long XAU short JPY-long USD) to hedge against and speculate in exaggerated moves.
Coronavirus is having a massive effect on anything China-related whether it is those businesses dependent on China exports to those dependent on Chinese consumers, and the knock-on effects are becoming more pronounced.
A quick checklist will reveal mobile telephone companies, mass luxury goods providers, motor vehicle companies, airline companies, freight companies, tourism-related businesses to name a few. Hong Kong property prices are set to tumble and there will be knock-on effects in property markets in Australia, New Zealand and Canada which are heavily exposed to leveraged Asian investors.
I fear this week will be a tough week for those with predominantly stock portfolios.
Last week, the Japanese yen was on the back foot, largely because Japanese annualized Gross Domestic Product fell to negative 6.3% for the 4th quarter. The US dollar had a hand in affairs too as it continues to surge against many other currencies. Both UK and Canadian inflation gauges surprised to the upside putting yet more pressure on the yen which only recovered slightly against the US dollar on Friday as Japan CPI met analysts’ expectations
This week, we look forward to US consumer confidence numbers, GDP figures from the US and Canada, and German and US inflation metrics. The effects of Coronavirus on equity markets will be keenly watched as fatalities mount outside of China and industries are stalling as demand and supply factors for Chinese goods are restricted. Gold will inevitably be a talking point too as it tests yearly highs and gathers support as either a safe-haven hedge or inflation hedge.
US consumer confidence, out on Tuesday is the first major economic release of the week. Although analysts expect the number to improve to 132 in February from January’s 131.6, I’m not convinced this will be the case.
ECB president Lagarde speaks in Germany on Wednesday and will be aware of the mounting cases of Coronavirus in Europe.
On Thursday, the US releases 4th quarter GDP figures with expectations of an annualized reading of 2.1%.
On Friday, German CPI is expected to remain steady at 1.7% Y/Y for February. Fourth-quarter Canadian GDP (annualized) which is released in the afternoon is expected to fall to 0.3% although the December figure is likely to be more positive at 1.6 % (Y/Y). US Core PCE (Y/Y for January) is expected to rise to 1.7%.
I will be monitoring equity markets, the VIX, the dollar, gold and oil.
Good Luck and Good Trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You Can Too.
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