US Open – US and European stocks rebound on virus containment hopes, EZ PMI’s brew optimism, hard cliff fears are back for GBP, Oil steadies, Gold rally pauses

Monday’s price action on Wall Street is a tale of two markets.  Chinese stock markets returned from the extended Lunar New Year holiday to a sea of red.  The coronavirus continues to spread at rapid pace in China, with the Chinese death toll surging over 360, surpassing the number of fatalities of the SARS crisis two decades ago.  It is still too early to predict the peak of the virus, but we could learn a lot more over the next two weeks as containment measures appear firmly in place globally. 

Chinese stocks were pummeled with the CSI 300 closing 7.9%, the worst drop since 2015.  The bloodbath for Chinese stock markets saw over 3,200 stocks limit down, with over 95% of stocks in the Shanghai and Shenzhen recording losses.  Stocks finished off the lows as the PBOC signaled they are going to be aggressive in providing support.  The PBOC delivered two cuts to money market rates and injected 1.2 trillion yuan into the financial system, with it really being a net injection of 150 billion yuan as over 1 trillion-yuan short term funds matured. 

US and European stocks are rebounding in early trade on expectations that the coronavirus was mostly contained to China and that central bank stimulus from the PBOC and the rest of the world will keep on propping up stocks.  It seems many investors just want to ‘buy the dip’. This is just the beginning of help from the PBOC, but if we continue to see the virus have over 20% daily increases in both the death toll and number of cases, this will just become another dead-cat-bounce.  It will take a couple more weeks before markets are confident that the virus was mostly contained to China. 

EZ PMI

Euro-zone manufacturing data suggests optimism is brewing as order books stabilize.  Expectations will be high for the European factory rebound to continue once coronavirus concerns ease.  On the Brexit front, it has been relatively quiet as the 11-month transition periods begins for both sides to strike a trade deal.  After 47 years of EU membership, the UK begins the tough task of trying to secure a trade deal agreement that is as good as Canada’s with a fraction of the time.  The British pound weakened as expectations grow that the UK will not be able to secure a trade deal by the end of the year.  Hard cliff fears are back for sterling traders. 

Oil

Oil prices are off their lowest level in more than a year after Saudi Arabia ponders what it needs to do to stabilize prices.  OPEC + will have a two-day technical meeting starting tomorrow and expectations are high we could see a total reduction of 500,000 to 1-million barrels per day of additional cuts.  The start of the trading week saw West Texas Intermediate crude fall to the $50.42 level after reports that Chinese oil demand plunged by ~3 million barrels a day, which is about 20% of their total consumption. 

Oil prices will likely remain near the low $50s until we see further signs that China will see some return to normalcy with oil consumption.  Any extended cuts delivered by OPEC + will likely deliver rallies that will get sold into.  Oil prices will remain heavy until we see start to see some signs that the virus may be peaking. 

Gold

Gold prices are slightly lower as US and European stocks attempt to rebound following Friday’s rout.  Gold’s rally seems to be in pause mode as markets will likely see central banks globally be proactive to thwart any slump coronavirus concerns will trigger.  The PBOC went first and we will likely see further stimulus in Asia and from emerging markets.  The $1,600 an ounce level is initial resistance for gold and if that breaks early in the week, we could see bullish momentum target the $1,640 region. 

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