US Open – Pandemic Panic, Treasury yields in freefall, Bernie vs Trump, Oil’s bloodbath, Gold eyes $1,700 and beyond

All the major indexes around the globe are selling off as global contagion fears intensify.  The coronavirus is spreading, reaching Italy, Europe’s fourth largest economy and spreading into the Middle East, with cases spreading into Iran and Oman.  Much of the resilience of US stocks has been that China contained the virus and that the economic impact would be short-lived as the Chinese would deliver massive stimulus that would make this recovery V-shaped.  Risk aversion appears here to stay as the impact of the virus is already showing up in the US (US Markit services PMI data) and on growing fears the virus spreading is accelerating globally.

Treasuries

Pandemic panic is spurring high demand for Treasuries that could take the 10-year yield well beyond the 1.32% record low that was made in the summer of 2016.  The 30-year Treasury bond yield already hit a record low and all signs are supportive for escalating worries to keep yields falling across the curve. Some traders are scratching their heads that the dollar is not much stronger despite the strong move in Treasuries, but it seems FX remains trapped in a low volatility environment.  If US stocks hit correction territory and the 10-year Treasury yield falls well below the 1.318% level, we could see the dollar have one last major run.

US Politics

It is still very early in the process of finding out who will win the Democratic nomination, but right now it seems Bernie Sanders is peaking at just the right time.  The Nevada caucuses showed Bernie won with a convincing 46.8% of the vote (96% reporting), well ahead of the second place Joe Biden’s 20.4% result.  Bernie is showing his base is diverse, with this weekend’s victory showing he can win the Latino vote. Iwbf he wins Saturday’s South Carolina primary, we might see markets start pricing in a Sanders vs Trump matchup. Financial markets will probably remain overly optimistic that President Trump would beat Sanders in November and we might only see some softness to tech and healthcare stocks.

Oil

Panic is hitting the oil markets as energy traders have no clue how far the coronavirus will spread.  It could be a bloodbath for oil in the short-term as the risks of a global pandemic will cripple travel and trade.  West Texas Intermediate crude could trade in the mid-$40s by the end of the week if the number of cases continue to spread across Europe and the Middle East.

Gold

It seems like it could be only a matter of time before gold breaks above the $1,700 an ounce level.  Risk aversion is firmly in place and with the moves the Treasury markets are showing, we should not be surprised if gold rallies another 3% if it breaks the heavily touted $1,700 resistance level.  The latest case for higher gold prices is being supported by fading optimism the US economy is immune to coronavirus concerns, and that overall virus impact on global growth will be far worse than many initially expected.

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