MARKET WRAP: Huge Weekend Stocks Gap on Italy’s Coronavirus, Gold at $1680

Huge weekend gap in stock futures

Stock markets are taking a dramatic turn for the worse as of Monday. The weekend gap – the difference between Friday’s close and Monday’s opening price looks like it will be the biggest this year. That’s even after markets fell on Friday. Investors have sold out of shares for 5 Fridays in a row because they were unwilling to hold on over the weekend in the likelihood of Italy’s bad news about the coronavirus. They were correct to do so this weekend. The number of coronavirus cases has shot up to 763, with all flights to the city of Daegu cancelled.

Coronavirus comes to Europe

 Italy Coronavirus
Italy Coronavirus

The coronavirus has made its biggest mark to date in Europe with a sudden rise in the number of cases in ItalyAny investor who’s been thinking they could park their investments in the US or Europe to shield them from coronavirus concerns will have to think twice. And it would appear many are already doing so. Wall Street posted its first weekly loss in three. Germany’s DAX index was at record highs three days ago and is now down 3 ½ percent from that record. The FTSE 100 is testing 7300 support after diving around 100 points from Friday’s close.

US 30-year yield hits record low

The yield on 30-year US Treasury bonds is at a record low of 1.9%. Yields had already been falling as investors bought bonds in a flight to quality. In addition, the yield curve has inverted over fears of a recession. The shock contraction in the US service sector brought home how close we might be to recession because of the coronavirus. The US composite PMI compiled by HIS Markit fell into contraction for the first time since 2013. The data is particularly striking because the United States economy had been impervious to the coronavirus. The next bit of forward-looking data on tap to confirm or deny new fears for the US economy will be on Tuesday with the Redbook index of retailers and Richmond Fed manufacturing index.

Forex: Dollar back in demand despite services contraction

The dollar was at the end of a solid week of gains when the terrible PMI data hit on Friday, so naturally, there was some profit-taking. Part of the appeal of the dollar has been the strong domestic economics when compared to dismal economic numbers in other developed economies, particularly Germany. Interestingly as of Monday, the dollar appears to be acting as a haven again.

The buck is seeing gains against the yen (USDJPY > 111.5) and the pound GBPUSD still below 1.30). The surprisingly strong data from Germany and France is helping keep the euro afloat (EURUSD > 1.08). German factories saw the highest activity levels in a year at 47.8, according to surveys completed by purchasing managers conducted by Markit.

Gold: Reached 1680 overnight, silver rising

We see more reasons to hold gold from government and central banker comments. The PBOC’s Chen said the central bank is reviewing whether to cut deposit rates, and South Korea’s President Moon has called for ‘extraordinary steps’ to bolster the economy. It can be tempting to call a market overbought and call for a correction just because it has gone up a lot.

Fortunately, we resisted this time, saying on Thursday, “Our best assumption is that the breakout holds and that prices move in the direction of 1650 per oz in fairly short order.” Gold has now taken out $1680 per oz overnight and is off the highs at $1660 per oz. There will undoubtedly be some profit-taking near $1700 per oz. We don’t see the logic for doing so before reaching the 2011/12 peaks nearer $1800.

Opening Calls:

FTSE 100 is set to 98 points lower open 7305

DAX is set to open 274 points lower at 13,316

S&P 500 is set to open 47 points lower at 3290

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