By Jameel Ahmad
Coronavirus fears are driving investor caution with risk appetite remaining fragile
Global financial market assets concluded the second successive week with steep losses, following on from the previous worst week for stock markets since the global financial crisis.
Virus fears and its ever-deepening spread into new countries is firmly in the driving seat for investor caution and the level of panic amongst investor sentiment has even encouraged the Federal Reserve to cut US interest rates in an “emergency cut” for one of the first times since Lehman Brothers collapsed at the beginning of the financial crisis.
Risk appetite remains in a very fragile state of mind and this is unlikely to change until either it is confirmed that a cure has been sourced (no indications of this being close yet) or the virus outbreak has peaked (it’s still rising) and this means more difficult days on the radars of investors remain ahead.
WTI Oil prices managed to tank to their lowest levels since 2018 following a breakdown in the OPEC+ alliance although valuations were already under scrutiny as word caught on that the alliance could confirm a production cut of 1.5 million barrels per day to support reduced demand in light of economic productivity challenges as countries contend with the virus.
Sadly the virus shows no indication of peaking as fresh cases and outbreaks remain on the rise, meaning the probability is increasing that WTI Oil prices will return to below $40 for the first time since July 2016 as early as maybe even next week.
Although there is a cloud of uncertainty over the commitment of Russia to remain in the alliance after it reportedly led the charge against making production changes in Vienna, it isn’t necessarily a terrible strategy from afar to allow oil prices to bottom out before making efforts to stabilise the market.
Even if the OPEC alliance did confirm the 1.5m production cut, there was still a probability that investors could have sold the news. Even a production cut of two million barrels per day might still not be enough to support price sentiment.
What is concerning about the heightened market uncertainty is the acceleration of central banks edging towards their panic buttons, as seen from the Federal Reserve in the United States last week. This puts central banks and officials in an even more delicate position should the virus encourage more cases, which is sadly the direction that things are heading in.
As the probability remains high that investor sentiment will remain negative into this week, the probability increases that investors will seek safe-haven assets such as the Swiss franc, Japanese yen and gold.
Gold has once come within touching distance of re-approaching highs not seen since 2013, just below $1,690, and if global stock markets continue their sinking trend, $1,700 will be seen as a likely inevitability and speculation might even pick up that gold prices could head all the way to $1,800 – something that has not been seen since 2011.
Jameel Ahmad, global head of currency strategy and market research at FXTM