HYCM Market Insights & Trading Tips

HYCM, an established global forex broker, shares its expertise with traders to equip them with everything needed to make informed trading decisions. Giles Coghlan, Chief Currency Analyst, consulting for HYCM Group, provides trading tips and regular insights on how global news affects the markets including forex, commodities, stocks, and indices.

About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd, and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.

High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

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US-China phase 1 signing: Deal or Dud?

The US-China phase trade deal is expected to be signed today at 16:30GMT in the US. The expectations leading into this event have been well priced into the market and we are cautious after the record increases we have seen in the S&P500 and the Dow Jones. This rally in risk assets could well be setting up for a ‘buy the rumour, sell the fact’ response. Furthermore, the latest reports this morning from US Treasury Mnuchin state that US tariffs will stay in place on Chinese goods until there is a Phase 2 agreement. So, this is shaping up to be a trade ‘dud’ rather than a trade ‘deal’.

Look at GBPUSD and how it responded to the UK election results in early December 2019. The GBPUSD currency pair hit 1.35000 on the news that the conservative party had won the UK election results. This was seen as a positive result for the GBP at the time as it broke the then Brexit deadlock. However, the GBPUSD pair sold off after hitting 1.35000 highs? Why if it was positive for the GBP? Because it was a buy the rumour sell the fact response. See the chart below:



The rumour was that the conservatives would win the election, so the GBP was bought on that expectation. Once the result came in, and it was expected, there was no other reason left to buy the GBP. The GBP buyers took profit and then the focus went back onto the UK-EU trade relationship. We are expecting a similar response here to the US-China phase 1 trade deal signing, so we are anticipating a fall in US equities and the risk-on trade post the signing of the deal.

What will change this outlook?
The outlook will change if there is some extra element of the deal which the market has not seen yet. At the moment the total package of the deal is meant to be around $200bln. That is meant to be around $50bln in energy. $40 bln in agricultural goods, $75bln in manufacturing and around $35-40bln in services. So, that is the broad expectations, but this deal has been low on detail and big on hype. So, watch out for a buy the rumour type response and we are certainly not getting carried away with the latest record highs in US equities.

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Pair a strong currency against a weak one

One of the key trading principles is to look to pair a ‘strong currency’ against a ‘weak one’. In doing this you are stacking the odds in your favor of your trade going in your desired direction.

So, how do you define a ‘strong currency’? A strong currency is one that has specific reasons for its strength. Here is a recent example. Let’s say that there is a +1.73% spike in the oil market on supply concerns. Which currency would that benefit? Well, it would benefit countries that export oil. e.g Canada and Norway. In this instance, we would expect CAD and NOK strength.

Now, what about a weak currency? Well, a weak currency is a currency that has specific reasons for its weakness. Let’s take another example from recent news and imagine that a number of Bank of England members are releasing news comments which indicate that they are in favour of rate cuts. When a bank cuts interest rates the value of the currency goes down. So, in this instance, we would have our ‘weak’ currency, the GBP.

Continuing to use this hypothetical example you can see we now have a ‘strong’ and a ‘weak’ currency. This would give us bias for trading the GBP/CAD or the GBP/NOK Short. Any retracements on these pairs would be potential areas to short from.

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What’s next for the Canadian Dollar

The Canadian dollar has two drivers: Central bank policy and the price of oil.

Central bank policy
The Bank of Canada is meeting next week to decide its current interest rate. The Bank of Canada surprised markets in December with a more bullish outlook than the marled was expecting. The BoC highlighted surprising strength in business investment and the economy was operating, ‘near capacity’. The key area of concern for the BoC in December was global trade tensions. With the optimism concerning the US-China phase 1 trade deal still in the market, it seems that the Bank’s concern has receded for now, at least from between the US and China. If this situation remains I am expecting the BoC to lean towards a more bullish outlook when it meets on Wednesday next week at 1500GMT.

Oil prices
The price of oil impacts CAD. With Canada, a key exporter in oil an increase in oil prices helps boost the CAD. The negative correlation between oil and the USDCAD pair is around 96%. So this means that a fall in USDCAD usually results in a rise in oil and vice versa. Take a look at the chart below to see the relationship.



Going forward the path of CAD will continue to be determined by these twin influences from the central bank and the price of oil. Whenever you are trading CAD you always want to know what is happening with these two key drivers. Ideally, to place a CAD trade, you want both drivers to compliment each other. So, a bullish central bank meeting next week and a rise in oil prices would be supportive of oil prices going forward. Similarly, a bearish central bank meeting and a fall in oil prices would result in CAD weakness.

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What’s the outlook for the AUD?

The AUD is continuing to be driven by developments between the US and China on trade and its domestic outlook. Although we have seen some positive AUD strength in the run-up to the signing of the US-China trade deal, the price has been capped underneath the 0.7050 handle. We will need some new, fresh positive US-China trade talk on phase 2 aspect of the deal to see any more AUD strength in the short term. In particular, look for headlines concerning Intellectual Property rights as this is a key issue to be discussed around phase 2 deals.



The monetary policy minutes from the RBA’s December meeting provided a case for rate cuts ahead if incomes remain pressured as the current level of wage growth is not seen to be enough by the RBA to reach their inflation goals. The employment release this week will be important for the AUD going forward and CPI data too out on January 29. Although the positive retail sales released last week have reduced chances of a rate cut in the near term, sadly we can expect some negative data to start coming through due to the devastating Australian bush fires. This will impact Australian employment levels, tourism to the country, and consumption.

Therefore, as a result of a weak Q4 2019 and the expected impact of bush fires the overall outlook for the AUD is bearish. If the RBA cut rates to 0.25% then that is the level at which QE may come into play, so bear that in mind. QE weakens a countries currency and would accelerate AUD downside. Presently, I am expecting AUD sellers on retracements.

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Bank of Canada Rate Statement Today at 15:00 GMT

What to watch for

The Outlook for the Canadian Economy is generally positive when compared with other Central Banks. The December 2019 rate statement was more hawkish than the market was expecting and this led to some CAD strength. The rate statement referred to the Q3 investment spending positively and ‘nascent evidence that the global economy is stabilising’. Recently the latest CAD employment figures have been strong. Also, the last CPI data delivered with the headline coming in at +2.2% vs +2.2% y/y expected and the median a beat at +2.4% vs +2.2% expected. The median figure was the highest since 2009 and we would consider this enough for the BoC to retain its hawkish bias.

The BoC meets today and we are expecting a hawkish hold and a bullish case for CAD. This is not only to do with the domestic data but also due to the scaling back in global risks for the Canadian economy. The signing of the phase 1 trade deal will provide temporary relief for the BoC as they highlighted global tensions as a reason for caution in their December rate meeting. However, although the market is firmly expecting the BoC to remain on hold for the first half of 2020, there are still expectations of a rate cut of 25bps by December 2020. This is reflecting the increased uncertainty of a Phase 2 trade deal.

If there is, in fact, a bullish hold by the BoC look to pair the CAD against a weak currency for any potential trades out of the BoC rate meeting. If on the other hand, the Bank of Canada turns more dovish, look to pair the CAD with a strong currency. If recent risk-off tones from China’s virus outbreak remains then the JPY would be a suitable counterpart as it finds buyers in risk-off markets.

Either way, this is a key event and expect market volatility around 15:00GMT today and for the press conference later at 16:15GMT.

Please also be aware that we have Canadian CPI data released at 13:30GMT today too and as of last month’s report all measures are within the 2% level. A strong deviation will move the CAD and look for both CPI and the Rate Statement to be in the same direction (e.g. both bullish or bearish) for a potential directional trade out of the two risk events.

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European Central Bank rate statement today At 12:45GMT

What to watch for

Inflation in the eurozone is currently remaining under the ECB’s target of 2.0% at 1.3%. At their last meeting in December, the ECB affirmed that they expect the key ECB interest rates to remain at their present levels, or lower, until it has seen inflation move up to a level sufficiently close to 2%.

In the statement that accompanied December’s rate statement, President Lagarde stated that incoming data is pointing to lower levels of inflation pressure and that growth risks are tilted to the downside. In particular Germany’s manufacturing contraction, as a fall out to phase 1 China trade deal, has been an ongoing concern for the eurozone.

The new President Christine Lagarde has also echoed the previous President’s call for fiscal stimulus. One thing to watch in the statement today is whether that call for fiscal stimulus is repeated. Fiscal stimulus is a stimulus that comes from a Gov’t rather than monetary stimulus/policy which comes from a central bank. With the ongoing debate about whether negative interest rates work well for an economy, the focus of the central banks that have low-interest rates and are easing is for fiscal stimulus to stimulate growth. If there is a hint of fiscal stimulus to come this will be EUR positive. Obviously, be aware and ready for a change of interest rates as a cut would result in EUR sellers and an increase in interest rates would result in EUR buyers.



However, no change is expected for today’s rate meeting, but the statement and press conference will be closely eyed for clues on the ECB’s next step. Don’t forget the press conference which is 45 minutes after the initial rate statement at 13:30. Whenever there is a rate statement and a press conference always remember that the event is never ‘over’ until the press conference has finished.

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The pull of the safe haven

Use this in your trading
In times of danger or trouble, it is normal to seek places of safety. During a fire, we head to the nearest exits to preserve life. During a bad storm at sea, you might head to the lifeboats to avoid sinking with the ship. During times of economic uncertainty then the markets have their places of safety too. These are known as the ‘safe havens’.



What is a safe haven?
A safe haven Is simply a place where value is expected to remain during times of economic uncertainty. Two of the most popular places of safety in the FX sphere are the JPY and the CHF. The Japanese Yen is most probably the largest risk sentiment mover and is the go-to currency of choice for risk-on and risk-off moves. When there is a shift in risk sentiment remember that you are likely to see strong movements in the JPY. One key tells that you are going to see risk-off moves is by looking at the equity markets. Just check out the main indexes like the S&P500, FTSE100, DAX, and the Nikkei225 alongside the Shanghai Composite. When these markets are falling then we know we are in a risk off-market. Why? Simply because equity markets are very vulnerable to risk. Whenever times are uncertain the outlook for a country’s companies becomes uncertain too, so people reduce their risk and exposure to these markets:

Falling equity markets =Risk off =YEN strength
Rising equity markets =Risk on =YEN weakness

The other safe havens are commodities like gold and silver which retain their value as a ‘place of safety’ during a crisis. This is why on the US-Iran flare up at the start of the year we saw strong bids into gold. Knowing if we are in a risk-on or a risk-off market will help you know when to buy and when to sell the Yen.

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FX Week Ahead 27.01.20

Last week saw a return to risk-off tones as concerns are growing over the spread of a coronavirus from Wuhan, China. The coronavirus has spread rapidly this last week as preparations get underway for the Chinese Lunar New Year. The market has memories of the 2003 SARS virus which cost the Asian and Pacific region over $50 billion dollars. One report from the Journal of Environmental and Public Health made a case for China’s GDP having being lowered by 1% due to the impact of SARS. So, Asian equity markets have understandably retreated from recent highs on concerns the latest virus is going to be a drag on the Asian -Pacific economies.

Key events from the past week

 

1. CAD: BoC turns dovish, Wednesday, Jan 22. The BoC surprised markets with a dovish tilt and Governor Poloz acknowledged that he had ‘opened the door’ to rate cuts ahead. This weakened the CAD. USDCAD spiked higher on the rate announcement and ground higher to 1.3151 after the press conference.
2. ECB: Rate statement and Press Conference, Thursday, Jan 23. The ECB kept rates unchanged and Christine Lagarde said that risks are,’tilted to downside, but less pronounced’. However, she said that the subdued inflation outlook meant that monetary policy would have to remain accommodative for a prolonged time.
3. AUD: Employment data surprise, Thursday, Jan 23. RBA chances of a rate cut at the February meeting dropped from 50% to only around 20% after the surprise increase in part-time jobs and tick lower in unemployment rates. Labour data is key for the RBA and this positive print should keep the RBA on hold next month.

Key events for the coming week

 

1. USD: FED funds rate, Wednesday, Jan 29. The last dot plot had rates on hold through 2020, however, market expectations are still for a 25bps cut by December. Watch the rate statement for any latest shifts in the Fed’s thinking on the path of US interest rates.
2. GBP: Interest rate statement, Thursday, Jan 30. The BoE has had mixed signals lately from dovish BoE members, weak retail sales figures, but some positive wage and business confidence data. Watch out for the flash PMI figures on Friday 23 considered by many as the defining data point for the decision on Jan 30.
3. Coronavirus: Watch out for the latest virus news. If the spread of the corona-virus increases, and it most likely will during the Chinese Lunar New Year travel period, expect risk-off flows to continue out of Asian equities.

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Why oil falls in ‘risk-off’ markets

Use this in your trading
Last week we looked at the role of the JPY and the CHF as safe-haven currencies. Today we shall look at the reasons why oil falls in a risk off-market.

Oil has been falling on coronavirus fears
Last week we saw the move to a risk-off market on the fears that the Chinese coronavirus would become a global pandemic. These fears have continued this week. One of the casualties of these fears is the commodity oil. It fell sharply last week. Why? Well, when the market is in a risk-off mood it is fearing that the global economy is going to shrink. See US Oil Chart for a recent fall in oil prices.



Less growth means less machinery movement for transportation and construction. This, in turn, means there is less demand for oil, so oil prices fall. In the coronavirus instance, people will also travel less by airlines. Remember, in the current market conditions oil is heavily oversupplied, so there is already an oversupply which is keeping oil prices pressured. So we can expect sellers on oil retracements during the coronavirus crisis.

Does oil ever rise in a risk-off market?
Yes, when the risk is impacting oil’s supply levels. So, during the US-Iran crisis at the start of this year, the market was concerned that a wider middle east conflict would impact some of the world’s largest oil producers. Saudi Arabia, Kuwait, Bahrain, Iran, and Iraq. In this case, although the markets went into a risk-off mood, oil prices increased. Why? Simply because in this instance a middle east conflict would have reduced the supply of oil and pushed it up. See the chart below:



However, this is the exception to the general rule that oil markets fall in a risk off-market.

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Why has Gold gone cold?

Gold’s been under the weather
Last week we were surprised by the limited reaction in gold. With so much risk-off tones in the air due to the coronavirus, we had expected to see more than the very muted reactions in gold. So, it was helpful to come across this Bloomberg piece which illuminated the perspective for gold. The following factors have been keeping a lid on gold:

1. Recession fears have fallen. The Bloomberg Economics US Recession probability model shows receding chances of a downturn within the next 12 months. The latest reading is strongly down from 2019 highs and below the levels that anticipated past recessions. The November reading was 26% down from 29% in October and early indications are that December’s readings will show reduced risks for 2020.

2. Russia’s gold buying is expected to be the lowest in 6 years and China’s gold buying is on hold.



3. Gold ETF holdings, at already elevated levels, moved higher again. However, subject to a major geopolitical flare-up tensions remain elevated.



Sadly, the coronavirus is now gripping the market after a 2% fall in the Nikkei overnight and the extent of the coronavirus starts to expand. We liked Nikkei shorts last week and they look set to fall further through near term daily support.

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Why a 1% down day is key for the S&P500

When the S&P500 registers a day where it loses more than 1% of its value that is a significant event. In the current market sentiment, the S&P500 has not recorded a single day of loss greater than 1% since October 2019. A 1% loss day breaks that run. Yesterday the S&P 500 closed down -1.57% at 3243.

Why is that significant
Well, historically speaking, when that happens there is a much greater chance of the S&P500 trading sideways or lower for the next 30 days. Now in the present situation that makes considerable sense considering the coronavirus concern. Look at the table below to see how a 1% down day was met by a falling or sideways market in the next 30 days.



What will make those concerns grow?
1. A spread of the virus outside of the Hubei Province. The Hubei province, in which the city of Wuhan is in lockdown, contributes less than 5% to China’s total GDP. So, in order for global equity concerns to grow the market will need to see the coronavirus spread further within China.
2. A declaration by the World Health Organisation that the coronavirus is a ‘global health’ concern. This will indicate the potential for a greater spread of the virus.

If we see either, or both of these events occur, then expect further equity sellers, JPY and CHF buyers as well as gold buyers. Also, we could expect the S&P 500 to fall or trade sideways in the next 30 trading days. However, the true seriousness of the coronavirus has not yet been fully established. Yes, the virus is very contagious. Yes, sadly over 100 people have died. However, many more die of the flu each year. Therefore, if the market views the coronavirus as a containable virus then the S&P 500 will recover quickly. Look at the response of the S&P 500 after the last virus of SARS in 2003. Notice that the S&P500 recovered much more quickly than the MSCI Asia Pacific Index. This, of course, makes sense, as many more SARS cases were in the Asia Pacific region.



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What is your preferred source of safety from the Coronavirus?

Question of the day

This was a question on Bloomberg Market's Live this week. What are you looking at for safety in the current concerns over the coronavirus?

1. Treasuries: One of the first 'go-to places'.
2. Gold: Another quick go-to place for the value. Short term it makes sense for a quick spike, but longer-term the improving US outlook means that gains should be capped.
3. Bitcoin: Sometimes mirrors gold as a digital 'gold', but for some investors, the jury is still out whether bitcoin is here to stay or the first flush of a changing digital age that may or may not be here. In our view, when investing in a safe haven on the coronavirus fears, we would favour gold over bitcoin every time. Is that just an unfair bias and unnecessary conservatism, or sensible? Anyone take the other view?
4. Tech stocks: Seen as less vulnerable as industrials, finance or energy stocks. Perhaps long health stocks?

Other areas to look at

1. Vanilla short on stocks? This was our preference last week. With equities getting hit, shorting the major indexes makes sense for a trade. We got into Nikkei shorts last week seeing the storm coming and risk looked pretty asymmetrical to us.
2. Shorting travel and tourism stocks. Look for individual stocks particularly exposed to the fall out from the coronavirus.

Ok, that gets the conversation started, now over to our seasoned readers. What is your preferred source of value? Anyone here has a playbook from 2003 that they used? Our view from here is that the coronavirus fears have peaked. We took profit on our Nikkei future shorts yesterday when we saw the reaction of the MSCI Asia Pacific Index and the S&P500 when, during the 2003 SARS virus, they gained in value as the WHO declared SARS a global health emergency. See the thread above which shows the S&P500 fast out of the blocks shortly after the March announcement. It was March 12 when they issued their global threat announcement.

Our view is that a bottom is in place now unless the coronavirus is seen to be more deadly than SARS. Yes, coronavirus is contagious, but it is not as deadly, at present, as SARS.

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Understanding the factors influencing oil

Oil has been heavily pressured lately on the coronavirus fears. The concern has been that a global pandemic will restrict the demand for oil. Less construction, air flights canceled, tourism reduced and cities on lockdown would all dampen the need for oil. This has, on top of an already well-supplied oil market, caused oil to fall as you can see in the chart below.



However, it is worth being aware of three factors that could support oil in the medium term:

1. There is a desire for by the OPEC- Russia partnership to agree to longer production cuts. These may even extend to 2020. Saudi Arabia always has the potential to talk up the price of oil by hinting at potential further cuts.
2. The People’s Bank of China is offering support when trading begins again on February 03 for local assets. So, this boost from the PBOC could well translate into a risk-on mood for US oil.
3. The geopolitical difficulties in Libya could halt production (causing oil prices to climb), Venezuela is thinking on a plan to privatise some oil assets. Iraq is volatile with a rocket attack this last week on Baghdad’s Green Zone.

US oil at daily support
With US Oil at a key daily support level there is a technical place for oil longs should any of these factors above start to support oil prices. If coronavirus fears start to recede, then expect oil to be bought on a return to risk on growth.

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Understanding the balance sheet

The Fed is going to continue adding cash into the banking system by buying billions of Treasury bills for a few more months. However, it wants to start cutting back these purchases in Q2 according to Jerome Powell on this week's rate meeting.

Why did the Fed start buying Treasury Bills?

The Fed did this in response to a surge in borrowing costs in bank funding markets last Autumn. In order to keep providing liquidity in the US money markets, the Fed propped up the gap.

The Federal Reserve had acquired a large catalog of Treasuries and mortgage-backed securities after the 2008/9 financial crisis through three quantitative easing programs (known as QE or asset purchases/ easy money). The purpose of QE was to drag down long term bond yields and reduce the cost of borrowing.

2017

Then in 2017, the Fed started to reduce the amount of these asset purchases. The amount of these purchases is known as the Fed's balance sheet. Last August the unwinding of QE, by reducing the balance sheet, ended August 2019. However, in September 2019 the money market reaction was that the balance sheet was now too small.

The Fed responds

The Fed responded through daily cash injections in the repurchase agreement market. Known as the repo market. On top of this, the Fed started buying Treasury Bills to get bank reserves levels up.

The extent of the Fed's purchases

The Fed has been buying around $60billion a month of T-bills and reserve levels have risen more than $270 billion to roughly $1.67 trillion. He said that the bottom end of his range and floor is $1.5 trillion as that was the level around which liquidity problems arose. Powell wants to slowly reduce support here, but he has given no timeline to how he will taper these purchases. Take a look here at the impact on the asset purchase chart below.



So, who cares about this?

Equity investors are concerned. Some people are arguing that the latest move by the Fed is QE in disguise and is what has been supporting the latest bull run in US stocks. The thinking is that the Fed is signaling that they will step in to catch a falling market. Uncle Sam (well the one in the Fed, at any rate) will save the day when and if the going gets tough.

What's the trade?

A sudden halt or stop in the balance sheet will hit US stocks. Short S&P500 is the vanilla option in this instance, but the Fed will likely signal a gradual reduction. However, we hope that this lifts the fog on 'repo markets' and 'balance sheets' if you have been letting that wash over your head recently.

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FX Week Ahead 03.02.20

Last week saw a return to risk-off flows over the spread of the coronavirus from Wuhan, China. The coronavirus has continued to spread rapidly and the market saw strong flows into JPY and the CHF. Global and Asian equity markets have continued their falls on concerns the latest virus is going to be a drag on the Asian-Pacific economies. On Wednesday the Fed kept rates on hold, but markets are now pricing in two rate cuts this year. The Bank of England didn’t cut rates on Thursday, despite some speculation it would, which led to the GBP rallying on relief.

Key events from the past week

1. AUD: Inflation surprise, Wednesday, Jan 29. The inflation data was a surprise beat at 0.7% vs 0.6% q/q, but this was in part due to the increase in prices due to the Australian bush fires. The AUD strength out of the print was faded. This was due to as risk-off flows seeing the AUD lose value on coronavirus fears.
2. USD: Federal Reserve Rate Decision, Wednesday, Jan 29. The Fed kept rates unchanged at 1.50-1.75% as expected. The USD fell lower as, though little was changed on the statement, the market found Powell dovish in the press conference and the market is now pricing in a 52.8% chance of two US rate cuts this year.
3. GBP: Bank of England rate Decision, Thursday, Jan 30. The BoE kept rates unchanged and only two dissenters wanted a rate cut while the market was expecting three dissenters. This led to the GBP rallying. The key focus for the GBP going forward is going to be inflation data and EU/US trade deals.

Key events for the coming week

1. AUD: Rate Statement, Tuesday, Feb 04. The market is not expecting a rate cut next week with odds of a cut at ~15%. With little chance of the RBA moving away from their dovish bias and coronavirus fears weighing as well as the impact of the Australian Bush fires, I am expecting AUD sellers on retracements.
2. USD: Non-Farm Payrolls, Friday, Feb 07. The Fed kept rates on hold last week and said that consumer growth was moderate vs strong in the December report. A strong NFP reading will help underpin any recovery for the US Consumer as wage growth flows through into consumer spending.
3. Coronavirus: Watch out for the latest virus news. This week look for signs of the coronavirus peaking in its spread. If the market becomes reassured around containment of the virus, expect equities and commodities to both recover.

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Silver out of the spotlight and in gold's shadow

Gold pushes higher again

The high gold prices push away retail buyers. The retail sector accounts for around a third of all buyers, so the higher prices have been discouraging demand. However, the rise in ETF inflows has virtually matched 2019's drop in consumer demand. See the chart below:



However, the gold/silver ratio has dropped recently after hitting some of the highest levels since July 2019 last week. This means that if the safe haven rush continues silver offers better value than gold. The last few pushes higher in gold since the start of 2020 have been led by geopolitical concern and any further concerns will be needed for gold's next push higher.



Silver is trading over 50% from its all-time high while gold is just under 20% off it's high. So, one to watch as silver sneaks out of the spotlight.

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OPEC+ stands ready to support the fall in oil prices

Oil has been under continued pressure lately on the coronavirus fears. The concern has been that a global pandemic will restrict the demand for oil. Less construction, air flights canceled, tourism reduced and cities on lockdown would all dampen the need for oil. This has, on top of an already well-supplied oil market, caused oil to fall as you can see in the chart below.



However, it is worth being aware of three factors that could support oil in the medium term:

1. There is a desire for by the OPEC- Russia partnership to agree to longer production cuts. These may even extend to 2020. Saudi Arabia always has the potential to talk up the price of oil by hinting at potential further cuts. On Monday the Saudi and Russian leaders held a rare phone call and confirmed that they were ready to ‘continue co-operation within OPEC+’. This phone call has probably brought some relief to oil bulls after US crude fell under $50 yesterday. OPEC is said to be considering a 14-15 emergency meeting to discuss the impact of the coronavirus on oil prices.

2. The People’s Bank of China is offering support when trading begins again on February 03 for local assets. So, this boost from the PBOC could well translate into a risk-on mood for US oil. However, Chinese demand for oil has already dropped 3m bpd on reduced movement because of coronavirus fears.
3. The geopolitical difficulties in Libya have halted production due to the shutting of oil ports. (causing upward prices to climb). If this production was to restart then around 1m bpd would come back online and put further downward pressure on oil.

US oil breaks through daily support

US Oil broke through key daily support level yesterday which would indicate lower prices are ahead. However, if coronavirus fears start to recede, then expect oil to be bought on a return to risk on growth.

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Chinese stocks fall offer phoenix entry

The Chinese open was always going to be bad with all the stored up coronavirus fears released in one go after the extended Lunar New Year holiday. The open was as bad as feared, if not slightly worse, with the Shanghai Comp opening down more than -8.0% at the start of the week and the CSI300 down more than -9.1%. This was the worst opening in nearly 13 years.



This price drop was a 3+ standard deviation and took valuations back to 12 months lows. Statisticians put this kind of event in the ‘outlier’ section. The attraction of a day like yesterday is that for investors who are bullish on China’s outlooks this does offer a tempting entry point. The Shanghai Composite was trading yesterday at 9.7 times projected full-year earning which is just over half the ration for the S&P 500.

The PBOC is actively supporting the Chinese economy and a number of large, longer-term investors will be drawn off the sidelines to these bargain prices. Of course, whether it is a bargain or not turns on the further outbreak/containment on the coronavirus.

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Dr Copper recovers from coronavirus fears

The Doctor is feeling perkier

Looking at the initial fall in commodities vs the fall in the Asian Weighted Index on coronavirus fears you can see how far commodities fell and how quickly. They fell much harder than equities.



Now that we are seeing a global rebound in equity prices with the Nasdaq making record highs yesterday and Asia in the green too it is worth looking at copper futures. You can see Copper is trying to hold that key support level marked on the weekly chart around the 2.500 handle. As momentum indicators turn positive we are expecting buyers from here, pullbacks into support and stops below recent lows. Copper has a long way to potentially recover if the market suddenly refocuses back on to pre-coronavirus optimism. Although European equity futures are in the red, and it remains to be seen whether there really is a global equity recovery, keep copper on your radar. The Doctor has a good way to recover if he shakes off his recent coronavirus hit.



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