The charts that matter: coronavirus – or a liquidity air pocket?

With the yield curve showing worrying signs of flatlining again. John Stepek wonders what's to blame and turns to the charts that matter most to the global economy to find out.

Welcome back.

First things first – what do you think of our new website? Let me know all your feedback by emailing (put “website” or something similar in the subject line so we can spot it).

Secondly, I recorded a special edition of The Week Unwrapped podcast the other day, with Miatta Fahnbulleh of the New Economics Foundation and Olly Mann. It’s all about Britain’s puzzling productivity problems – have a listen here.

Finally, you can still get my book, The Sceptical Investor, at a whopping 40% discount. If you haven’t succumbed to the temptation yet, pick it up here and type in the code SCEPTIC40 when you come to pay. Or get it free on audio book if you join Audible at the same time.

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Here are the links for this week’s editions of Money Morning. (And please accept my sincere apologies – technical gremlins meant that you didn’t receive a newsletter on Thursday).

We also wrote about the coronavirus and its impact on your investments (TL;DR – if you’re a long-term investor, there isn’t one); what early evidence of a “Boris Bounce” could mean for the pound; and what the next move for the euro against the dollar might be.

The charts that matter

Last year, the yield curve inverted (or at least, the one that gets the most attention – the gap between the yield on the ten-year US Treasury and that on the two-year). This triggered fear of recession across the globe.

The yield curve is no longer inverted (ie interest rates on long-term government bonds are higher than rates on short-term ones, which is ‘normal’). but after a buoyant start to the year, it is showing worrying signs of flat-lining again. What’s going on?

The headlines might suggest that the outbreak and spread of Chinese coronavirus is to blame (it encourages a “risk-off” mentality, which means people want to buy more bonds, which are viewed as relatively safe – arguable, but that’s the conventional wisdom at least).

However, it looks more likely that this is related to the Federal Reserve’s ongoing problems with making sure that there’s enough cash swimming around the system to prevent the whole thing from seizing up. The US central bank has been putting money into markets for reasons that are a bit too technical to go into here (it’s kinda-sorta-but-not-really QE4).

But to cut a long story short, this week, there was a net reduction to the amount of money in the system, because although the Fed put more money in, its previous operations expired, so that on balance – according to the Wall Street Journal, at least – about $10bn was sucked out of the system.

This doesn’t really speak of a healthy financial system, does it? But I suspect that this – rather than coronavirus – is behind the flatter curve this week.

(The gap between the yield on the ten-year US Treasury and that on the two-year: three months)

Gold (measured in dollar terms) is still going great guns. My colleague Dominic noted earlier in the week that a somewhat obscure indicator that worked during the great gold bull market in the run-up to 2011 has started working again.

(Gold: three months)

The US dollar index – a measure of the strength of the dollar against a basket of the currencies of its major trading partners – has continued to drift higher. The Fed looks as though it may be struggling to win the global currency war (ie everyone wants their currencies to be lower). That will not make Donald Trump happy, as a stronger US dollar isn’t great for markets. But as Dominic pointed out yesterday, it’s not really up to him.

(DXY: three months)

The good news is that for now, the Chinese yuan (or renminbi) is still below the seven-to the-US dollar level that spells deflationary fear. The bad news is that it has weakened sharply this week (when the blue line on the chart below rises, the US dollar is getting stronger).

(Chinese yuan to the US dollar: since 25 Jun 2019)

The ten-year yield on the US government bond slipped back – as I said above, I reckon this is Fed-related rather than about the coronavirus.

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year bond dipped back into negative territory.

(Ten-year Japanese government bond yield: three months)

And the yield on the ten-year German Bund followed the US Treasury yield, even although eurozone data wasn’t especially bad this week.

(Ten-year Bund yield: three months)

Copper fell back due both to the “risk-off” mode and because it’s particularly sensitive to bad news on the Chinese economy (which is one area that the coronavirus is likely to impact on).

(Copper: six months)

The Aussie dollar held up surprisingly well given the concerns about China. Stronger-than-expected employment data helped.

(Aussie dollar vs US dollar exchange rate: three months)

Cryptocurrency bitcoin edged lower this week, getting as low as $8,200 per coin.

(Bitcoin: ten days)

US weekly jobless claims data beat expectations, coming in at 211,000, from 205,000 the week before. Markets had forecast a jump to 215,000. The four-week moving average meanwhile fell to 213,250. If it can maintain this slide then it might be possible that we still haven’t seen the trough for this cycle. In turn, that would imply that we haven’t seen the top of the market yet.

(US jobless claims, four-week moving average: since January 2016)

The oil price (as measured by Brent crude, the international/European benchmark) has fallen again this week. Again this one can be mostly put on the coronavirus. Weaker China, potentially less aircraft travel – none of that is good for oil.

(Brent crude oil: three months)

Amazon didn’t do much this week. It feels almost as though it’s slipping into “too boring for this hot market” territory. Why buy Amazon when you can buy something truly innovative, like our other favourite stock market indicator…

(Amazon: three months)

… which is of course, the share price of electric car group Tesla. This has risen by nearly $100 since our last update a fortnight ago. That’s the best part of 20%. In two weeks. The challenger car company is now having its very own melt-up.

I mean, I’ll leave you to draw your own conclusions because Lord knows, I don’t have any to offer you. Except, perhaps, that this is still very much the “jam tomorrow” market.

(Tesla: three months)

Have a great weekend.


John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.