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 editor@moneyweek.com (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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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).

Advertisement
Advertisement - Article continues below

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).

Advertisement
Advertisement - Article continues below

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)

Advertisement
Advertisement - Article continues below

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)

Advertisement
Advertisement - Article continues below

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)

Advertisement
Advertisement - Article continues below

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)

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below
Advertisement

Recommended

Visit/investments/commodities/600639/commodities-look-cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/investments/property/600826/living-on-a-houseboat-the-pros-and-cons-of-a-floating-home
Property

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020