The charts that matter: corona-panic takes hold

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On the podcast front, I was back with The Week Unwrapped team in what was a very interesting conversation about using hallucinogenics to boost your effectiveness at work (who knew that a lack of mind-altering drugs was at the heart of the productivity conundrum?), and a look at the race for the Antarctic, which seems to be heating up once again. Meanwhile, I brought along the topic of local currencies – what are they, and are they any use?

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Anyway, here are the links for this week’s editions of Money Morning.

• Monday: The coronavirus is scary – but it’s irrelevant to your investments
• Tuesday: How long before financial markets stop fearing the coronavirus?
• Wednesday: Will the coronavirus derail the bull market? Here’s what history suggests
• Thursday: It’s still “inflation or bust” as far as the Fed is concerned
• Friday: As Britain leaves the EU, what lies ahead for the pound?
• Subscribe: Get your first 12 issues of MoneyWeek for £12

We also wrote about UK house prices this week (bad news, they seem to perking up), the Bank of England’s decision to hold interest rates, and Neil Woodford investors finally getting some of their money back.

The charts that matter

As the week comes to an end, it’s pretty clear that the market is starting to panic about coronavirus. I’m reading ever more worried-looking Tweets, we’ve got an Economist magazine cover on the subject (I discussed the relevance of that here), and the charts are showing that anything China-related is being hit hard.

Firstly, the yield curve is getting close to inverting again. One of the much-watched ones (the gap between the yield on the ten-year US government bond and that on the three month) has already inverted. But the most important one – the gap between the yield on the ten-year and the two-year is getting close too.

At the end of the day, this doesn’t mean much, because the recession warning already triggered when the yield curve first inverted last year. But it does show that investors are getting worried that growth in the future will be weaker than growth today. That means they don’t feel like backing the “reflation” trade.

Of course, if coronavirus leads to more money printing by the Chinese and American central banks, then they might change their minds. But let’s see what happens.

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

It’s been another good week for gold (measured in dollar terms). Gold is seen as a “safe haven”; it’s seen as a way to hedge against geopolitical turmoil and panic; and it tends to do well when interest rates fall (as bond yields have done this week). So it’s no wonder it’s gone up even in the face of a solid dollar.

(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 – was a bit stronger this week but was held back somewhat by a dovish Federal Reserve. That’s quite interesting given that this is an environment you’d typically expect to generate a lot of demand for the dollar.

(DXY: three months)

Official trading in the Chinese yuan (or renminbi) has been suspended for the Chinese New Year. However, you have to expect that the yuan will weaken when trading re-opens. Trading in offshore markets saw the yuan weaken to near the seven mark (once seen as a ‘line in the sand’, though not so much now).

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

The ten-year yield on the US government bond fell. It’s partly the dovish Fed, and partly the “risk-off” mood inspired by the coronavirus.

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year bond slipped a little further into negative territory.

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

And the yield on the ten-year German bund fell hard, because bad news for China is bad news for Germany.

(Ten-year Bund yield: three months)

Copper fell for the same reason – bad news for the Chinese economy is bad news for Dr Copper (whose price is seen as a good indicator of prospects for global growth).

(Copper: six months)

The Aussie dollar also showed clearly the concerns over China.

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

Cryptocurrency bitcoin rallied this week. I’m not sure if that’s a coronavirus reaction – bitcoin does appear to do well when situations arise where people might want to get their money across border in a way that circumvents official channels.

(Bitcoin: ten days)

US weekly jobless claims fell last week, but only because claims for the previous week were revised sharply higher. So this week, claims came in at 216,000. The week before was revised up to 223,000 from a previous estimate of 211,000. As a result, the four-week moving average now sits at 214,500.

When the four-week moving average troughs, the market often tops soon after. Have we seen the trough yet? Still can’t be sure.

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

The oil price (as measured by Brent crude, the international/European benchmark) also took a hit from fears over China hitting global growth.

(Brent crude oil: three months)

Internet giant Amazon reported forecast-beating results at the end of the week. The impact isn’t visible in the chart below, but it sent the company’s share price soaring.

(Amazon: three months)

Electric car group Tesla meanwhile appears to be immune to any concerns over China even although the company has had to suspend production at its Shanghai factory, which could result in delays to Model 3 production.

(Tesla: three months)