The charts that matter: reverse corona-panic takes hold

Investors seem to have decided that the coronavirus panic was just yet another buying opportunity. John Stepek looks at how the week's events affect the charts that matter most to the global economy.

Welcome back.

Here are the links for this week’s editions of Money Morning in case you missed any.

Get 40% off my book: Buy The Sceptical Investor 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.

We also took a look at the UK and the European Union’s first steps towards laying out their respective Brexit stalls.

The charts that matter

At the end of last week, everyone was worried about coronavirus. By the end of this week, investors – fickle things that they are – had decided it was just yet another buying opportunity. And then at the very end of the week, they started getting a bit edgy again as it turned out that lots of companies are starting to mutter about their supply chain problems.

It helped somewhat that US nonfarm payrolls report for January came in a lot stronger than expected. As long as US consumers have jobs, they’ll keep consuming, and few economic forces in the world are as potent as an American with a bit of disposable income burning a hole in his or her pocket.

As a result of all this, the yield curve improved a little. The gap between the yield on the ten-year US Treasury (government bond) and the two-year widened, with the ten-year yielding a bit more than the two, which is what you’d expect in a growing economy.

The yield curve of course, inverted last year, which is a recession signal. But that could happen within the next 18 months and still count as a valid signal – so it’s not exactly brilliant for market timing.

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

A strengthening dollar and a less fearful investment atmosphere meant it was a mediocre week for gold (measured in dollar terms). However, signs that wage inflation is picking up helped the yellow metal to hang in there – higher wage inflation suggests higher price inflation (eventually).

(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 good deal stronger this week.

(DXY: three months)

The Chinese yuan (or renminbi) held up better than might have been expected this week. That’s partly because the US and China are trying to play more nicely just now, what with an election coming up and China under pressure with the coronavirus.

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

The yield on the ten-year US government bond rallied somewhat due to the tentative return to “risk-on”.

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year was ever so slightly higher too, though still just sitting in negative territory.

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

Even the yield on the ten-year German bund perked up a little bit this week, although not by much.

(Ten-year Bund yield: three months)

Copper rallied somewhat, as markets calmed down about coronavirus, even though clear evidence of disruption to trade started to come through.

(Copper: six months)

The Aussie dollar also perked up a little.

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

Cryptocurrency bitcoin rallied this week. It’s not clear to me what moves bitcoin, but it seems to be pretty clear to my colleague Dominic – he suggested on Wednesday that bitcoin was a “buy” and lo and behold, it spent the rest of the week going up.

(Bitcoin: ten days)

Before we turn to US weekly jobless claims, let’s look at that nonfarm payrolls report. The US economy added 225,000 jobs in January, which was a lot higher than the 160,000 expected. The December reading was revised slightly higher to 147,000 from 145,000.

Meanwhile the unemployment rate moved higher – to 3.6% from 3.5% – but wage inflation beat expectations, rising by 3.1% on the year, instead of 3%.

You might be wondering – why did the unemployment rate go up? Well, it’s for a “good” reason – the labour market is healthy enough to encourage more people to join the pool of potential employees. In other words, people who might have given up looking for a job are back looking for one.

We know this because the participation rate rose to 63.4% (from 63.2%), which was the higher since June 2013. So all in all it’s quite hard to argue that this was in any way a bad jobs report.

So what about the more timely weekly data? Well, they were pretty good too. US weekly jobless claims fell sharply to 202,000 (from 217,000 – the previous week’s figures were revised higher by 1,000 claims). As a result, the four-week moving average now sits at 211,750.

When the four-week moving average troughs, the market often tops soon after. The number last hit a bottom in April last year. But if the jobs data continues to be punchy, we could see a fresh low before too long.

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

The oil price (as measured by Brent crude, the international/European benchmark) continued to be extremely weak.

(Brent crude oil: three months)

Internet giant Amazon beat forecasts with its fourth-quarter results last week, hence the huge jump in the share price.

(Amazon: three months)

Electric car group Tesla continued its incredible run. The buying energy had fizzled a little by the end of the week but you’d still be significantly richer today if you’d bought at the end of last week (not that I ever suggested you do).

(Tesla: three months)

Have a great weekend.

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