As the holiday-shortened trading week gets going Tuesday, investors will be on the lookout for any new developments in the ongoing spread of coronavirus. The weekend has brought few, if any, fresh headlines about the disease. An increase in the rate of infections could, however, be enough to fuel widespread risk aversion and selling in stocks and risk assets.
A further spread of the virus could potentially act as a black swan event that could have significant effects on the Chinese and global economies. The virus may impact key areas of the Chinese economy that could already be considered fragile. The property sector in the country, for example, could send shockwaves throughout the global economy. With very high debt levels and sales having already come to a halt, an ongoing lack of activity could start a wave of defaults. A large amount of defaults in China would not only affect China but could also cause a significant decline in demand for commodity producing countries such as Australia and Brazil. A wave of defaults could also fuel a general sense of risk aversion in the global marketplace that could send stocks and risk assets sharply lower.
The coronavirus epidemic could also drive central banks to ease at a more expeditious pace. This week, markets will pay close attention to the latest FOMC meeting minutes due for release on Wednesday afternoon. The latest meeting minutes come on the heels of testimony by Fed Chairman Jerome Powell to a Congressional committee last week. It no longer appears to be a given that the Fed will hold on rates for the year, and further action could potentially come in the weeks ahead at the central bank’s March meeting. The FedWatch tool, as of Friday afternoon, was estimating only about a 10 percent chance the Fed would lower rates at the March meeting. The chances of action from the central bank jump for September, however, as the tool is showing over a 40 percent chance of a rate cut from the Fed.
With interest rates in the U.S. already at low levels, the U.S. Fed could be forced to look at alternative methods of boosting the economy. These could include fresh QE or even fiscal spending by the government. Whatever the case may be, lower rates and/or QE or other easing measures should be another positive for the gold market and could send the metal back to previous all-time highs or better in a hurry.
The last several weeks have seen the gold market build a large triangle pattern. The recent trading range has been tight, and the market could be on the verge of a significant breakout up or down. The bulls are looking for a sustained breakout above the $1600 region. The bears are looking for a breakdown below the $1550 and $1500 levels.
A lack of any fresh bullish or bearish inputs could keep the gold market in its recent trading range for the next several weeks or longer. The next major market move will likely be driven by the coronavirus epidemic or changes in monetary policies.