The Week Ahead in Gold
Stocks are set to open the new trading week Monday lower, sharply lower. The benchmark S&P 500 futures contract is down over 100 points, while the Dow Jones Industrial Average has declined by nearly 1000 points. It is going to be a rough open as stock trading gets going, and there is one primary area of concern for investors that may be behind today’s lower open: The coronavirus epidemic.
Over the weekend, the virus reportedly spread into Italy and South Korea. European stocks got hammered as worries over the spread of the disease increase. The Italian stock market, for example, declined by a whopping four percent. The equity losses were not limited to Italy, however, as German and French markets also felt the pinch of rising worries and fear.
Of course, the worry now is that the spread of the virus may put a major dent into global economic activity. The notion of a slowdown is not unrealistic, either, as the virus continues to spread rapidly. On Saturday, the International Monetary Fund (IMF) reportedly suggested that the virus could dent global economic growth by .1 percent and growth in China by .4 percent compared to estimates made just several weeks ago.
The effects of the virus are clearly being felt by manufacturing companies. Negative effects from the covid-19 outbreak are being seen in manufacturing indexes all over the globe, and many companies are now mentioning the potential impact from the virus when reporting earnings. With Chinese markets seeing major disruptions, the global supply chain is hampered, and those effects could continue if the virus spreads further.
U.S. stock markets remain firmly in uptrend mode, although that could change quickly with a few more days like today. Just how far equity markets may fall depends on several factors. The most important factor right now, however, may be how quickly or how slowly the virus spreads further. If the spread is slowed significantly, it may become easier for authorities to obtain a handle on it and control it. If it accelerates, however, the bottom could fall out from under global equity markets and a new downtrend could be seen.
The news of the spread has pressured stocks lower while boosting some safe haven asset classes. Yields on the benchmark 10-year note have fallen by several basis points, while the price of gold has climbed by nearly $40 per ounce. The rise in gold puts prices at seven-year high, and previous all-time highs are well within reach. In a sign of strength, the yellow metal is sharply higher today even as the dollar index also catches a bid higher and crude oil prices sink. In fact, most raw commodity markets are under selling pressure and could see sharp declines as the day progresses.
The gold bulls next target is to take out the overnight highs at $1691.70 and to then close above the $1700 level. The bears will want to see a breakdown below the $1620 region before getting too excited.