Public health officials still haven’t been able to determine what kind of impact the coronavirus will have globally and it’s clear by how they’re trading that investors are struggling to do the same.
On Monday, the U.S. markets bounced after a downside swing in January eliminated the Dow Jones Industrial Average’s 2020 gains. Gold also cooled off, suggesting that investors are becoming less worried about the virus that has now resulted in 361 deaths.
“I think the brunt of the volatility will continue to be felt more on the ground in China,” said Michael Arone, chief investment strategist at State Street Global Advisors. “As it relates to the U.S. there’s a growing sentiment that historically after some of these events it has proven to be a buying opportunity … and some folks are stepping in.”
U.S. investors appear to be growing more comfortable with the risks associated with the virus, Arone said, especially because it hasn’t caused any deaths in North America yet. There’s also a constructive backdrop for the markets to work in — earnings and manufacturing are solid, he said.
While the U.S. might feel the effects of an economic slowdown in China in a few quarters, what happens in Chinese markets overnight isn’t a blueprint for what’s to come on Wall Street. Chinese markets suffered their worst single-day sell-off since August 2015 after returning to the markets for the first time since Jan. 23, when they shut down for an extended Lunar New Year holiday.
Crude oil didn’t fare much better and continued its downward slide on Monday. Demand has fallen sharply and both West Texas Intermediate and Brent Crude have already shed more than US$10 since early January. According to market watchers, there’s still more room to fall.
Citing the impact the coronavirus has had on the global economic outlook, on Monday, Edward Morse, Citigroup Inc.’s global head of commodities research, deeply slashed his short and mid-term price targets on Brent Crude for 2020. Morse cut his first-quarter forecast to US$54 from US$69 and his second-quarter target to US$50 from US$68. Morse sees prices recovering slightly in the third-quarter and hitting US$53, but that’s still US$10 down from his original target.
‘This outbreak could have a longer and deeper demand impact than earlier thought’Edward Morse, Citi’s global head of commodities research
In the next three months, he said, Brent prices could fall as low as US$47 per barrel.
“The large oil-price revision comes from the view now that this outbreak could have a longer and deeper demand impact than earlier thought, though there remains plenty of uncertainty, with much still depending on how far the virus spreads,” Morse said.
That pain in both equity and commodities markets should be short-lived, Fiera Capital vice-president and portfolio manager Candice Bangsund said. The coronavirus outbreak has not yet led to Bangsund readjusting her 12-month target of US$70 on WTI.
Help may on the way from the Organization of the Petroleum Exporting Countries, according to the Wall Street Journal. OPEC’s members are meeting this week to debate taking possible action and Saudi Arabia is reportedly pushing for a curtailment. Should that occur, Bangsund said it could help establish a floor of $50 on WTI.
“Acting likely as a floor for prices, I think US$50 is a good downside scenario, maybe a worst case-scenario,” Bangsund said. At some point there is going to be an opportunity to buy the dip and buy the correction.”
Stephen Innes, chief market strategist at AxiCorp, is looking to deploy the same strategy on Chinese equities. The fear about the virus is overblown, he said. He works out of Bangkok and while there have been more than a dozen cases, it’s mostly “business as usual.” He doesn’t have a business trip planned to Hong Kong or Shenzhen, but wouldn’t cancel one if he did, he said. Despite the downward movement in China, there will be no equities crash, he said.
Innes said he has close to 10 per cent to work with but is just fine with only making five to ensure he’s not buying on the way down. Chinese a-shares are volatile so he’s willing to wait it out.
“I’m patient because I know it could get worse before it gets better,” Innes said. “There’s no sense of urgency.”