Covid-19, weak oil price, gold in focus


  • Energy
  • Monday, 24 Feb 2020

Considering the fact that gold is supposed to be a stable store of value, something that could help investors in times of uncertainty, suggests that the situation around coronavirus is not as encouraging as many people thought.

PRICE of gold surged to a seven-year high last week as investors sought a safe haven while volatility saw the S&P500 index close the week at up 20.7%.

Some of the best performing industries over the past seven days were WSJ US Gemstones Index with a 575% growth, WSJ Home Electronics-Appliances Index with a 488.8% improvement and WSJ US Luxury Goods Index increasing 240.2%.

On the opposite side, we have WSJ US Mortgages Index, which presented a 91.9% decline, WSJ US-Mining Support Services Index (-82.5%) and WSJ US Leisure Goods Index (-80.4%).

Considering the fact that gold is supposed to be a stable store of value, something that could help investors in times of uncertainty, suggests that the situation around coronavirus is not as encouraging as many people thought.

However, central banks may respond by cutting interest rates, something that will benefit assets like gold. The amount of gold exchange-traded funds are holding has risen for the last 3 weeks.

According to Saxo Bank, during January total holdings in exchange-traded funds backed by bullion rose by an average of 1.3 tons/day. So far this February holdings have been rising by 1.9 tons/day.

A natural question that arises is why despite the dollar strength and recovering markets gold is in such demand.

One of the possible reasons can be that additional rate cuts, increased stimulus, together with negative US real yields push investors to diversify their portfolio, including so-called safe-haven investments.

On the other hand, markets are still scared the Covid-19 coronavirus outbreak will have a longer than expected impact. Car sales in China already fell 96% in the first week of February to a daily average of just 811 vehicles.

The China Passenger Car Association (CPCA) hopes sales would pick up during the second half of the month.

With that purpose, Chinese carmaker Geely has launched a "contactless" service that lets customers buy its cars online that will be delivered directly to their homes.

Still, according to a report by Tsinghua University and Peking University, over 85% expect to run out of cash within three months.

If the trend with the virus continues to hold through March, there is going to be a massive disruption for the economy. In this context, investors expect that China will help its smaller business, by reducing the collection of social

security taxes and offer small-scale short-term loans.

Finally, the US has a major problem - almost the entire oil industry sits on wild leverage to banks! Low oil prices = defaults for shale industry = defaults for US banks = disaster.

According to Moody’s Investors Service, explorers and producers have more than $85 billion of debt maturing over the next four years. If low prices remain, it will directly affect producers’ ability to raise more money this year, thus

threatening their future survival.

Macro data during the week

* Existing home sales decreased 1.3% m/m in January to a seasonally adjusted annual rate of 5.46 million units. Total sales were up 9.6% year-over-year

* Index of leading indicators rose 0.8% w/o/w, above the expected increase of 0.3%

* Initial claims increased by 4,000 to a still-low 210,000. Continuing claims increased by 25,000 to 1.726 million

* Same-store sales rose 5.7% w/o/w, higher than the previous increase of 4.8%

* Home mortgage apps fell 3.0% w/o/w after last week’s 6.0% decrease

* The Conference Board's Leading Economic Index (LEI) increased 0.8% in January after decreasing 0.3% in December

* The key takeaway from the report is that it showed positive contributions from almost all components after the headline reading decreased in four out of the last five months

* The Philadelphia Fed Index for February catapulted to 36.7 from 17.0 in January

* Eurozone's January CPI decreased 1.0% m/m. Flash February Manufacturing PMI increased to 49.1, meanwhile flash February Services PMI improved to 52.8

* Germany's flash February Manufacturing PMI grew to 47.8

* U.K.'s flash February Manufacturing PMI reached 51.9

* France's flash February Manufacturing PMI fell to 49.7

* Japan's January National CPI 0.0% m/m, Flash February Manufacturing PMI 47.6 (last 48.8) and flash February Services PMI 46.7 (last 51.0)

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