Virus fear shakes markets, gold up
MARKET OVERVIEW
The rapid spread of coronavirus outside China has raised alarm bells in the global markets and led to around two per cent drop in Sensex and Nifty-50 indices.
As the market opened after a long weekend, the Sensex and Nifty-50 had a gap down opening in line with the sharp fall in the Asian markets with South Korea’s benchmark Kospi index down 3.9 per cent and Hong Kong’s Hang Seng index down 1.79 per cent.
Heavy selling commenced in the afternoon as European markets opened sharply lower and US equity futures also indicated sharp fall in the US market.
The Sensex fell over 850 points intra-day, its second big fall in 2020, touching a low of 40,306.36 before the final close at 40,363.23 down 806.19 points or 1.96 per cent. Nifty-50 index breached 12,000 levels as it fell 2.08 per cent or 251.45 points to close at 11,829.40.
The mood was so negative that all stocks in both Sensex and the Nifty closed in the red. “A big global risk off could potentially result in outflows from emerging markets and trigger a flight to safety,” said IFA Global Research.
Gold crossed `44,000 in India on Monday along with the global prices hit a seven-year peak of $1,700 on safe-haven buying. “Short term target for gold can be $1,725 and this could translate a movement of over `1,000 in the domestic market. The prices are likely to cool down when the coronavirus trigger subsides,” said Himanshu Gupta, vicepresident, Globe Capital.
The rapid spread of coronavirus outside China has raised alarm bells in the global markets and led to around two per cent drop in Sensex and Nifty-50 indices.
Both Sensex and Nifty-50, which opened after a long weekend, had a gap down opening due to the sharp fall in Asian markets.
South Korea’s benchmark Kospi index was down 3.9 per cent and Hong Kong’s Hang Seng index down 1.79 per cent.
Heavy selling commenced in the afternoon as European markets too opened sharply lower and slumped over 3 per cent. The US equity futures also indicated a sharp fall in the US market.
Sensex fell over 850 points intra-day, its second big fall in 2020, touching a low of
40,306.36 before the final close at 40,363.23 down
806.19 points or 1.96 per cent. Nifty-50 index breached 12,000 levels as it fell 2.08 per cent or 251.45 points to close at 11,829.40.
The panic led to foreign portfolio investors selling stocks worth `1,160.90 crore as per the provisional stock market data.
“A big global risk off could potentially result in outflows from emerging markets and trigger a flight to safety. While the disease may not have impacted the country directly as much, the domestic economy which is just about showing some nascent signs of recovery may not escape unscathed. The greenshoots could get nipped in the bud,” said IFA Global Research. The mood was so negative that all stocks in both Sensex30 and Nifty-50 closed in the red. Blue chip IT stocks like Infosys which had appeared safer bet, also fell in the last hour of panic selling.
Globally, equity markets are unnerved by the spread of coronavirus to countries beyond China and neighbouring countries to West Asia and Europe now, analysts said. South Korea raised its disease alert level to the highest red alert as the confirmed cases continue to rise at an alarming rate.
Gaurav Dua, head – Capital Market Strategy & Investments, Sharekhan by BNP Paribas said, “The pandemic is threatening to cloud global economic growth and EXIM trade. The growing risk aversion is clearly visible in the sudden spike in safe haven assets like gold prices seen lately and the surge in volatility index.”
Volatility index India VIX an indicator of short term volatility in the market shot up 26 per cent intraday to 17.2 and closed 24 per cent up at 16.99. In addition to global uncertainties, the expiry weak and the fiscal year end pressure only adds to the volatility in the near term,” Dua said.
Emkay Global’s S. Hariharan, said, “Macro news flow around spread of the coronavirus and its concomitant impact on trade & activity levels have been the strongest driver of daily moves in the last few sessions and would continue to be a major factor. Among large components, Auto sector has been the worst hit over the last 2 weeks, driven primarily by concerns on supply chain disruptions.”
New York, Feb. 24: Some asset prices are moving together in unusual ways, an indication that investors may be preparing their portfolios for a coronavirus-led global slowdown.
US stocks, gold, US Treasuries and the dollar have all surged in 2020, a climb that has taken place alongside persistent concerns over the outbreak’s economic fallout.
Such synchronous moves are not typical, as investors usually have different reasons for buying each asset class. A bullish bet on stocks, for example, is often a wager on stronger economic growth, while gold and bonds tend to find favor in more pessimistic times.
That conventional wisdom has not applied this year. The S&P 500 is up 3.3 per cent in 2020 and stands just off a record high despite Friday’s drop, gold is up 8.3 per cent and near its highest level in seven years while the US Dollar Index is up 3 per cent and hovering near a threeyear high. Stocks, gold and the dollar have all notched yearly gains of 3 per cent or more only twice in the past decade.
Meanwhile, the 10-day rolling correlation between the dollar and gold stands at 0.6 — higher than it has been more than 99 per cent of the time over the last decade. Typically, a stronger dollar tends to pressure gold, which is denominated in the US currency and becomes more expensive for foreign buyers when the buck rises.
Correlation is measured on a scale from minus one, which represents asset prices going in opposite directions, to plus one, indicating prices moving in perfect tandem.
Several forces may be fueling the multipronged rally, analysts said. While investors are loathe to reduce their stock exposure—a losing strategy over the more thandecade-long bull market— many are buffering their portfolios with haven assets such as gold, bonds and the dollar in case the outbreak accelerates or its economic fallout is greater than expected.
At the same time, investors are favouring US stocks and bonds, as many expect the US economy to be less vulnerable to a hit from the coronavirus than those in Asia and the eurozone. That has boosted the dollar while sending yields on some US government bonds to record lows.
“Market participants are looking at U.S. assets as a safe haven no matter what asset class,” said Mark McCormick, global head of foreign exchange strategy at TD Securities.
Many also expect the disruptions wrought by the outbreak to hit global growth and push central banks—including the Federal Reserve—to cut rates or introduce stimulus measures.
However, such a momentum shift has occurred only four times since 1975 and has been followed by an average return of 17% on the Russell 3000 index, her research shows. “A ball in motion tends to stay in motion,” she said.