The FXTM analysis says that the spike in the Volatility Index (VIX) on Friday is starting to reflect fears about the spread of the coronavirus
Global stocks continued to plunge on Monday after US equities experienced their worst week since August. The spike in the Volatility Index (VIX) on Friday is starting to reflect fears about the spread of the deadly coronavirus. It has already killed 80 people in China, infected more than 2,700 globally and is showing no signs of retreating. The latter issue is leading investors to sell risk assets and flee to safe havens.
Whether the market reaction to the coronavirus will be short-lived or extended further remains a guessing game for now. The bottom line is how much global economic output will be wiped out, and so far, no one knows the answer.
Many investors prefer to increase their cash allocation and overweight safe havens, such as Treasuries, Gold and the Japanese Yen, until we have a clear assessment on the degree of economic impact. However, if the mortality rate continues to rise with no cure to the virus, investors will move to panic mode, so expect to see further downside in risk assets. That’s why investors are advised to keep a close eye on the VIX index.
While the coronavirus is set to grab all the headlines, this week is shaping up to be a busy one on many fronts. Earnings season gets into full swing with 145 S&P 500 companies reporting results, central banks in the UK and US decide on monetary policy, President Trump’s impeachment trial enters its second week and key economic data are due to be released.
Tech giants will be under the spotlight with Apple, Microsoft and Amazon among the names to be reporting results on Wednesday and Thursday. Those big tech firms contributed to a large chunk of the S&P 500 rally in 2019 with Apple rising 86%, Microsoft 55% and Amazon 23% last year. For these companies to sustain their upside momentum, we need to see not just earnings surprise to the upside, but upcoming quarters projections as well.
Exxon Mobil, Chevron, Facebook, Tesla, Pfizer, General Electric, Boeing, Caterpillar, and United Technologies are among the big firms reporting this week.
Central Banks Meetings
The Federal Reserve and Bank of England will be holding their first meetings of 2020. The Fed is widely expected to remain on hold when delivering its statement on Wednesday. We also anticipate very little changes to their economic projections. With a robust labour market and moderate inflation, we don’t expect to see any amendments to monetary policy in the near term. Market participants still need to know how long the Fed will remain on the sidelines, but the only answer they’re likely to receive is “we are data-dependent.”
However, the BoE’s rate decision is likely to be much more interesting with markets split 50/50 on whether we’ll see a rate cut on Thursday. MPC members have been talking up the case for lower rates so far this year, but the positive PMI releases last week will likely lead to more of a wait-and-see approach. Whatever the outcome from the meeting, expect to see volatility in the Pound.