There are several reasons why a trader might have expected volatility to have ramped up in January: the big December jobs report, beginning of Q4 corporate earnings season, the presidential impeachment trial, potential winding down of the US-China trade war, and of course, all things Federal Reserve, from billion-dollar liquidity injections into repo markets to the FOMC.
But one unexpected “actor” took center stage and continues to hold it: the coronavirus epidemic. Coronavirus fears gave the markets a steady stream of daily “headline risk”–having arguably caused the markets to rise and fall significantly as traders and investors digest the latest news on the epidemic’s potential economic impact.
It is obvious that the coronavirus is impacting the markets. What is more difficult is trying to make sense of the complex ways tr markets are being impacted.
Coronavirus’ Impact on Market Volatility
Dow Jones Futures (YM) – Daily chart, January 2 to February 10, 2020
FOR DETAILS, SEE ADDENDUM BELOW ARTICLE
Trading Headline Risk
When dealing with market volatility, specifically the kind we call “headline risk,” it’s important to remember that today’s market sentiment may or may not have an impact on tomorrow’s fundamentals.
Although short-term traders often welcome volatility, headline risk can be unpredictable–meaning, it’s hard to tell whether your “technical trading setup” will hold or whether it will be disrupted by the sentiment of market investors, most of whom are probably not technical traders.
So the advice here is to mind your setup and be aware that sentiment may change the underlying structure of a classic technical pattern.
Trading the Fundamental Picture
We haven’t seen a virus with this kind of infection capacity recently, so it’s difficult to make accurate predictions. Getting a full assessment of its worldwide economic impact will be a complicated undertaking.
Yet we can measure its current impact on the Chinese economy:
China has become the world’s factory, particularly when it comes to tech production (e.g. iPhones). As a top global producer, they’re also a top buyer of certain commodities such as oil and copper. In 2003, during the SARS outbreak, China accounted for 4% of the world’s GDP. Now, that number has increased fourfold to a whopping 16%.
As the beginning of this month, over 40,000 people are infected with the coronavirus, mainly in China (particularly around the city of Wuhan). Over 900 people have died (again, most of the fatalities have been China as well).
What’s the virus’ toll on Chinese business? Globalized supply chains have been cut. Car plants have remained shut, disrupting international manufacturers such as Volkswagen, Toyota, General Motors, Honda, and Hyundai among others. US fast food magnate Burger King just closed all locations in China, according to a February 10 CNBC report. And according to CNBC’s Steve Liesman, the US first quarter GDP may sink to as low as 1.2%, despite the stock market’s current rally.
The Coronavirus is Manageable…for Now
Many economists are saying that the coronavirus’ impact on the world economy is manageable in its current state. But if the infections continue to spread at its rapid rate, there’s no way to predict the kind of short term and long term damage it may do to the world’s economy.
How to Respond to the Coronovirus’ Market Impact
If you’re a long-term investor, then this will not likely affect your long-term goals (assuming you’re not anticipating a complete apocalyptic outcome). If you’re a short- or intermediate-term trader or investor, then you should anticipate the possibility of market volatility when trading on an intraday or daily basis. Keep in mind that there’s no guarantee that your technically-based market structures will hold with this type of volatility; at the same time, there’s no evidence to suggest that a given technical setup won’t hold.
So, you might want to pay attention to what’s happening fundamentally to help guide your technical trades. Remember, we’re not just dealing with the volatility impact of the coronavirus, we’re dealing with its impact amid other potential headliners, from repo markets to central bank monetary policy to other scheduled economic reports.
Addendum for Coronavirus Chart
- The broader market pulled back today as a traveler from China was diagnosed as the first US case of coronavirus in Seattle. Fears over a potential outbreak sent chills through the markets.
- Authorities in China confirmed that the new virus could spread through human contact.
- The stock market began the day higher on the news that China is taking steps to contain the coronavirus–officially calling for a quarantine in the city of Wuhan where the virus originated–but optimism dried up when US Treasury Secretary said that the US may impose tariffs on European automobiles if EU countries move forward in their plans to tax US digital companies.
- Markets rallied toward the end of the day and overnight as the WHO eased fears concerning the spread of the coronavirus.
January 24 (intraday)
- Writing intraday, hours before the close, the Dow had plunged 250 points of fears that a second coronavirus case in the US has been confirmed.
- Stocks plunged after more cases of the coronavirus were confirmed over the weekend, worrying investors over the virus’ impact on the world economy.
- The broader market recovered today from the biggest sell-off in over three months as investors put into context the implications of the coronavirus outbreak.
- Stocks made a major comeback and closed higher after sustaining steep losses over coronavirus fears. The Dow Jones Industrial Index erased its 244 point drop to gain 124 points by the end of the day.
- The World Health Organization is meeting to decide whether to the virus should be declared as a global health emergency.
- Stocks plunged as investors grew increasingly worried about the coronavirus epidemic’s economic impact. The Dow’s January gains have been wiped out, having dropped 605 points today.
- The broader stock market recovered from their steep sell-off last Friday but coronavirus fears linger across the market. China took measures to reduce the impact of the epidemic on its economy, lowering reverse repo rates by 10 basis points. China also made a liquidity injection worth $171 billion (1.2 trillion yuan) to limit the negative economic impact of business and travel shutdowns.
- Speculation that the global economy may be resilient in the face of coronavirus due to current accommodative monetary measures may have boosted market sentiment. China released reports indicating that their global manufacturing is steady as their central bank injects liquidity into their banking system.
- A dramatic move in the Dow, S&P 500, and Nasdaq Composite today–all indices had a massive surge, entering record-high territory, erasing losses due to coronavirus fears. Much of the optimism was due in part to news that a coronavirus treatment may be on the horizon. However, the Word Health Organization played down this report, stating that no such therapeutic currently exists.
February 7 (intraday)
- Writing intraday, the Dow just dropped 150 points on fears that the coronavirus epidemic may dramatically slow the Chinese economy. Investors are beginning to sell despite stronger-than-expected US jobs data.
- While economists expected steady growth in January non-farm payrolls to the tune of 160,000, instead they got a surprise figure of 225,000. Nevertheless, coronavirus fears dampened optimism that might have boosted markets on the jobs numbers.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.
Disclaimer Regarding Hypothetical Performance Results: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.