How will the coronavirus affect oil, gold, metals and Bitcoin?
13:47, 29 January 2020
As the death toll from coronavirus rises above 130, the main question on everyone's mind is if the outbreak can be contained. However, investors are even more worried about something else: how will the coronavirus affect the stock and commodity markets?
Oil
The price of oil has already fallen over 10 per cent since January 10, when the second death was announced in China. On January 27 alone, the futures prices tumbled 3 per cent after China confirmed that the death toll now stood at 82, with 2,700 confirmed cases.
The outbreak's effect on the price is due to three factors:
1) Decrease in demand for oil as a result of travel restrictions. This is the most immediate effect. Usually the demand spikes during the Lunar New Year holiday season, with 80 million people traveling by air alone. However, with many flights now cancelled, the demand for oil in January – February 2020 could be 3-8 per cent lower than in the same period of 2019.
Apart from jet fuel, gasoline consumption will also decrease due to restrictions on road transportation in Hubei (Wuhan being a major commercial hub).
2) Further-reaching damage to the economies of China and Asia Pacific. The travel industry will suffer worst. Starting from January 27, China has halted all group tours at home and abroad. This measure will seriously affect Thailand, Australia, Vietnam, Singapore and Japan – all popular destinations with Chinese tourists. As a consequence, restaurants, transportation and retail will also be hit.
However, the downturn is unlikely to last too long. As soon as the virus is defeated, travel will boom. We've seen the same effect after the SARS epidemic in 2003, when the demand quickly doubled.
3) Fear of oversupply. According to International Energy Agency experts, the oil surplus could reach 1 million barrels per day in Q1-Q2 of 2020. However, this fear could be unfounded. The Saudi Arabian oil ministry states that the effect of the virus on global oil demand will be very small and that the current slump is driven by panic.
What is your sentiment on MATIC/USD?
Gold
As it often happens in times of crisis, investors flocked to gold – a favourite safe-haven asset. On January 27, the price grew by $20 to reach its 7-year high of $1,585 per ounce.
However, the next day the price moved down to $1,570, with investors turning to US state bonds instead. This seems to have put an end to the bearish bond market, with the 10-year Treasury yield falling to its lowest point in more than three months. Earlier, experts predicted that the demand for bonds would continue to decrease after the signing of the US-China trade agreement.
Bitcoin
As the virus spread, BTC price grew sharply, reaching $9,439 on January 28, 2019.
The current rally even led the Financial Times to publish an article called Coronavirus is Good for Bitcoin, which came under a lot of criticism. Indeed, Bitcoin is becoming a safe-haven asset, mostly because it remains largely uncorrelated with traditional assets, such as the S&P500 and gold. On the other hand, while the crypto market does react to international events, it's subject to a lot of internal forces that have nothing to do with geopolitics and economy.
For example, the rally could also be partly fuelled by a recent statement from Jack Dorsey, CEO of Twitter and Square Crypto. He announced that his company would participate in the development of Lightning Network – a protocol for instant Bitcoin payments.
Finally, we should remember that the Bitcoin market is subject to constant manipulations by whales (traders who hold vast quantities of BTC). Whales collude with each other and practice insider trading, which is easy enough in the unregulated market. The effect of such schemes could be just as great as that of any real-world event.
Industrial metals
In an effort to contain the outbreak, the authorities in several Chinese provinces shut down non-essential businesses. Thousands of factories will remain closed at least until February 8. China is the world's leading consumer of industrial commodities, so it comes as no surprise that metal prices were hit hard.
Copper in particular lost almost 10 per cent between January 16 and 28, falling from $6,300 to $5,714 per ton on the LME. This is a sharp contrast with the past two months' rally: between December 3, 2018 and January 16, 2019 copper gained 8.5 per cent.
Nickel suffered even more, falling 12 per cent from $14,290 to $12,640 per ton. Even palladium – one of the hottest investments in the past few months – is down 9 per cent since January 17, from $2,483 to $2,283 an ounce.
Interestingly, January 28 saw a small uptick in prices. This could be just a bounce – but it could also be a signal that speculators are entering the market. Should you follow them?
Is this the moment to buy?
Experts are cautious in their predictions about the current outbreak. On the one hand, coronavirus is tricky to contain, because it can spread during its asymptomatic incubation period. On the other hand, its 2.5 per cent mortality rate is much lower than for SARS (10 per cent) or MERS (35 per cent). Overall, health professionals expect that the virus won't spread much further.
If this is true, we can expect a strong rebound in demand for commodities. And that means that the current dip could be a great market entry point, both for oil and for metals. Investors with an appetite for risk can consider buying palladium, nickel, copper and other products used by the Chinese industry.
In conclusion
China's growth rate is already at its lowest in 30 years, so the outbreak comes at a really bad time. Still, investors shouldn't give in to panic. Australian scientists have already recreated the virus, and work on a vaccine is underway.
China has come a long way since the 2003 SARS epidemic, and it's taking extraordinary measures to contain the outbreak. Once it succeeds, markets will react with enthusiasm. Coronavirus is unlikely to become a pandemic – and the current slump in prices is unlikely to turn into a global recession, either.
Contributor: Alisa Orlova