• Will economies stall due to a spread of quarantines?

    Last week, the equities markets experienced a very strong bounce on a combination of Fed liquidity and an overly optimistic narrative regarding the test of any type of old drugs on the new coronavirus.



    This bounce however was supported neither by the 20DMF nor by the Cumulative Ticks.






    The only stocks that attracted money were the most liquid mammoth NQ8 stocks. This is in my opinion only the result of liquidity being made available.





    This new virus started to have a real impact on the Chinese economy mostly due to the spread of quarantines: factories are stopped, school closed and containers are not moving anymore.

    If we look at how/when the five members of a UK family were contaminated in France, it is clear that the virus has been spreading around for quite some time and that it might be difficult to stop. From a Singapore conference early in January, the virus flew with his host to France on January 24 and new cases only declared themselves last Friday. This is a two weeks incubation period that the virus uses undetected to jump to new hosts.

    https://www.theguardian.com/world/20...-uk-and-france

    In terms of market activities, we can see below that both oil and copper reverted to a bearish state.





    Gold and the 10Ys also show an inverted move as the narrative turned rather fearful on Thursday and Friday.





    However, the largest sign that international trade will take a hit is the US$ situation: we can see below that as a safe haven, the US$ has been bouncing in price, but the EV pattern shows that investors are selling. This does not mean that the US$ is going to fall. It means that the need for US$ in the nearby future is lower because shipment of goods are expected to slow down and hence no need to keep these US$ contracts.



    If investors were selling the US$ and buying other currencies such as the Euro, we would see an accumulation of Euro, which is not the case below.



    Conclusions:

    The markets will take notice and selling will completely overwhelm the central banks' liquidities injections as soon as it will become obvious that the virus has propagated ahead of the Chinese quarantines. The markets will hence expect more worldwide pockets of quarantines and a greater disruption in the global production and trade.

    However, for now, we can see below that except for NFLX, all the other NQ8 stocks displayed positive EV patterns on Friday. This tells us that the Fed money is still being pushed in the markets and could still be transmitted to the rest of the markets through ETFs. But the slightest selling move on the NQ8 could spread like Australian fires. No need to becoming a powerless koala: better move before the fire is declared!