Long-held correlations breaking down
While the CBOE Volatility Index (VIX) rallied and the U.S. dollar strengthened, especially against Emerging Markets, something odd appears to be occurring in major macro barometers, including the U.S. dollar, the Japanese yen, Gold, and U.S. treasuries: long-held correlations are breaking down. Even as the U.S. dollar has strengthened, so too has gold, when historically the two have had an inverse relationship. Gold, in particular, is soaring on coronavirus fears and its spot price may be poised to reach a level not seen since 2012 [Figure 2].

Though it’s not clear what the breakdown in correlations means, it could be that investors believe, both, that the U.S. may potentially be less impacted by coronavirus, and also that the Fed may need to embark on another cycle of easing. Already, there are almost two full cuts priced in by the end of the year, with the first full one expected by the June meeting.

Will concerns about coronavirus and US politics intensify or will investors buy the dip?
This week, we’ll be watching whether concerns about coronavirus and U.S. politics intensify — or if investors come back in to “buy the dip” as they have so many times since early 2019.

Fear of Coronavirus pandemic: We’re entering a new stage with the coronavirus, as talk of a pandemic grows louder. We’re seeing local transmission and the virus’ spread is broader than first thought. China has again, and for the third time, revised its methodology for counting infection rates, feeding into a lack of trust about infection rate numbers. Investors remain concerned, as reports of supply chain disruptions and the total number of cases worldwide increase. Markets will be keeping a close eye on rates of infection, and how well containment efforts work, not just in China but also in currently affected countries like South Korea, Japan, Italy and Iran.

U.S. presidential politics impacting markets: U.S. politics are finally impacting markets — and not in a good way. Given Bernie Sanders’ strong showing in the Nevada caucuses, and Mike Bloomberg’s poor performance in last week’s debate, the Democratic nomination is looking like Bernie’s to lose. Nominees will debate again on Tuesday, with the next primary in South Carolina on February 29th. Bernie’s performance is making investors nervous and, according to the popular BAML survey, the “Outcome of the 2020 U.S. Presidential Election” is now the “biggest tail risk.”2 And the betting market PredictIt currently has Bernie at a 65% chance of winning the nomination, up 15 points in the past week.

U.S. personal income and other data coming out this week: We’ll be watching the Eurozone confidence survey coming out on Thursday. China’s PMI and Japanese retail sales and industrial production come out on Friday. U.S. personal income and spending will be released on Friday as well.

To download a copy of this commentary and the chart of the week click the button below.

To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.