The Dow Jones faces a disastrous open as the coronavirus spreads across America and the U.S. embassy in Iraq is hit with a rocket strike.
The Dow looks set for an extremely rough start to the week as a multitude of geopolitical risks converge on a shaky stock-market.
After a weak close on Friday, investors in the Dow Jones are now faced with missile strikes against the U.S. embassy in Iraq, as well as a rapidly escalating coronavirus epidemic in China, with multiple new cases reported in the United States as well.
With many economists predicting that the U.S. economy’s historic run would only be halted by an “external shock,” almost on cue, we have not one but two highly significant threats to the Dow Jones’ quest for 30,000.
Over the weekend, medics also acknowledged two cases in California, one in Orange County and the other in Los Angeles County. That’s a highly unwanted occurrence for an area already in mourning over the loss of its most beloved athlete, NBA superstar Kobe Bryant and his daughter Gianna in a helicopter crash.
For investors paying close attention to the spread, California is of particular significance for three reasons. Firstly, California is the most populous U.S. state, with Southern California (mostly L.A. and Orange County) the most densely populated region. Secondly, California is comfortably the largest state economy in the United States, a little under double second place Texas.
Finally, it has the largest Chinese-American community (estimated at more than 1.2 million), some of whom visit their country of origin for the Lunar new-year (January 25), making the threat of contamination more probable moving forward.
Given the previous impact that virus epidemics have had on the stock market, major global indexes like the Dow Jones cannot ignore the spread of coronavirus within China.
Fears are escalating that Beijing has been massively downplaying the rate of infections, and the crisis has hit during the most significant economic event of the year.
A huge hit to Chinese productivity is expected, with knock-on effects in the global economy inevitable. In Hong Kong, protests remain fierce, this time against state administered quarantine, as protesters set fire to the buildings designated for infected parties.
While coronavirus worries are clearly on the rise, Nordea research believes China will eventually gets things under control, stating,
We remain relatively calm, though. Neither around the outbreak of SARS, nor around the outbreak of Swine -or Birdflu, did Copper prices fall of a cliff. Hang Seng (and local Chinese markets) were hit by the SARS-outbreak, but it proved short-lived as the virus was contained within roughly half a year. Global contagion effects were limited, and they should also be so this time around, even if the Corona virus has been spreading slightly faster than SARS.
As if all this was not enough, fears of re-escalation between the U.S. and Iran is once again on the rise. Several rockets were fired at the U.S. embassy in Iraq, with one reportedly having made a direct hit, while the others mostly missed.
Although there was an impact on the Dow Jones after the killing of Iranian general Qasem Soleimani, investors quickly priced out further military action as both Washington and Tehran appeared to back off. Now, this may all have changed, and already shaky risk sentiment will be waiting for Trump’s response.
The president is in a particularly tricky situation. He needs to maintain his strong man persona, while his best chance of re-election, a Fed-pumped Dow Jones, is looking particularly vulnerable to risk-off. Iran may be testing where his convictions lay, and is clearly optimistic his preference remains for de-escalation.
It seems unlikely, however, that a missile strike on what is technically U.S. soil in Iraq can go ignored.
Risk-off sentiment is currently sweeping global financial markets, as the safe-haven Japanese yen surges the Chinese Yuan weakens. Crude oil dipped over 2%, while Dow mini futures plunged 1.4%.
Every single one of these signs points to a hazardous combination of events for the Dow, mainly as it has only been focusing on positive trade war headlines for months.
Breaking beneath 29,000 on Friday, bulls are suddenly remembering what it feels like to lose money. Chaos in China (with a possible pandemic on the cards) and conflict in the Middle East looks like horrific timing after what has been a record-breaking run for the U.S. stock market.
This article was edited by Sam Bourgi.