Commodities market and other risky assets such as global equity markets are taking a hit from the spreading of the coronavirus, which has impacted many business affairs in China and in tandem induced fear across the globe.
Risky commodities such as base metals and oil have been deeply jabbed over the possibility of an economic slowdown in the wake of the virus. The death toll in China has been estimated by some media houses to reach over 80 with over 2,500 infection cases.
The commodity market and equity markets are responding negatively over the news; however, the recent event of the coronavirus has propelled gold with market participants hedging fall in equity markets and depreciating currency.
The Oil Market
Oil markets have witnessed a significant decline with Brent crude oil futures (CFD) cracking from its recent top of USD 71.75 a barrel (intraday high on 8 January 2020) to the present low of USD 57.74 (intraday low on 27 January 2020), which marked a fall of ~19.52 per cent.
Major Oil Decision Makers Voice their Opinion
While the market seems to be pessimistic over the epidemic threat and discounting risky assets, top oil decision makers are of the opinion that the virus threat might not impact the oil demand as much as being estimated by the market.
In the status quo, Saudi Arabia, the oil kingpin urged caution related to the spread of the coronavirus and its impact on the global oil demand and economy and the Saudi’s energy minister- Prince Abdulaziz bin Salman mentioned on local media that the fall in oil prices has been primarily driven by the psychological factors rather than demand and supply dynamics.
The oil minister also mentioned that the pessimism adopted by the market is keeping a lid on oil prices despite the limited impact on oil demand of the China virus. Prince Abdulaziz bin Salman also referred to the 2003 SARS outbreak and mentioned that the pandemic did not significantly hamper the oil demand.
While Saudi’s energy minister indicated towards the high pessimism and urged caution related to over-discounting the oil price, the United Arab Emirates (UAE) also drummed on the similar lines, and the UAE Minister of Energy- Suhail al- Mazrouei mentioned that it is important that the market does not exaggerate projections concerning future demand for oil.
Algeria’s Energy Minister- Mohamed Arkab, who currently holds the presidential chair of the Organization of Oil Exporting Countries (OPEC) added to the response of Saudi and UAE and suggested that the impact of the coronavirus over the oil demand would be minor.
When the oil market is getting overly pessimistic, Saudi Arabia reiterated that it would take all the required measures to support the oil price, and while the OPEC+ members are already supporting a production cut of 1.7 million barrels per day, other options would be worth noticing, when the OPEC+ members meet in Vienna in March 2020 for its 178th Extraordinary Meeting.
However, when the oil premiers are seeing the fall in price as a result of exaggerated pessimism over the impact of the coronavirus on the oil demand, it could also be a result of towering oil production capacity of the United States, which is further giving the supply comfort to energy market participants.
To Know More, Do Read: U.S. Contours All-Time High Oil Production; Libya Supply Constraints Subdued
Base Metals Copper Down 9.7%, Iron Ore Down 5.9% from Recent Highs
Base metals such as copper and nickel, which previously surged over the industry projection of upcoming surge in demand took a hit as market assess the demand to drop over the new year holiday season and outbreak of coronavirus in China.
Copper futures (CFD) declined from USD 6,342.25 a pound (intraday high on 16 January 2020) to the present low of USD 5,725.75 (intraday low on 27 January 2020), which underpinned a price depreciation of ~ 9.72 per cent.
Iron ore prices witness a similar price action with prices of iron ore futures (CFD) dropping from RMB 684.50 (intraday high on 8 January 2020) to the present low of RMB 644.00 (intraday low on 27 January 2020), a fall of ~ 5.91 per cent.
The drop in iron ore prices exerted pressure on top Australia iron ore exporters, and while share prices of Fortescue Metals Group Limited (ASX: FMG) were trading above a decade high and near its all-time peak, the stock plunged on ASX from $12.870 (intraday high on 23 January 2020) to the present low of $11.410 (as on 28 January 2020), which marked a decline of ~ 11.34 per cent.
S&P/ASX 200 and S&P/ ASX 200 Resources
The drop in major commodity prices such as copper, crude oil, iron ore, led a decline in resource sector, which makes up a significant portion of the S&P/ASX 200 Index, and the index fell from 7,144.90 (intraday high on 22 January 2020) to the present low of 6,964.70 (as on 28 January 2020), which marked a loss of ~ 2.52 per cent.
Gold Shining Brighter
While the coronavirus epidemic threat reduced the demand for consumption-based commodities, the investment-based commodity- Gold rose to a record high and remained quick to hedge against the drop in the equity market and other risky assets.
Gold spot rose from its recent low of $2,224.64 (intraday low on 14 January 2020) to the present high of $2,345.92 (as on 28 January 2020 4:21 PM AEDT), which underpinned a price appreciation of ~ 5.45 per cent.
The surge in gold prices is taking it near the peak of $2,352.26 (marked on 8 January 2020), and while the gold prices were previously halted over the gain in risky assets, the bulls are taking control of the rally, and prices are surging over the currency depreciation and drop in equity indices.
To Know More, Do Read: Equity Gains Cap Gold Shine; Market Apprehensive Over Risky Assets
Yuan Plunge and Export Earnings in Pressure
Chinese Yuan is now under pressure with one Yuan changing for $0.2133 (as on 28 January 2020 4:35 PM AEDT). The fall in Chinese Yuan coupled with falling commodity prices, is now jeopardising the export revenue projections for 2020 amid a strong dollar.
CNY/AUD recovered from its recent low of $0.2041 (intraday low on 31 December 2019) to the present high of $0.2136 (as on 28 January 2020), which marked a dollar appreciation of ~4.65 per cent. As, China is the primary market for Australia raw materials such as iron ore, copper, lithium, the drop in Yuan could hamper the export earnings, which in turn, is putting further pressure on ASX resource stocks.
- Commodities market and other risky assets are under pressure over the epidemic threat of coronavirus.
- Oil plunges by ~19.52 per cent amid coronavirus looms global demand; however, oil premiers urged cautious in assessing the impact of China virus on global demand.
- Ferrous and non-ferrous metals are facing the heat as well.
- Gold surges near a record high.
- S&P/ASX 200 remains under pressure over the drop in the resource sector, with top gunners such as FMG losing ~11.34 per cent in just a few days.
- CNY depreciates further, and coupled with falling commodity prices, jeopardise domestic export earnings projection for 2020.