Market Seeks Safe Haven Shelter Once Again, Coronavirus or Overvaluation?

  • Feb 28, 2020 AEDT
  • Team Kalkine
Market Seeks Safe Haven Shelter Once Again, Coronavirus or Overvaluation?

Gold prices are again measuring higher highs with the price reaching a record of $2,562.05 (intraday high on 24 February 2020) and currently hovering around the same to trade at $2,518.12 (as on 28 February 2020 2:29 PM AEDT).

The reason behind the gold rally seems to be psychological rather than any other price drivers. The rising pessimism among the global market participants concerning spreading of the coronavirus is pulling the price up of safe haven and battering the risky assets down.

The surge in gold price coupled with a fall in equity indices across the globe is putting pressure across the fixed income instruments, which, despite reaching near to maturity is trading above par or at a premium.

The exchanged-traded Treasury bond of maturity at 15 April 2020 (GSBG20) is currently at the Bid of $102.150 and at the offer price of $102.160. The most active exchange-traded Treasury bond on the exchange GSBG29 (maturity 21 April 2029 and coupon of 3.250 per cent (annually, paid semi-annually) is trading with a bond yield of 0.720 per cent at $122.341.

The fear related to the coronavirus is pushing the market participants seek safe shelters, which in turn, has led to the fall in Australian 10 year bond yield to a new record low of 83.8 bps (as on 28 February 2020 2:23 PM).

Also Read: Market Pessimism Grows Stronger Over Coronavirus; Risky Assets Under Pressure, Gold Near Record Peak

Safe Havens

  • Gold

XAUAUD Daily Chart (Source: Thomson Reuters)

XAUAUD Daily Chart (Source: Thomson Reuters)

On the daily chart, gold prices are trading above the pairs of the short-term exponential moving average with a positive cross between the short-term pairs and the long-term pairs. The increasing gap between the short-term exponential moving averages and long-term exponential moving average suggests that the gold is gaining upside momentum and is out of its deep consolidating range observed during the last quarter of the year 2019.

XAUAUD Daily Chart (Source: Thomson Reuters)

XAUAUD Daily Chart (Source: Thomson Reuters)

Post applying the Ichimoku clouding technique, it could be seen that the price is trading above the Span A, which denotes that mean value of the conversion line and the base line. Gold demonstrated a positive cross between the conversion line (mean value of 9-day highs and lows) and the base line (mean value between 26-day highs and lows) near Span B, and gold prices spiked; however, Ichimoku failed to give a timely strong-signal, as the crossover took place below Span B, which is typically regarded as a weak buy signal.

The Ichimoku is now giving some healthy signal with increasing spread between Spread A and Spread B (mean value of 52-day highs and lows), reflecting the presence of a strong bull trend.

It could be summarised by studying the features of the above charts that the price pattern is behaving in line with the market stance of high pessimism related to the return from risky assets under the present global circumstances.

  • Japanese Yen

JPY Spot Daily Chart (Source: Thomson Reuters)

JPY Spot Daily Chart (Source: Thomson Reuters)

On the daily chart, the Japanese yen is strengthening indicating the money flow towards safer haven i.e., JPY as clearly indicated by the price action in the above chart. The spread between long term moving averages and short term MA narrowing down suggesting a higher probability of a change in trend.

Also Read: The Do's and Don'ts While Trading in Commodity Market

JPY Spot Daily Chart (Source: Thomson Reuters)

JPY Spot Daily Chart (Source: Thomson Reuters)

On applying the Ichimoku clouding on the daily chart, it could be seen that the asset is currently hovering around the support zone (sky blue clouds) with a positive cross between the conversion line and the base line.

The spread between Span A and Span B is slightly narrowing and complimenting the findings from applying guppy multiple moving averages.

The 14-day Relative Strength Index is just above the mean, from where the RSI had rebounded twice. Both the price and RSI near support suggest that the future trend would be confirmed post the price either moves below the support zone or takes support and rebounds.

  • Falling Bond Spread

Yield Spreads (Source: Thomson Reuters)

Yield Spreads (Source: Thomson Reuters)

The bond yield spread between the Australian 20 years treasury bill yields and 10 years treasury bill yields (green) is again moving down since the first quarter of the year 2019, which further suggests that the market is pessimistic over the long-term growth and keeping the yields low.

Likewise, after a slight recovery in the spread between the Australian 10 years treasury bills yield and Australian 5 years treasury bills yield (purple line); the spread is again moving downwards signifying lower discount rate (or bond yields) demanded by the market in the wake of falling returns from risky assets across the globe.

While the demand for safe assets are recovering and the market believes that the impact across the risky assets is mainly due to the coronavirus outbreak, there is another class of investors emerging in the market and mentioning that the fall across the global equity indices is not just because of the coronavirus.

A class of investors believe that the coronavirus is just a storm in a teacup and the fall is mainly due to the overvaluation, which some of the market correlation indicated previously.

To Know More, Do Read: ASX Gold Stocks- A Healthy Buy for Profits?


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