Using patterns is specific not only to technical analysis, where the appearance of a familiar pattern in a chart allows a trader to follow a well-known algorithm but also to fundamental research. Trying to prevent a recession, the Fed dropped the federal funds rate three times in 2019, as its predecessors did in the 90s.
The market’s reaction to the current coronavirus outbreak is compared with the reaction to the outbreak of atypical pneumonia in 2003. The same is true of trade wars, parliamentary and presidential elections, and other events.
We need to admit that the past 3-4 years provide a perfect opportunity to study those patterns and rationally use them in the future. Brexit, Donald Trump’s victory at the 2016 election, Tories’ victory in 2019, trade wars and, finally, coronavirus are bright examples of how these or those assets react to expected or unexpected events. Obviously, epidemics will always break out, so why not work out a pattern today to know what to do exactly tomorrow?
The situations with atypical pneumonia, coronavirus, and other epidemics developed in a similar way. At the first stage, as the virus was peaking, there was risk aversion and a global economic slowdown caused by the decrease in business activity and consumption volumes, and breaches in supply chains. Stock markets, developing countries’ currency rates, and commodities were falling while gold, yen, and other safe-haven assets were in high demand.
Everything would change dramatically at the second stage. Once the epidemics reached their peaks, investors’ interest would return to major assets and the global economy would claw back losses.
For example, during the epidemic of Zika fever in 2016, the MSCI World Index fell by 5.5% and then grew by 8.4 % in the 6 following months. The analysis of 13 outbreaks that have occurred since 1981 showed that the index was growing 7.1% on average within 6 months following an epidemic’s peak.
The negative impact of the current epidemic on the global economy is considered to be more serious than in 2003 because China’s role is more important now than 17 years ago, and also because of globalization and a poorer current condition of global trade and GDP.
However, an epidemic can’t last forever. So, investors can form a strategy that allows earning money when an epidemic has reached its peak and become less interesting for reporters.
Obviously, we need to stake on the recovery of risk assets. They became much cheaper and economic, political and other cataclysms offer a perfect opportunity to buy what is cheap.
The idea of buying the currencies of those countries that suffered the most because of their tight connections with China seems quite interesting.
For example, pay your attention to a 5% fall of South African rand, a 4% fall of the Aussie and Kiwi, a 3% fall of Singapore dollar, and a 2% fall of Russian rouble since the beginning of 2010. China’s share in the export of those states is quite big, so the recovery of the Chinese economy will help out those currencies. Continue reading with Litefinance.com...