By Giles Coghlan, Chief Currency Analyst at HYCM
When the S&P500 registers a day where it loses more than 1% of its value that is a significant event. In the current market sentiment the S&P500 has not recorded a single day of loss greater than 1% since October 2019. A 1% loss day breaks that run. Yesterday the S&P 500 closed down -1.57% at 3243.
Why is that significant
Well, historically speaking, when that happens there is a much greater chance of the S&P500 trading sideways or lower for the next 30 days. Now in the present situation that makes considerable sense considering the coronavirus concern. Look at the table below to see how a 1% down day was met by a falling or sideways market in the next 30 days.
What will make those concerns grow?
1. A spread of the virus outside of the Hubei Province. The Hubei province, in which the city of Wuhan is in lockdown, contributes less than 5% to China’s total GDP. So, in order for global equity concerns to grow the market will need to see the coronavirus spread further within China.
2. A declaration by the World Health Organisation that the coronavirus is a ‘global health’ concern. This will indicate the potential for a greater spread of the virus.
If we see either, or both of these events occur, then expect further equity sellers, JPY and CHF buyers as well as gold buyers. Also, we could expect the S&P 500 to fall or trade sideways in the next 30 trading days. However, the true seriousness of the coronavirus has not yet been fully established. Yes, the virus is very contagious. Yes, sadly over 100 people have died. However, many more die of the flu each year. Therefore, if the market views the coronavirus as a containable virus then the S&P 500 will recover quickly. Look at the response of the S&P 500 after the last virus of SARS in 2003. Notice that the S&P500 recovered much more quickly than the MSCI Asia Pacific Index. This, of course, makes sense, as many more SARS cases were in the Asia Pacific region.