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LAWRIE WILLIAMS: Wuhan virus: Beware the dead cat bounce

As we move into a new week the Wuhan virus has fresulted in more cases being confirmed in China and more deaths.  Outside China there have also been more confirmed cases but, thankfully, so far no more deaths.  The rate of increase does seem to have slowed a little over the weekend due to the draconian measures taken by China to contain the virus spread, but fears remain that China may be under-reporting both the number of confirmed cases and the number of deaths.

Nevertheless, some equities markets seem to be making something of a small recovery.  The Nikkei index was down, but the Hang Seng rose and European markets opened tentatively stronger.  Chinese domestic markets though plunged: The Shanghai composite index fell 7.72% while the Shenzhen composite dived 8.41%, according to a report by CNBC.   Obviously the effects on China’s domestic growth and economy in general, will be severe.

We suspect U.S. stock indexes will make something of a recovery after Friday’s heavy falls, but it is early days yet and should there be reports of further growth in cases outside China, and particularly any more deaths we would expect serious falls to become apparent yet again. 

Precious metals prices were all marked down in Asia and in this morning’s European trading, but substantial nervousness remains and the recoveries in equities this morning could just be a proverbial dead cat bounce.  Be warned.  As to precious metals prices, gold and silver in particular are seen as something of an economic bellwether and if they look to be rising sharply there has to be a strong possibility that the powers that be will attempt to keep them under control, as well as trya an make sure equities markets hold up.

Johns Hopkins University in the U.S. has produced an online map which is updated daily to cover all the latest reports of virus incidents and deaths in China and around the world:  Click here to access it.  As one can see from the graphic of virus incidence at the bottom of the map there is the possibility emerging that the incidence of the virus spread both within and outside China could be diminishing – but this could be because of a reduced incidence of reporting over the weekend. Suffice it to say that any signs that international spread of the virus is growing could rapidly dash the more optimistic sentiment of today’s markets.

So what would be my personal investment advice under the current circumstances?  Global GDP is certain to be affected by the virus incidence in China alone due to the restrictive nature of the government’s response to try and alleviate the spread.  This should be positive for gold and silver which tend to do well in a global geopolitical/geo-economic crisis, but perhaps not for platinum and palladium where demand will likely be affected by the downturn in the world’s largest car and truck market. 

As for general equities we’d tend to hold off any investment at least until it becomes apparent that the virus spread scare is over.  Better safe than sorry.  And even then it may not be safe to climb back in if what has happened already should trigger something of a meltdown as we have been warning.  The slightest suggestion that the virus is spreading outside China would likely have a hugely adverse impact on markets.  And it is still too early to say whether that is likely to be the case or not.

03 Feb 2020 | Categories: China

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