- Dow futures crashed over 1.5% at the open of trade on Sunday.
- Xi Jinping wobbled stocks after admitting China made mistakes as the coronavirus spreads rapidly in Italy, South Korea and the Middle East.
- Further problems for the Dow Jones emerged after Bernie Sanders comfortably won the Democratic primary in Nevada.
Dow futures crashed 520 points on Sunday as the spread of coronavirus in Italy and South Korea raises concerns about a global pandemic. Adding to the worries, a surprising admission of guilt from Chinese premier Xi Jinping suggested the coronavirus is far from being under control in China.
Xi Jinping Confirms Coronavirus Not Under Control
All three major U.S. equity indexes were off sharply at the open of trade Sunday afternoon. The Nasdaq fell 1.5%, the S&P 500 declined 1.2% and the Dow was off around 1.8%.
In the commodity sector the price of gold hit fresh multi-year highs above $1,660. WTI crude oil plummeted with the stock market, down 2.5% at $52.38.
Dow bulls may finally be forced to accept the economic reality of the coronavirus outbreak, as Chinese Premier Xi Jinping made an (exceptionally rare) admission that the virus has exposed several shortcomings in his government.
Xi commented that China still does not have the infection spread under control, as he stated,
First, [we must] resolutely curb the spread of epidemic … increase the rate of treatment and cure, and reduce the infection and death rates effectively in Hubei and Wuhan.
His use of the word “crisis” is quite shocking from the famously guarded CCP and is likely to have a negative impact on Wall Street’s nervous mood.
Dow Reacts to News of Coronavirus Strongholds In South Korea & Italy
The timing of the announcement is unsurprising given that China can no longer control the dialogue around the outbreak. It has now taken root in Iran, South Korea and Italy.
South Korea has now announced more than 600 cases of the coronavirus, and recently raised its threat level yet again.
In Iran, the government fears the virus is in every single city and has announced eight deaths. As neighboring states shut land borders, the World Health Organization (WHO) is extremely concerned about this outbreak, largely because they fear Iran does not have the medical infrastructure to deal with a significant crisis.
Italy has become a base camp for the coronavirus in Europe with 155 confirmed cases and 11 cities under lockdown. Worried citizens are stocking up on food, with any shortages likely to have an impact on inflation in the region.
Market Shock Possible as China Hoards U.S. Dollars
While the impact of the coronavirus has been obvious in plenty of dire economic statistics, none more so than the 92% drop in Chinese car sales, there are structural warning signs flashing red.
According to a research note from economist Andreas Steno Larsen at Nordea, China’s biggest exporters have been hoarding U.S. dollars as the fear of a major devaluation in the yuan runs rampant:
It seems like USDs are already scarce… at least in China. China’s MOFCOM said that exporters face difficulties in receiving FX, and already before the outbreak of the Wuhan virus, the conversion rate of “received FX” was at 12-months lows. Usually, this is a sign that exporters fear CNY weakness. We wouldn’t be surprised to see record-lows in the foreign FX conversion rate in February, which leaves a bit of homework to be done for the PBoC in terms of restabilising the credibility outlook around the CNY.
The People’s Bank of China (PBOC) keeps a tight grip on the CNY. Weaker fixings by the PBOC can be interpreted bearishly by the stock market, but so far, USD/CNH has not seen a dramatic spike.
Coronavirus Not The Only Worry For Stocks This Week
Adding to potential volatility for the Dow Jones, Senator Bernie Sanders is powering his way towards the Democratic nomination after another win in Nevada.
One billionaire speculated that a Sanders presidency poses a bigger threat to the Dow Jones than the coronavirus.
With so much going on, the VIX has been on the rise. After such a busy weekend of bearish headlines, all signs point to a week of volatility in the Dow Jones, particularly in stocks with sizeable Chinese exposure.
This article was edited by Sam Bourgi.
Last modified: February 23, 2020 11:51 PM UTC