Trading Tips for Black Swan Events: How to Profit Trading the Coronavirus Scare
Black Swan events such as the September 11th World Trade Center Attacks in 2001, the Great Recession of 2008 and the Fukashima Accident in Japan in 2011 were major unexpected catastrophes that had huge implications for humanity and caused major opportunities for those trading in currencies, commodities and equities.
Of course, not every Black Swan event has to be seen as a catastrophe to have a major market implication.
The collapse of the Soviet Union and its hold on Eastern Europe, the advent of the internet, the introduction of smartphones and the surge in popularity of electric vehicles could be considered positive events that to one degree or another were Black Swan events. The Black in Black Swan doesn’t mean dark but rare and unexpected.
Black Swan events are major market movers because the market tends to have much more dramatic responses to what’s unexpected than what’s expected as day to day prices tend to have already built in what most of the market expects. Black Swan events are often subjective and in the eye of the beholder but the amount of universal acceptance or awareness often stemming from the hype surrounding such an event can drive its effect on the market as much as it may affect actual market factors such as supply and demand.
The Wuhan coronavirus (2019-nCoV) was thought to cross over from animals to people in late December 2019 at a fish and wild game market in the city of Wuhan, the capital and largest city of the Hubei province in central China. The first fatality was recorded January 9th and within a month over 900 deaths have been recorded linked to “the Wuhan virus” which is similar to the SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome) viruses that both caused widespread panic and concern before they were both contained.
When SARS broke out in China in 2003, China only represented less than 5% of the world’s GDP. Since that time with annual GDP growth rates exceeding 6%, China has grown to be the world’s second-biggest economy with over 17% of the world’s GDP and has become the world’s largest consumer of a long list of commodities and “the factory for the world” supplying many key components to manufacturers and finished goods to retailers around the world.
Economists and traders who were fretting over the Black Swan event of an escalating trade war between the United States and many of its largest trading partners barely had a chance to catch their breath from the signing of Phase One a US-China trade deal halting tariff escalations when the Wuhan virus even more rapidly shook the markets as the Chinese and foreign governments along with international businesses took dramatic steps to contain the virus or mitigate its damage.
Internal travel bans within China, mass closures of manufacturers and eateries like thousands of Starbucks or hundreds of McDonalds, tens of thousands of flight cancellations and a declaration of a “force majeure” cancelling or suspending incoming oil, natural gas, copper and other commodity shipments into China and a privation of critical component and finished goods exported out have combined to hit the markets like an oncoming freight train.
The uncertainty of how bad the situation really is in China, how quickly it will actually be contained, how fast a treatment or cure will be found and distributed, how well it will be contained outside of China and how big and looming the death count grows will be determining factors on how the Chinese government and international community react but the publicity surrounding the outbreak is taking its toll in international tourism as Chinese and tourists who visited China are facing travel restrictions across the globe as well as China has almost overnight become one of the last places anyone wants to visit.
Countries relying on the Chinese importing their goods and raw materials are seeing their economies and currencies taking a hit. Several key examples are the Australian (AUD), the New Zealand dollar (NZD), the Singapore dollar (SGD), the South African Rand (ZAR) Hong Kong dollar (HKD) and Chinese Yuan (CHN) which have all lost value against the US dollar (USD) over the last month. In fact, most world currencies have taken a hit as the USD appears to be assuming a role of a safe-haven so far during the crisis. Gold has been fulfilling its traditional safe-haven role better than the JPY as the Japanese waiver with the virus’s possible effect on Japan hosting the 2020 Summer Olympics, shaky Asian markets as well as its reliance on China and other affected countries. Additionally, Bitcoin (BTCUSD) has shown itself to be gaining interest as a haven asset especially for residents of certain countries in times of crisis.
During the SARS and MERS outbreaks, it took months before those outbreaks became relatively contained. While these kinds of dramatic occurrences play out, markets can react with large movements on the prices of many trading instruments/assets.
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