Economic Indicators Point Towards Global Recession As Coronavirus Break Out In Iran, South Korea, and Italy; Will Bitcoin Continue To Be Used As A Safe Haven Asset?

February 25, 2020 / by Zachary Mashiach

We’ve talked about how the Coronavirus will likely have a major impact on financial markets, including Bitcoin (BTC), largely due to the Chinese economy slowing to a crawl. Since then, the Coronavirus has broken out in multiple other countries, and a slate of economic indicators suggest that a global recession may be developing. Will Bitcoin (BTC) continue to behave like a safe haven, or will Bitcoin (BTC) decline alongside the rest of the economy?

Previously, the large majority of Coronavirus cases had been confined to China, where there are currently over 75,000 cases and over 2,000 deaths. There were cases in many other countries as well, but until this week, all other countries had fewer than 100 cases each. 

In the past several days, Coronavirus outbreaks have developed in South Korea, Iran, and Italy. In South Korea, the official case count is approaching 1,000. In Italy, the cases are in the hundreds, and in Iran, there are dozens of cases, but an unofficial death toll of 50 suggests there are hundreds of cases. 

Previously investors and speculators had been holding out hope that China would contain the Coronavirus and that it would not become a true pandemic, but now, there are no more illusions about this is a global pandemic. 

The main impact on the economy from the Coronavirus has been a slowing of trade, retail sales, work, air travel and manufacturing in China due to quarantines and the closing of international borders. Now, similar quarantines are popping up in South Korea, Iran, and Italy. 

Stocks have reacted negatively to this news. European stocks saw their worst day in four years on Monday, Feb. 24, while the Dow Jones Industrial Average declined roughly 1,000 points. Simultaneously, oil slid — which is a good proxy for weakening economic health — and gold rallied. 

One very concerning economic red flag is that the New York Fed’s recession probability indicator, which utilizes the slope between 3-month bond yields and 10-year bond yields, has never had any false positives in the past once the probability reaches 40%. 

On Monday, the 10-year bond yield declined below 1.4%, confirming that an economic recession is imminent since this pushes the recession probability indicator above 40%. Simultaneously, 10-year bond yields declining to below 1.4% suggests that the Federal Reserve will have to cut interest rates to 0% or lower in the next 12-18 months. Indeed, there are already calls for the Fed to cut rates immediately

Further, Morgan Stanley has determined that a selling feedback loop could begin after Monday’s losses due to systematic and price reactive traders. Essentially, this Morgan Stanley data quantifies how recent stock market losses may be enough to induce a speculation-fueled stock crash. 

Until now, the Coronavirus has caused stock weakness, but the hope it would not spread beyond China prevented major losses. This has changed in the past week with outbreaks of Coronavirus occurring in several other countries, and now, an imminent economic recession seems quite possible.

How Will The Bitcoin Market React?

Until now, Bitcoin (BTC) has generally been gaining simultaneous with economic weakness due to the Coronavirus. Bitcoin (BTC) was behaving like a safe-haven asset, but on Monday, Bitcoin (BTC) dropped from $10,000 to as low as $9,500. 

This raises questions as to whether Bitcoin (BTC) will continue to behave like a safe-haven asset going forward, or if Bitcoin’s (BTC) price will decline if the Coronavirus sparks an economic recession. 

It seems possible that the Coronavirus could be sparking Bitcoin (BTC) selling. For example, if traders are losing lots of money in the equities market, they may sell some Bitcoin (BTC) to cover their losses. The losses on Monday were particularly steep and fast, which may have triggered this effect, versus the previous situation where stocks were declining a bit and collectively traders were investing in Bitcoin (BTC) as a safe haven.

That being said, the CME Bitcoin Futures expiration is coming this week, and it is possible that Bitcoin’s (BTC) declines on Monday have something to do with the expiration, and that next week Bitcoin (BTC) will start behaving like a safe-haven asset again.

It is impossible to forecast how Bitcoin (BTC) will react if the economy goes into a recession due to the Coronavirus pandemic. Bitcoin (BTC) has proven that it can act as a safe haven and gain value as stocks fall. Monday’s data shows that Bitcoin (BTC) could also be sold off while stocks are experiencing steep declines, possibly due to investors selling Bitcoin (BTC) to cover their losses. 

Although no Bitcoin (BTC) price prediction can be made due to these complex circumstances, the one thing that is clear is that the Coronavirus will be a dominant factor in the financial and Bitcoin (BTC) markets in the coming weeks and months. That being said, Bitcoin’s (BTC) behavior after the CME Bitcoin Futures expiration this week may shed some light on how Bitcoin (BTC) will react going forward.