Stocks, Oil crumbled on COVID 2.0 scare; Gold, Bonds gained

·       Wall Street tumbled after China’s ‘Batwoman’ scientist reported HKU5-CoV-2 virus, which is believed to have pandemic potential, but to a lesser extent

·       The market is now concerned about a potential COVID 2.0 from China after Trump 2.0 advocated a stronger China Trade deal 2.0!

·       HKU5-CoV viruses were first detected in bats in 2006, but the new data suggests HKU5-CoV-2 has a higher potential for interspecies infection' than others.

·       However, the potential for HKU5-CoV-2 to spill over to humans remains to be investigated

On Thursday, Wall Street Futures slipped on Trump tariffs tantrum and fading hopes of a 50 bps cumulative Fed rate cut in 2025 as the market is now expecting only a 25 bps rate cut in Dec’25, while June’25 odds dipped below 45%. The market may be also now anxious about the repetition of the 2007-08 sub-prime crisis amid increasing delinquencies in both personal and commercial real estate. On Thursday, Dow Jones (DJ-30) was dragged by the subdued guidance of Walmart amid the Trump trade war tantrum, deportations, and mass Firings of Federal employees. Walmart is seen as the bellwether of US consumer spending, the backbone of the US economy.

Wall Street was already under stress on the concern of a potential hard landing under Trump 2.0

In the last few weeks, since Trump 2.0 inauguration on 20th January 2025,  the US Federal Reserve (Fed) has expressed growing concerns about the potential for a U.S. economic "hard landing"—a scenario where efforts to control inflation lead to a recession amid Trump 2.0 policy tantrum and uncertainty. The Fed is quite concerned about Trump’s aggressive tariffs, deportations firings of Federal employees, and conservative immigration policies, which may affect the goldilocks nature of the US economy and a potential soft landing scenario.

Now after the first 30 days of Trump 2.0, almost all Fed officials, including known doves are concerned that Trump’s bellicose policies may cause higher unemployment, labor market tightening, wage inflation spiral, and eventually reignite inflationary pressures, disrupt economic growth, and complicate the Fed's ongoing mission to achieve a "soft landing"—cooling inflation without tanking the economy.

The latest FOMC minutes (January 28-29, 2025 meeting) also, highlight this tension. FOMC officials noted that while the economy has shown resilience, with unemployment steady at 4.1% as of late 2024 and GDP growth estimated at 2.5% for Q4 2024, the Trump administration's plans could shift the outlook. Trump's proposed aggressive tariffs on almost all major trading partners including allies could drive up the cost of living as US importers/producers/retailers may not hesitate to pass on additional costs this time to test customer acceptability and consumption behavior.

On Friday (February 21, 2025), Wall Street plunged after China Reports New Coronavirus with pandemic potential discovered. Stocks and oil slid, while Gold and bonds surged (as haven assets) following the announcement of a new coronavirus discovered in China, named HKU5-CoV-2, which is believed to have pandemic potential.

On Friday, Chinese scientists reported the discovery of a new bat-derived coronavirus, HKU5-CoV-2, capable of infecting human cells by binding to the ACE2 receptor, similar to SARS-CoV-2. This announcement has raised concerns about potential spillover events, though the virus's efficiency in binding to human ACE2 is reportedly lower than that of SARS. While the discovery of HKU5-CoV-2 is concerning, experts emphasize that its current risk to humans is low, and continuous monitoring and research are essential to assess its potential impact accurately. This discovery, led by researchers including Shi Zhengli from the Wuhan Institute of Virology, was highlighted by several influential media outlets noting its ‘pandemic potential’. Shi Zhengli, famous as 'Batwoman' for her work on coronaviruses, led the discovery, published in a top scientific journal.

Details on HKU5-CoV-2

The virus was identified by a research team led by Shi Zhengli at the Wuhan Institute of Virology. It belongs to the Merbecovirus subgenus and can bind to the same human ACE2 receptor as SARS-CoV-2, raising alarms about possible transmission from animals to humans. Although experts indicate that the immediate risk of widespread infection may be low, they emphasize the importance of monitoring such viruses due to their potential to mutate and cause outbreaks in the future.

The new HKU5-CoV-2 is a coronavirus belonging to the Merbecovirus family of pathogens. Merbecoviruses have been detected in minks and pangolins - the animal believed to be the intermediary for Covid between bats and humans. This, the scientists wrote, 'suggests frequent cross-species transmission of these viruses between bats and other animal species:

“This study reveals a distinct lineage of HKU5-CoVs in bats that efficiently use human [cells] and underscores their potential zoonotic risk. HKU5-CoV viruses were first detected in bats in 2006, but the new data suggests HKU5-CoV-2 has a higher potential for interspecies infection' than others. However, the potential for HKU5-CoV-2 to spill over to humans remains to be investigated.”

More about HKU5-CoV-2 virus:

Chinese researchers have recently identified a new bat coronavirus, designated HKU5-CoV-2, which has the potential to infect humans. This virus utilizes the same ACE2 receptor as SARS-CoV-2, the virus responsible for COVID-19. The study, led by virologist Dr. Shi Zhengli, famously/infamously known as "Batwoman" for her extensive work on bat coronaviruses, was published in the journal ‘Cell’. The research involved institutions such as the Guangzhou Laboratory, the Guangzhou Academy of Sciences, Wuhan University, and the Wuhan Institute of Virology. Lab experiments demonstrated that HKU5-CoV-2 can bind to human ACE2 receptors and infect human cells, including those in artificially grown lung and intestinal tissues. However, its efficiency in entering human cells is lower compared to SARS-CoV-2. The presence of a Furin cleavage site in the virus aids its entry into cells. Researchers have identified monoclonal antibodies and antiviral drugs that may target this bat virus.

While the discovery underscores the potential zoonotic risk of HKU5-CoV-2, experts advise caution. Dr. Michael Osterholm from the University of Minnesota suggests that existing immunity in the population to similar SARS viruses might reduce the pandemic risk. The study also notes that the virus' significantly lower binding affinity to human ACE2 and other suboptimal factors suggest that the risk of it emerging in human populations causing an all-out COVID 2.0 pandemic should not be exaggerated.

This finding has renewed focus on the Wuhan Institute of Virology, previously linked to theories about the origins of the COVID-19 pandemic—a claim that has been consistently denied by Chinese authorities. But whatever the actual or factual truth, after COVID, China is not ready to take any risk and is now instantly sharing all the details of any potential COVID-like virus, which may cause a local or even global pandemic. China has an advanced system/infra to detect and treat any such viral outbreak in the early stage as we have seen recently in late Dember’24 for HMPV.

Key Points of HKU5-CoV-2

Discovery and Origin: The virus was identified in bats within China and is a novel lineage of the HKU5 coronavirus, initially detected in Japanese pipistrelle bats in Hong Kong in 2006.

Transmission Potential: It has the potential for animal-to-human transmission due to its ability to bind to human angiotensin-converting enzyme (ACE2) receptors, similar to SARS-CoV-2, but the risk is lower.

Classification: HKU5-CoV-2 belongs to the merbecovirus subgenus, which also includes viruses like MERS-CoV.

Infection Ability: Lab tests have shown that it can infect human cells and artificially grown lung and intestine tissues. However, its efficiency in binding to human ACE2 is significantly lower than that of SARS-CoV-2

Risk Assessment: While there is a risk of transmission, researchers caution against exaggerating its immediate threat due to its lower potency compared to COVID-19's causative agent. Further research is needed to fully understand its potential impact.

Chinese Research Team: The study involved scientists from institutions like Guangzhou Laboratory, Guangzhou Academy of Sciences, Wuhan University, and the Wuhan Institute of Virology

In summary, while HKU5-CoV-2 poses some risk due to its ability for cross-species transmission via ACE2 receptors similar to COVID-19's virus (SARS-CoV-2), it is considered less potent at present than SARS-CoV-2 in terms of causing an all-out global pandemic; i.e. widespread infections among humans.

Global market implications:

The latest discovery has reignited fears reminiscent of the early days of the COVID-19 pandemic, prompting investors to sell off equities in anticipation of a synchronized global lockdown and recession. The ongoing situation underscores the interconnectedness of health crises and financial markets, as uncertainties surrounding public health can lead to drastic economic consequences, as we have seen during the COVID period in 2020. The HKUS COV research was conducted by the Wuhan Institute of Virology, which is at the center of the Western media’s lab-leak theory for COVID 1.0 in 2019-20, which claims COVID-19 was manufactured in a Chinese military-grade lab and accidentally/intentionally leaked to the public to take revenge for Trump’s Phase one trade deal. Now this time, Trump is talking about an improved Phase 2.0 trade deal between the US and China and China is again preparing to spread COVID-2.0!

Conclusions:

Overall jokes apart,  on a serious note, the market is not ready to take risks after the COVID 1.0 episode. Wall Street, Dalal Street, and also European markets are now extremely overvalued and thus COVID 2.0 scare may be just an excuse to correct itself. At around $200 TTM EPS (Q3CY24) and 22 reasonable (higher side) fair PE against actual EPS CAGR of around 7% and potential tech/AI prospect, the current fair value of SPX-500 may be around 4405.

The CY24 SPX-500 EPS may come to around $206 at around the current  CAGR run rate of 7.00% and CY25 EPS may be around $226 assuming 10% growth (on the higher side). Thus at around $226 projected EPS for CY25 and 22 fair PE, the current fair valuation of SPX 500 may be around 5050 rather than current levels of 6050, even after considering Trump 2.0 and AI/Tech optimism.

Bottom line

SPX-500 is vulnerable to a deep correction of around 20% to 5050 levels at any time due to any excuse/trigger like the US and synchronized global recession for Trump 2.0 and even any potential COVID 2.0 uncertainty. Trump’s bellicose policies from tariffs, trades, threats, techs, and mass firings of Federal Government employees may cause a hard landing for the US economy. Fed is concerned about Trump’s policy uncertainty from immigration, deportations, tariffs, fiscal austerity on one side and tax cut talks on the other side. Thus Fed may have now no option, but to wait for an actual policy move till at least March or even June’25. Thus considering all the possible scenarios, the Fed may close the QT by Q2 or Q3CY25; the Fed will do the next QE (if required) in a different composition. And Fed may cut a cumulative 50 bps in 2025 (June and December 25) every alternate quarter.

Market impact:

On Thursday, Wall Street Futures slid on the concern of a hard landing or even an all-out economic recession amid the concern of not only Trump 2.0 but also COVID 2.0 uncertainty. Stock Futures on both sides of the Atlantic, as well as the Pacific, plunged after a report about the potential COVID 2.0 virus in China; oil also slid on the concern of COVID 1.0 like global lockdown; haven assets like Gold and bonds surged.

Trump & Musk’s sudden austerity policies regarding Federal employees and projects may cause more economic harm than any meaningful real gain.  It seems that Musk is now the real US President in charge, and Trump’s senile, lethargic, and often dementia-like attitude may be indicating that Trump 2.0 may be much weaker than Trump 1.0. In this way, Trump 2.0 may lose trifecta or House majority soon in the 2026 mid-term election.

The S&P 500 tumbled 1.7%, and the Nasdaq 100 slid 2.1%, while the Dow Jones plunged 748 points, marking its biggest loss of the year. UnitedHealth shares plunged following reports that the Department of Justice (DOJ) is investigating its Medicare billing practices, making it the worst-performing Dow component. Consumer sentiment also took a hit, with the University of Michigan’s index falling to 64.7, reflecting growing concerns over inflation, which consumers now expect to rise to 4.3% in the coming year amid Trump 2.0 bellicose policy impact. The slide followed Walmart's subdued guidance and broader fears about the impact of President Trump's tariff policies. On the week, the S&P 500 dropped by 1.6%, while the Dow and Nasdaq slipped 2.5% and 2.4%, respectively.

On Friday, Wall Street was dragged by almost all the sectors led by Consumer Discretionary, Techs, Industrials, Energy, Materials, Communication Services, Banks & Financials, Real Estate, Health Care, and Utilities, while Consumer staples closed in slight green. China-savvy DJ-30 (blue chip MNCs) was dragged by United Health, NVIDIA, Amazon, American Express, 3M, Salesforce, Caterpillar, and Boeing, while boosted by Merck, Coca-Cola, P&G, Amgen, J&J, Verizon, McDonald’s and Honeywell. Pharma, communication/data, and QSR (Quick Service Restaurant) related stocks gained, while real economy-related stocks plunged due to the potential threat of COVID-2.0.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44650) now has to sustain over 45300-45500 any further rally; otherwise sustaining below 45200, DJ-30 may again fall to 44500/44100-43700/43300 and 42800/41900 and further 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (22300) has to sustain over 22400 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22350-22100, NQ-100 may again fall to 21700/21300-21100/20700 and further 20500/20300-20100/19250 in the coming days.

Also, technically Gold (CMP: 2945) has to sustain over 2965-2975 for a further rally to 3000/3025-3050/3075; otherwise sustaining below 2955-2950 may again fall to 2925/2895-2875/2860 and 2840/2825-2800/2780 and 2750/2740-2725/2690 and further 2675/2655-2610/2560 in the coming days.