Capitulation pressures intensify

Intermediate
  • The more aggressive spread of the coronavirus into other European countries outside of Italy, after the lockdown last weekend of 15 Italian provinces was extended to the whole of the country, was underscored by the World Health Organisation (WHO) now categorising COVID-19 as a pandemic.
  • Spain is now on lockdown too, with many European nations now closing schools and banning large public gatherings, including sports events, whilst further containment measures are expected across Europe into this week.
spread of coronavirus in Europe
  • In addition, the spread into the USA has seen the US authorities ban travellers from Europe and the UK too, with President Trump declaring a state of emergency on Friday. Again, further containment measures are anticipated.
  • Panic buying has broadened globally, from previously the buying of hand sanitizer, disinfectant and toilet rolls, with now broad-based panic buying echoing intensifying fears amongst the general public.
panic buying
  • The financial authorities have attempted further measure to intervene to stabilise financial markets with equity markets in freefall since late February.
  • Earlier in the month, the Reserve Bank of Australia (RBA), the Bank of Canada (BoC) and the US Federal Reserve (Fed) cut interest rates, whilst last Wednesday the Bank of England also produced an intermeeting cut of 0.50%.
  • This was timed to coincide with the UK budget, which saw an attempt to provide a fiscal boost to the economy, with modest tax cuts, but a significant increase in government spending.
  • On Thursday, the European Central Bank (ECB) did not cut rates (which are already sub-zero) but did announce measure to support bank lending and also increased its asset purchase program.
  • On Thursday, the Fed also announced $1.5 trillion in capital injections via the repo market, to calm Treasury-bill liquidity issues in an attempt to improve economic activity given risks from the coronavirus
  • Although stock markets did stage a strong rebound Friday this was only after a devastating plunge earlier in the week, in the wake of the freefall from late February.
  • The Fed on Sunday also cut rates to effectively zero percent and will recommence its bond buying to the tune of $700 billion. Stocks markets plunged again!!
  • Ongoing fears regarding the global coronavirus spread alongside the potential fallout from liquidity risks in the financial system have kept markets extremely nervous.
  • To highlight the severity of the recent moves and the volatility, the S&P 500 had its largest percentage down day on Thursday (-9.5%) since the 1987 “Black Monday” crash, managed its best up day on Friday (+9.3%) since October 2008, with the market not posting consecutive back-to-back 9% daily moves since October 1929!
  • Turning to the safe havens, global bond markets have started to selloff from record high prices/ low yields, partially due to fiscal stimulus hopes, but also likely due to investors “selling the good to pay for the bad”.
  • Gold has had also sold off significantly, potentially for the same “selling the good to pay for the bad” reason, but also likely due to the surge in the US Dollar.
  • This takes us to the Forex side, where the US Dollar has rejected its position as the ugly sister across major currencies, surging against all major currencies at the end of last week, even against the Japanese Yen, USDJPY rallying back above 107.00.
  • The traditional “risk currencies” amongst the Majors, the Australian, New Zealand and Canadian Dollars are falling heavily, whilst Emerging Markets currencies have plunged.
  • This is likely due to a shortage of US Dollars alongside a strong demand for the global currency in such uncertain times.
  • On the commodity front, the Oil price has struggled to recover from its 25% plunge at the start of last week after an oil price war was started between Russia and Saudi Arabia.
Oil price war
  • This was after larger output cuts were not agreed upon and the taps were turned on by Saudi Arabia and the oil price slashed.

Key this week

  • Data regarding the European and US spread of and deaths from the coronavirus will remain in focus this week, alongside the increasingly stringent containment policies put in place by governments.
  • The functioning of the liquidity markets will be important too, of particular concern are mounting pressures in the credit markets.
  • Central Bank activity
    • Wednesday: Fed Meeting and interest rate decision, with a large interest rate cut likely, with the futures market pricing in a 0.75-1.00% rate cut.
    • Thursday – Bank of Japan (BoJ) Meeting, interest rate decision, press conference. Interest rate cut unlikely, but some other monetary policy stimulus likely.
    • Thursday – Swiss National Bank (SNB) Meeting, interest rate decision.
    • Friday – People’s Bank of China (PBoC) interest rate decision.
  • The oil price is going to be an important factor to monitor going forward.
  • Data remains somewhat irrelevant, but below are the main data points to possibly watch.
Date Key Macroeconomic Events
16/03/20 Chinese Retails Sales and Industrial Production
17/03/20 RBA Meeting Minutes; UK Employment report; German ZEW Survey; US Retail Sales
18/03/20 Federal Open Market Committee Meeting, interest rate decision, press conference
19/03/20 Australian Employment report; BoJ Meeting, interest rate decision, press conference; SNB Meeting, interest rate decision
20/03/20 PBoC interest rate decision

Editor in chief

Steve Miley has 29 years of financial market experience and as a seasoned expert now has many responsibilities. He is the founder, Director and Primary Analyst at The Market Chartist, the Editor-in...continued

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