Equity markets tumbled yesterday and during the Asian morning today due to fears of a fast coronavirus spreading outside China. The yen, bonds and gold rallied, with the precious metal hitting its highest since January 2013. The greenback slid though, as investors raised bets that the Fed may need to cut rates twice this year. What’s more, the yield of the 10-year US Treasuries hit a record low on Monday, while its difference with the three-month yield widened to -15bps, reflecting increasing concerns over a recession in the world’s largest economy.
The dollar traded lower against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It lost the most ground versus JPY, SEK and EUR in that order, while it managed to eke out some gains only versus CAD. The greenback was found virtually unchanged against the AUD and GBP.
With regards to the broader market sentiment, we cannot derive safe conclusions just by looking at the performance in the FX world. Yes, the yen was the big winner, but can we rely on that? Last week, the yen was trading in a tumbling mode, even during risk-off periods. What’s more, the risk-linked currencies did not fall sharply against the dollar, which was also down, instead of attracting haven flows as well. Therefore, we prefer to turn our attention to the equity and bond markets.
In the equity world, we see a bloodbath. Most major EU indices tumbled more than 4%, with Italy’s FTSE MIB feeling the heat the most. The Italian index fell 5.43%, its biggest fall since August 24th, 2015. Wall Street followed suit, with all three of its main indices losing more than 3%. The tailspin rolled somewhat over into the Asian morning today, with Japan’s Nikkei falling 3.34% and China’s Shanghai losing 0.60%. Strangely though, some markets tried to stabilize, with Hong Kong’s Hang Seng trading virtually unchanged and South Korea’s KOSPI gaining 1.18%.
The reaction in the KOSPI appears very strange to us, especially given that the nosedive in equities was the result of surging coronavirus cases in South Korea, Italy and Iran. In any case, although both cases and deaths are back into slowdown mode in a worldwide scale, fears of a fast spreading outside China may keep market participants on the edge of their seats. Market chatter suggests that the recovery in some Asian indices may be owed to reports on a vaccine, which will though be submitted for human tests in late April. But didn’t we know that from last week?
As for our view, it has not changed. On the contrary recent developments support it even further. Remember that even when stock indices were hitting record highs, we noted that the risks were asymmetrical and tilted to the downside. We also noted that with scientists saying that the virus is likely to spread more easily than previously believed and with the vaccine trials set to start late April the fastest, we still believe that the economic wounds could well drag into Q2. This may prompt investors to reduce further their risk exposures and seek shelter in safe havens. Even if equities rebound somewhat, we will treat such a move as a corrective bounce. In order to start examining the resumption of the prevailing uptrends, we would like to see clear evidence that the virus is indeed contained.
Risk-linked currencies, like the Aussie and the Kiwi are likely to stay under selling interest, while safe-havens, like bonds, gold and the Swiss franc could prove to be the beneficiaries. We are still reluctant to trust the yen, despite being yesterday’s main gainer. The reason is that last week, it’s been falling even during risk-off periods on concerns that the Japanese economy is headed towards a technical recession.
With regards to gold, the precious metal continued marching north yesterday, hitting resistance near 1689, a territory last seen back in January 2013. Then it entered a corrective mode, which continued today as well. Apart from haven flows, gold may have accelerated higher early yesterday, also due to the weak dollar.
The dollar failed to shine yesterday, and the reason may have been increasing bets over more cuts by the Fed. Up until last week, investors were pricing in one cut for this year, specifically in September. Now, they anticipate more than two by the end of the year. Specifically, they are pricing in one in June and another one in November.
Although the message we got from the latest FOMC meeting as well as by Chair Powell’s testimony before Congress is that the current level of interest rates remains appropriate, investors’ concerns over the virus’s impact on the global economy have heightened, and with the Fed being one of the major central banks with ample room to ease further, they may be thinking that US policymakers should decide to act.
What’s more, the yield of the 10-year US Treasuries hit a record low on Monday, while its difference with the three-month yield widened to -15bps. A yield curve inversion has preceded every recession in the past 50 years, and thus, participants are closely watching it for indications on whether this could be the case in the world’s largest economy.
Yesterday, the global equities sold off sharply, where the Euro Stoxx 50 index was no exception. The price came close to testing its January low, at 3614, but still remained slightly above it. Given the steep slide, there might be a possibility to see a small correction higher, however, given the current negative atmosphere in the markets, the potential correction could be short-lived. This is why we will stay bearish, at least for now.
Near the aforementioned 3614 hurdle, runs the 200-day EMA, which could help support the index from dropping lower straight away. We may see a small correction to the upside, but if Euro Stoxx 50 struggles to move back above the 3671 barrier, this could invite the bears back into the game. Another test of the 3614 area might lead to its break this time, which may clear the path to the 3567 zone, marked by the low of October 18th. Slightly below that zone runs a long-term tentative upside line, taken from the lowest point of December 2018, which could provide additional support.
Alternatively, if the price suddenly moves all the way back above the 3728 barrier, marked by yesterday’s high, this might spook the bears from the field temporarily and allow the bulls to take charge. We will then aim for the 3775 obstacle, a break of which may clear the way to this year’s high, at 3865.
Once again, AUD/CHF is approximately near its 25-year low, at 0.6429 level, which the pair tested in the beginning of February. Given that rate is still trading below a medium-term tentative downside resistance line taken from the high of April 18th, this gives us an indication that the overall trend is still to the downside. For now, we will stay cautiously bearish, because in order to aim for further downside, we need to see a break of the current lowest point of February, at 0.6429.
If such a move happens and AUD/CHF does drop below the above-mentioned hurdle, at 0.6429, this would confirm a forthcoming lower low and would place the pair in an uncharted territory. We could then only assume certain key levels, which may get tested. Levels like 0.6350, or 0.6300 could become potential targets.
On the upside, we will start considering slightly higher areas, if the rate pushes back above the 0.6541 hurdle, which is the low of February 18th. That’s when we will aim for the current highest point of February, at around 0.6613, which could provide a bit of resistance. If the buying continues, our next target will be the 0.6669 level, marked by the high of January 20th. All this move higher could still be part of a larger correction, especially if the rate continues trading below the previously-mentioned downside line.
During the European morning, we already got Germany’s final GDP for Q4, which confirmed its initial estimate, namely that Eurozone’s economic growth engine stagnated in the last three months of 2019. This also confirmed that the yoy rate dropped to +0.3% from +1.1% in Q3.
Later in the day, we have the US Conference Board consumer sentiment index for February, but no market consensus is available.
With regards to the energy market, we get the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is provided.
We also have two speakers on today’s agenda: Fed Vice Chair Richard Clarida and BoC Deputy Governor Timothy Lane.