It was another tough day at the office for US markets overnight, all three leading indices falling by around 3.0% as the US Centre for Disease Control (CDC) warned it was when, not if, Covid-19 coronavirus would arrive in the United States. The dead cat bounce seen in Asia yesterday was quickly consigned to oblivion once Europe arrived. That theme continued throughout the rest of the day as the world reassessed the economic implications of the coronavirus’ arrive in multiple countries—Notably Iran and in Italy.
US bond yields fell aggressively – with the US 10-year now yielding 1.31% – as investors fled for the safety of government debt. Expectations for a Federal Reserve rate cut reached a deafening level, premature as that may be. That was aided by the CB Consumer Confidence falling to 130.70 from 132.00 previously, and the Richmond Fed Manufacturing Index for February plunging to -2 from 13. The triumph of reality over head-in-the-sand optimism has been long overdue with a procession of US companies warning about the adverse effects of the coronavirus outbreak on their supply chains and finances.
The Western world may want to take a leaf out of Asia’s playbook in responding to the coronavirus slowdown though. Another set of mindless rate cuts may temporarily restore confidence but are likely to be limited in effect. The simple reason is that one can cut rates all they like to give a temporary boost in confidence to asset markets; it means not a jot to SME’s for whom cashflow is King. SME’s, the backbone of employment in most economies, require cashflow to pay wages, invoices, taxes etc. at the end of each month.
If economic activity slows, they run out of cash, and it is game over. No amount of rate cuts will change that equation as evidenced by the tidal waves of quantitative easing unleashed during the financial crisis. Banks sit on the money, and it flows into pumping up asset valuations, not to the real economy.
China and Singapore are targeting stimulus explicitly aimed at managing SME cashflow crunches and keeping people in work. Hong Kong’s budget this afternoon, is almost certainly going to take this to another level, with perhaps even direct cash handouts to citizens. Should the money creation machine again be called upon in America, a much more imaginative method of monetary transmission should be considered in the form of direct lending or support to SME’s to manage their cash flow issues.
Regionally, South Korean Business Confidence for February fell to 65 from 76 this morning, reinforcing the gloom hanging over the Kospi today. Hong Kong will announce GDP for Q4 2019, with the pre-coronavirus data likely to show the economy contracted by 3.0% YoY. That drop will pale to the hit the economy has likely taken in January and February. This afternoon’s Hong Kong budget is expected to be full of direct handouts and other goodies to both business and citizens. That will mitigate some of the external selling pressure stock markets are likely to face today. Still, a disappointment in the scale of the stimulus measures anticipated this afternoon could make for a challenging day for the Hang Seng tomorrow.
Elsewhere, Malaysia’s political turmoil continues with the Malaysian King naming Dr Mahathir as interim Prime Minister until a new coalition government is formed. It is what the makeup of that government will be that has both Malaysia and international observers on edge. A return to indirect power by the former ruling party, UMNO, is likely to put Malaysia at the bottom of the investment list for the region and exacerbate recovering from a protracted domestic slowdown. The House of Cards belongs on television and not in real life, meaning that Malaysian equities and the Ringgit will remain unloved by investors, even if coronavirus fears ease.
Wall Street was pummelled last night, thanks to the CDC, as a nascent recovery was squashed, with Wall Street almost replicating Monday’s falls. The S&P 500 plunged 3.0%, the Nasdaq by 2.77% and the Dow Jones by 3.15%. Not even plunging US Treasury yields and talk of a Fed rate cut could stop the rot.
Asian markets have fallen this morning, but not by the same extent as Wall Street overnight. In a rerun of yesterday, US index futures are tracing out a small profit-taking dead cat bounce, and that appears to be taking the edge of Asian selling interest.
That said, the picture is not a good one, with the Nikkei 225 and Australian All Ords down by 2.0% with the South Korean Kospi down 1.70%. Singapore is lower by 0.90% with Kuala Lumpur down 0.50%, a surprising result, given the political turmoil there.
Mainland exchanges are yet to open, but their falls may not be as pronounced as the rate of new coronavirus infections continues to decline, allegedly. A global slowdown ex-China, and its effects on China growth, is a story yet to be told on another day. The Hong Kong Hang Seng has fallen though by 1.40% ahead of today’s budget with Taiwan 0.85% lower.
The reprieve in US stock index futures is likely to be a short one. Asian stocks will continue to remain under pressure, remaining acutely vulnerable to new negative virus headlines. Europe is to some extent, still playing virus catch-up, with European stock likely to endure a harsh morning session. With interest rates in Europe already at zero effectively, the trade bloc is poorly positioned to battle a coronavirus induced slowdown. The Germanic fiscal austerity mantra leaves any sensible stimulus policies locked over the event horizon, from which light cannot escape.
The flight to safety overnight in North America, saw US Treasury yields collapse as investors piled into bonds. Having withstood that barrage on Monday, the fall in overnight yields finally saw the US Dollar fall against its developed market equivalents. The move lower in the Dollar was helped by increasing expectations that a Federal Reserve rate cut will arrive sooner rather than later. A closing of the yield gap between US rates and the rest of the developed world, being the only thing that could structurally undermine Dollar strength in 2020.
GBP/USD regained the 1.3000 level but remains mid-range between 1.2800 and 1.3200, ahead of EU trade negotiations next that tart next week and an expansionary March budget. The EUR/USD climbed to 1.0880, but the single currencies performance remains underwhelming as Germany’s exposure to China, and Italy’s exposure to coronavirus sap confidence. Both the Swiss Franc and Japanese Yen rallied against the Dollar overnight, boosted by haven flows.
The fall in US yields gave some respite to the emerging market sell-off of late. That respite is probably only temporary, notably if coronavirus establishes itself at scale internationally. In Asia today, despite the ructions in equity and commodity markets, regional currencies remain steady against the greenback, albeit at the weaker ends of their ranges.
Like equities, oil saw a dead cat bounce in the futures markets in Asia yesterday, mainly driven by profit-taking by shorts the night before. Despite US API Crude Inventories falling this morning, oil’s immunity to Covid-19 remained marginal as Brent crude fell 2.40% to $54.90 a barrel, and WTI fell 2.60% to 50.00 a barrel.
In a repeat of Asian trading yesterday, both contracts have eked out small profit-taking rallies in Asia this morning. Brent crude has risen 40 cents to $55.30 and WTI by 45 cents to $50.45 a barrel.
While undoubtedly, some bargain hunters are around buying oil this morning, black gold continues to look like black mould. A weekly close below $55.00 a barrel on Brent crude will have the alarm bells ringing amongst the OPEC+ grouping. Some sort of price stabilisation measures is inevitable this time around should Brent crude prices continue falling. There is, however, a difference between stabilisation and a rally. Investors should be careful not to confuse the two, as any OPEC+ measures will likely only keep the lights on.
Gold was the surprise package overnight, falling by 1.45% to $1635.00 an ounce, even as stock markets and Treasury yields plunged on coronavirus uncertainty.
The price action suggests that a giant whipsaw has occurred in gold this week. A large amount of fast money going long at the top on Monday morning, only to have spent most of yesterday being squeezed out to the downside.
That culling of the FOMO traders, while pleasing, appears to have run its course. Having touched $1626.00 an ounce in overnight trading, gold has advanced to $1642.00 so far in Asia today. We may well have seen the lows for gold for the week now, as fundamentals reassert themselves. That landscape is undeniably positive for gold as stocks and yields fall and worries about global growth persist.
Famous last words aside, gold has support at $1625.00 an ounce initially, with resistance at $1664.00 and then $1690.00 an ounce—the distance of the levels reflecting the scale of the ranges and volatility in gold this week.
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