European open – Markets plunge, USD, gold, oil

Worst week since the GFC

Stock markets are well on their way to their worst week since the global financial crisis and there’s no easing up, with losses on course to accelerate across Europe.

Source – Thomson Reuters Eikon

It’s been a truly torrid week, made all the worse by the relentless dip buying strategy that saw stocks trading at record highs regardless of the risks that coronavirus carried. The strategy has paid off repeatedly over the years but that has bred complacency, to the point that even while the virus was spreading rapidly, investors just buried their head in the sand.

With the coronavirus having now breached the Chinese borders and spreading in some cases despite no clear connection to breakout areas, investors have finally accepted the reality of the situation. And panicked. Suddenly the threat of a pandemic on global supply chains and the economy has set in and investors are fearing the worst, while not really knowing exactly what that is.

Containment efforts will now be stepped up by various governments keen to get a grip on the coronavirus as they seek to avoid seeing their own economies fall victim to the spread. Some are better equipped to deal with an outbreak while others were just about managing to avoid recession as it was. Testing times lie ahead.

Greenback losing safe haven appeal?

The dollar is fast losing its safe haven appeal as traders respond the the coronavirus spread by betting on numerous rate cuts from one of the few central banks equipped to do so. With Treasury yields now at record lows and markets pricing in three rate cuts by the end of the year, the safe haven appeal may have diminished a little. That said, not all markets are trading in a particularly rational way so maybe we should wait for the dust to settle before declaring the end of the safe haven dollar.

Gold looking lost and confused

A prime example of a market not trading in a particularly rational way is safe haven gold. Just when you think a safe haven would be at its most sought after, the yellow metal is stumbling around lost and frightened. In the early hours of European trade on Monday, the yellow metal was doing what safe haven’s do in times of fear, hitting highs, and $1,700 looked at risk.

Gold Daily Chart

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Since then, as equity markets have tumbled, gold has been giving up gains and now looks lost and confused. Not even the dollar pulling back has given it a new lease of life. Any number of things could be behind this, with traders likely being badly burned by the events of the week, possibly forcing the liquidation of other positions to compensate. Perhaps they’ve been deterred by gold’s sudden plunge. The weekend may be coming at a good time.

OPEC+ must act aggressively to arrest slump

There’s no confusion in the oil market where crude prices have slipped to their lowest levels since December 2018 and the trend is not their friend. Oil producers are due to meet next week and will attempt to arrest the slump in crude prices but they’ll have a huge task on their hands.

The previously recommended 600,000 barrels won’t be enough and the group is struggling to get Russia on board as it is. The least we can expect is unilateral action by Saudi Arabia but other members joining a cut would send a stronger message to the markets. Until then, Brent is looking vulnerable at $50.

Brent Daily Chart

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.