Global stock markets continued their declines on Tuesday, undergoing another day of precipitous drops, as panicked investors came to the realisation that for all of the superpowers of central bankers over the past eleven years, not even they can mitigate the global effects of a virus, that continues to spread out across the world.
These declines continued in Asia this morning, with the result that we look set to open lower here in Europe in a couple of hours. Quite a contrast to a week ago when the DAX hit a record high, since then we’ve lost 8%, with the FTSE100 is down over 6%.
What we appear to be seeing is the realisation that global economic growth could well come to a halt as the combined effects of a flu virus and belated attempts to stem the spread of it across the globe, raise the prospect of an economic sneeze, as consumers stop spending, and supply chains seize up, due to workers and consumers staying at home.
Over the last 12 months or so the consumer has been the one remaining pillar that has been carrying the global economy, helping in the process to push stock markets up to their recent records.
Now that politicians have started to close borders, impose restrictions on movement, as well as impose quarantines, investors appear to be preparing the ground for the inevitable profit and revenue downgrades that are likely to appear in the coming weeks and months.
It certainly looks like the revenue warning from Apple just over a week ago was the canary in the coal mine for this move lower, and while it can be argued that there might be some comfort in the fact that flu cases in China appear to be levelling out, more and more cases are starting to get reported across Europe. Spain became the latest country to report an outbreak, while in the US, the CDC (Centre for Disease Control and Prevention) said that a coronavirus pandemic was now likely, while also reporting that 53 cases had been diagnosed in the US.
This contrasted with the upbeat tone of President Trump and his chief economic advisor Larry Kudlow who said that any outbreak was contained, and that the US economy was in good shape.
The CDC’s concerns are also contrary to the World Health Organisation who appear reluctant to go down the pandemic route for the moment.
Bond markets are already starting to price in a slowdown and possible recession with US yields hitting record lows, and other bond markets seeing sharp declines in yields.
For several years now, investors have tested to destruction the maxim of buying the dip in circumstances such as these and for the most part the strategy has been a successful one, since that day eleven years ago next Friday, when US markets hit bottom and turned around.
The sheer extent of the declines of the last few days is likely to test the nerves of investors over the next few days as they look to try and repeat the trick once more, however unlike previous occasions curing the effects of a virus is outside a central banks remit.
Just over two years ago at the beginning of 2018 the Dow Jones saw some really big 1,000-point swings over concerns about higher inflation, a hawkish Federal Reserve, and a spike in volatility. It was a baptism of fire for new Fed chair Jerome Powell, and one which he managed to navigate his way through.
At that time the US economy was in the process of a decent upswing, with the help of an upcoming fiscal stimulus, something that can’t be said to be the case now.
Furthermore, while central banks had the capacity to deal with an economic shock with lower interest rates and cheap loans, today’s situation is completely different in that none of these are much good if consumers either stay at home, or are quarantined.
That doesn’t mean that central banks won’t cut rates or try and mitigate any damage that comes from the spread of the virus, the question is will it be enough to arrest further weakness in equity markets. At the moment this seems like a big ask.
EURUSD – the euro appears to be finding a modicum of support in the April 2017 gap between 1.0730 and the 1.0780 area, as it edges towards the 1.0880 level. A move through 1.0880 could well see further gains towards 1.1000, with 1.0930 also minor resistance. A fall through the 1.0720 opens up the prospect of a slide towards 1.0340.
GBPUSD – has moved above the 1.3000 level but needs to move above the above 1.3050, which is the 50-day MA and trend line resistance from last December’s highs. A move below 1.2850 opens up the prospect of 1.2780.
EURGBP – another failure at the 0.8410/20 area yesterday keeps the prospect of a move back to the support at 0.8280, and last week’s lows. The 200-day MA at 0.8480 remains a key resistance.
USDJPY – slid back further yesterday after last week’s big surge higher and has slipped back below the break out level at 110.20. Having given way a failure to recover back above the 110.30 level opens up a return to the 108.50 area.