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Market contagion – cash is king

Market contagion – cash is king

Global markets entered a new, grimmer phase of the current meltdown as all asset classes came under heavy selling pressure. Shares and industrial commodities fell on growth concerns, but bonds, gold and the Japanese yen also dropped as markets entered “sell everything” mode.

Weakness in European shares fed into the US session. US traders initially lifted major indices on reports of a comprehensive government response, despite a 5.7% drop in the Euro 50 index. However details of the fiscal response failed to emerge. The pressure from Europe weighed on nerves, and a meltdown that took the Dow Jones Industrial Average to below 19,000 (-10.9%) began. A late rally lifted major US indices to losses of 4.5% to 6.5%, but the Dow closed below 20,000 for the first time in three years.

Worries about the economic impact of virus containment measures thumped crude oil markets (-9% to -10%) and copper (-7% to -8%). Of greater concern is the selling of assets once considered safe havens. Ten-year bond yield raced higher. German bunds sold off 20 basis points. US tens closed at 1.19%, more than double the record low 0.54% yield seen less than three weeks ago. Gold is trading below US $1,500, a far cry from the $1,703 high on 9 March.

This spreading of selling pressure across asset classes indicates a significant deterioration in sentiment. Reports of traders selling anything to raise cash to meet margin calls, and investors fleeing to the sidelines, means cash is now king.

The heightened fears were reflected in forex markets. Slashed interest rates had little impact as investors rushed to bring funds home, supporting the US dollar, Yen and Euro at the expense of almost all others. The Australian dollar set a fresh seventeen year low, below US 58 cents.

Asia Pacific markets are bracing for another tough day. Futures markets indicate negative starts for shares across the region. The Reserve Bank of Australia will likely cut interest rates at an emergency meeting today. Traders are looking for a reduction to 0.25%, the level previously described by the RBA as the “lower bound”.

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