While markets in Europe finished last week on an upbeat note, the same didn’t happen to US markets which plunged again after Europe had gone home, to post their worst weekly decline since the dark days of the financial crisis back in 2008, with both the Dow and S&P 500 closing down over 30% from their recent February peaks.
Reports that a clearing firm on the CME was in trouble helped drive the move lower, as investors switched from cautious optimism to blind panic in equal measure. Last week saw regular daily swings in excess of 5%, as markets contended with the optimism that widespread central bank easing and stimulus measures on the one hand would help to stem the bleeding to the daily narrative of fear of what a rising infection and death rate, would do in terms of widespread curtailments of freedoms and liberties to slow the pace of infection.
Politicians are only now starting to come to terms with the enormity of the task facing them, with the UK and the US both announcing their intention to push through large scale fiscal measures to combat the economic tsunami which is about to engulf their economies.
UK chancellor of the exchequer, Rishi Sunak, made history on Friday with the biggest and most extraordinary peacetime package ever announced, to help try and keep the UK economy on life support over the next three months, with the option to go further if needed.
The measures included grants of 80% of salary up to £2,500 a month, for 3 months initially, with £7bn of extra support in the welfare system, as well as VAT payments being deferred for the current quarter until the end of June. The 80% salary measure alone is likely to cost about £40bn or about 3% of GDP.
While we’ve been able to get an idea of the initial fiscal responses for the UK, as well as the US, where some US workers are getting individual cheques of $1,000 each. The US administration has also upped its initial $1trn stimulus plan, by doubling it, with the hope that some form of agreement might be signed off later today.
There is some doubt about this, given reports that Democrats appear to be talking up their own bill, in a depressingly familiar tale of unnecessary partisanship, at a time when the number of cases in the US is likely to rise exponentially. Reports last night that negotiations were faltering led to US futures markets opening 5% limit down within minutes of opening.
It’s possible a weekly jobless claims number of over 1 million later this week will concentrate minds, though if it does take them that long the Dow may well have halved, and I’m only half-joking when I say that such is the way these markets are moving.
We are now slowly seeing some fiscal responses being crafted in Europe, with Germany reported to be putting together a €356bn package, including up to €156bn of new borrowing. This means that German policymakers will need to suspend their long-standing aversion to deficit spending in the form of the country’s black zero rule, or debt brake rule which prohibits deficit spending.
Further details around this are likely to emerge later today, with reports that the budget could include taking equity stakes in German companies, as well as loans in the form of a €100bn economic stabilisation fund, as part of an overall €500bn bailout fund.
While the fiscal responses are welcome there is a feeling that they could well amount to a starting point, and not an end point given that cases of the virus are continuing to rise and governments are continuing to react by squeezing down on their populations freedom of movement in the form of quarantines, lock downs, and closures of businesses like cinemas, pubs, restaurants and gyms.
In Germany, the government has banned gatherings of more than two people, which is likely to be rather hard on the average family, while in the UK restaurants, pubs and gyms and other public venues have been asked to close. Italy has also gone further, banning movement inside the country to stop quarantined workers in the north from moving south.
It is becoming ever clearer that the economic damage of this pandemic is going to be huge, with the only certainty being that the cost to output is going to be sizeable, and will probably reverberate for years
As the governmental responses continue to ramp up, stock markets have continued to slide, with US futures falling 5% limit down as soon as they opened in Asia, while oil prices also fell sharply.
Asia markets took their cues from this and have also plunged, though the Nikkei has outperformed no doubt due to further Bank of Japan buying of equities. This sell-off in Asia, which took its cues from the slide in the US on Friday, is likely to see huge falls in European markets when they open later this morning.
EURUSD - last week’s break below the 1.0780 level opens up the 2016 lows at 1.0340. The Friday highs at 1.0830 now becomes resistance for any rebound and stabilisation, for a move back towards 1.0920.
GBPUSD – the pound slipped below key support last week, breaking below the 1.1960 area, and could well be on course for further losses towards 1.1000, and even the record low at 1.0500 set in 1985. The break of the 1.1960 area is significant and Friday’s failure to move back above it keeps the pressure on the downside.
EURGBP – appears to have found a short-term top at 0.9500, but the subsequent pullback that we saw at the end of last week failed to move below the 0.8980 area. To have confidence that we could see further losses we need to move back below 0.8980, to target 0.8820.
USDJPY – the US dollar continued its push higher last week, moving above 110.00 but failing to overcome trend line resistance from the 2015 highs. This remains the next resistance at 111.80 which also coincides with the highs last month. The 109.20/30 area now becomes a key support.