07-5-2020 10:15:5907-5-2020 10:09:51The Fed’s second emergency rate cut and the restarting of quantitative easing failed to lift investor confidence on Monday morning, with all three US index futures triggering circuit breakers shortly after opening.
This paints a cloudy picture for Asian markets, signalling another trading day of heightened volatility.
The ugly fact is, no monetary or fiscal tools seem to be helpful in containing the spread of the coronavirus. Over the weekend, UK and Switzerland have taken a passive strategy to fighting Covid-19; allowing 60% of the population to become infected and to build ‘herd immunity’ through the wild virus, despite the risk of thousands of lives. This did not help to provide any relief. Instead, more countries are likely to place border controls over those regions.
Singapore has immediately issued a 14-Day Stay At Home Notice for all travellers from ASEAN, Japan, UK and Switzerland on Sunday.
Before seeing the number of infections peak and start to decline, investors will likely stay on the side-lines and refrain from risking their cash to an unknown future.
Markets have never been this panicked for more than a decade and the risk of credit default is on course of rising against the backdrop of a deteriorating fundamental picture. The Markit CDX North America Investment Grade Index – composed of 125 equally weighted credit default swaps on investment grade entities – has surged to 107.48 from 45 seen at the end of February. This suggests that the market is asking for a higher premium on credit insurance products. The risk of corporate default is rising.
That may help to explain why the Fed is cutting rates so rapidly and deeply. We are perhaps heading into a USD negative rate era.
AUD is the worst performing currency among G10 peers, as the Reserve Bank of Australia (RBA) is ready to buy bonds from the secondary market to ensure liquidity. Governor Philip Lowe said the RBA will announce further policy measures on Thursday. AUD/USD is trading at its lowest level since 2009, at 0.6111.
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