As if this week hasn’t been bad enough for markets, the slide in equities accelerated yesterday as European markets underwent their worst day this week, as more and more countries reported fresh cases of the coronavirus.
Not only does this week look set to be one of the worst weeks for European stocks since 2011, but it also looks set to be the worst monthly performance for stocks since the volatility seen at the end of 2018.
While European markets underwent their worst decline this week, closing the day over 3% lower, not to be outdone US markets went further, closing the day over well over 4% lower, with the S&P 500 on course for its worst week since 2008. If the last few years have been symbolic of stocks being the only game in town, yesterday was reminiscent of pass the hot potato, with the S&P 500 crashing below the 3,000 level like a hot knife through butter.
As we come to the end of the week, and the month, the big question after six successive days of declines is whether we’ll see an end to the rot in sentiment that we’ve seen in the past few days. If this morning’s performance in Asia is anything to go by the answer looks likely to be no, with today set to look even worse, with European markets set to open sharply lower again, in another frenzy of selling, with few willing to try and catch this particular falling knife. Having become used to the tried and trusted method of buying the dip over the last 11 years, there now appears to be a marked reluctance to hold on to anything at all.
Crude oil prices were also caught up in the sell-off, as Brent prices hit their lowest levels since December 2018, over concerns that the virus will prompt a global slowdown, weaken consumer confidence and reduced travel, prompting lower demand, thus weighing on prices. Bond prices continued to edge higher, sending yields towards new record lows, as investors start to price in the prospect of a global recession.
Financial markets are already pricing in the prospect of further rate cuts on the part of the US Federal Reserve in response to what they feel could be an upcoming potential sudden stop in the global economy.
Gold prices rather strangely had a rather subdued day, still well off the highs of this week, but modestly higher nonetheless, despite a sharply weaker US dollar. The lack of momentum here could well be down to liquidations caused by margin calls as stock markets slide.
The pound has also come under pressure, sinking across the board, after UK prime minister Boris Johnson told the EU that he would walk away with 'no deal' if the EU doesn’t come forward with a Canada style trade deal. The EU’s resistance to a similar deal is largely based on proximity and the UK’s size, and therefore not being a suitable alternative. This seems a rather strange stance given that it was one of the options on the table when the withdrawal agreement was being negotiated. Nonetheless, the UK’s uncompromising stance has raised concerns once more that a 'no deal' could well come to pass at the end of the transition period, though why that is perceived as euro-positive escapes me.
Today’s economic data almost seems a sideshow in comparison to this week’s price action, however the latest US data is likely to be the most pertinent when it comes to the Federal Reserve’s reaction function. If the latest economic data shows that the US consumer is still spending as we get the latest personal spending and income data for January, it will be much harder for the US central bank to justify an aggressive easing posture, just because financial markets are having a tantrum. In any case, it is hard to see what possible benefit can be gained from a modest easing of interest rates in the face of the prospect of a flu pandemic. In the face of a demand shock it would be akin to firing blanks, although in the face of markets in freefall they may feel they have no choice.
Both personal spending and income are expected to show a rise of 0.3%. The next Fed meeting is on 18 March, with financial markets already pricing in the prospect of multiple rate cuts, hence the slide in the greenback in the last few sessions.
EUR/USD – yesterday’s move higher has brought us up to the 1.1000 area and close to the 50-day MA at 1.1020. A move through here targets the 1.1120 area, which should be the limit of any gains, before sliding back towards the 1.0920 area.
GBP/USD – has continued to slide with the 1.2850 area under threat. A move below 1.2850 opens up the prospect of 1.2780. We need to move above 1.3050, which is the 50-day MA and trend line resistance from last December’s highs.
EUR/GBP – the unexpected break above the 50-day MA at 0.8480, has seen the euro move higher with the prospect we could retest the 0.8590 area and January highs. Support is now likely to come in at the 0.8480 area with further support down near the 0.8280 level and last week’s lows.
USD/JPY – found support at the 109.30 area yesterday but could well retest the 108.50 area in the coming days. With the focus back on the downside we could squeeze back to the 110.80 level in the short term.