Asian markets rebounded on Tuesday following the Fed’s unprecedented ‘Unlimited treasury purchase’ program, which removed the cap of monetary easing in a market that has been badly hurt by dollar liquidity crunch and the coronavirus crisis.
Nikkei 225 Index opened 4.5% higher.
This sets to alleviate pressure on the strengthening dollar and assure investors that the Fed will take whatever measures it can to contain the emerging corporate credit risk. The Fed will become the biggest and perhaps the ultimate buyer of US government bonds, which in the long term will erode the credibility of the US dollar.
US dollar index has fallen for a second day to 102.0 area, from its recent high of 103.0. The Fed’s commitment to inject unlimited liquidity into the treasury and Mortgage Backed Securities will likely weigh on the dollar lower in the days to come, creating a ‘window of opportunity’ for a technical rebound among risk assets – equities, commodities, emerging market currencies and more. Mid-to long term prospects of risk assets, however, might still remain bearish-biased as Covid-19 may stay with us for a longer period of time and its collateral damage is gradually emerging.
US equity indices fell last night though, following the announcement. However, the volatility index has fallen from 74 to 61 overnight, suggesting the selling pressure has somewhat alleviated.
In Singapore, the STI rebounded 3% on Tuesday from its 11-year low of 2,233 points. A technical rebound is perhaps on the way as selling pressure alleviates. A decent rebound will also incentivise short-sellers to close their positions via buying back, therefore exacerbating a rebound.
Volatility Index – Apr 2020
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.
Margaret Yang Yan