Summary: Fear and risk aversion reigned in financial markets as the coronavirus spread overwhelmed global efforts to contain it, hitting like a tsunami. Stocks dropped the most since the 1987 “Black Monday” market crash. The Dow continues to plunge as this commentary is written, now down 11%. The CBOE VIX Fear Index jumped over 40% to 75.50, its highest since 2008. The Euro fell 0.60 % to 1.1190 after the European Central Bank approved fresh stimulus measures to help the Eurozone economy but fell short of cutting its main deposit rate. A few hours later, the Federal Reserve of New York announced a USD 1.5 trillion liquidity intervention that included bond purchases and expanded operations in the repo market. US Treasury yields stabilised despite the fall in equities. The key 10-year note yielded 0.80% and the US Dollar soared. Both central bank measures failed to quell investor fears. The Dollar Index (USD/DXY) a gauge of the Dollar’s value against a basket of currencies rose sharply to 97.37 (96.52), up 0.90%. Sterling fell under the weight of the broad-based US Dollar rally to 1.2615 from 1.2840. Risk and Emerging Market currencies from smaller economies slumped. The Australian Dollar sank over 3% to 0.6275 from 0.64950, its lowest since 2008. The Dollar soared 3% against the Russian Rouble to 74.00 (72.7 yesterday). At the close of day in New York the DOW was trading at 20,930, down 11.3% from 23,600 yesterday. The S&P 500 ended at 2,460 from 2,530 yesterday.
On the Lookout: Both central bank measures failed to quell investor fears. Hopes for an announcement of a stimulus package from President Trump never came. Signs of leadership from the White House and US Congress amid the COVID-19 pandemic so far have fallen short of expectations. The economic turmoil is expected to get worse. Business Insider reported that “the US stock market has now wiped out the entire USD11.5 trillion of value it gained since Trump’s 2016 election victory. As Kathy Lien from BK Asset Management aptly described the stock market collapse, “the continued sell-off in equities reflects the market’s lack of confidence in their leaders to contain the virus.”
Economic data releases were mostly ignored for the time being. US Headline PPI missed forecasts, dropping to -0.6% against -0.1%. Core PPI fell -0.3%, below expectations of 0.1%.
Trading Perspective: The stable performance of US bond yields despite the equity market rout saw FX flows return to the Greenback. The Dollar’s rally was broad based. volatility was the one constant in trading all the FX pairs. The focus remains on the coronavirus pandemic.
While China and South Korea have reported a fall in new cases, in the US where the largest economy and financial market sits, has yet to see the worst of the virus. Large scale events like the NBA basketball competition, are just being banned. Which will put King Dollar at risk. volatility was the one constant in trading all the FX pairs. Traders need to be flexible and swift in these markets and sentiment can change on a sixpence.