The fourth week of heightened volatility will see financial markets continue to focus on the coronavirus spread across Europe and the US. Investors will continue to monitor the spread and impact of Covid-19 on the global economy amid hopes of a coordinated stimulus package from world policymakers. G7 leaders will hold a video conference on Monday. The fact that the economic impact of the virus is deepening, and expectations are high for the week ahead to see another wave of massive monetary easing and for governments to inch closer to a fiscal response.
Also, we should not exclude a new move from the Chinese central bank, which may reduce the interest on one-year loans by 10 basis points to 3.95% and reduce the five-year loan interest rate by 5 basis points to 4.7%. On top of that, we will wait for tomorrow, Monday, a meeting of the G7, and finance ministers and heads of central banks will meet. Any developments from these meeting should be monitored, because we should not exclude big measures to try to limit the effects coronavirus spread
Perhaps not all economic data this week will show how bad the world economy is, but China’s data will be an important indicator of what the world is awaiting, and expectations are already going from bad to worse. We note an acceleration in the growth of the number of active cases of coronaviruses globally, to reach more than 157,000 cases and the numbers rise every minute as the time of writing
The whole world will be watching how governments will respond to this pandemic, which is likely to push the global economy into recession.
- In the US, Federal Reserve policymakers will probably slash interest rates for the second time this month.
- In the UK, the unemployment rate is set to fall to its lowest level since early 1975 and average earning growth is seen accelerating from the previous month’s 16-month low.
- the People's Bank of China decides on monetary policy on Friday, following a 10bps rate cut last month, to inject more liquidity into the financial market and lower financing costs for companies battling with the coronavirus pandemic.
- The Bank of Japan will likely announce an expansion to its stimulus measures at the end of its monetary policy meeting on Thursday.
- The Reserve Bank of Australia will publish the minutes of its last monetary policy meeting.
- Economic data to follow this week are industrial output and retail sales for the US and China, alongside UK jobs report, Japan trade and inflation, and Australia employment.
US Dollar is King
The dollar has overwhelmed the competition lately as the virus scare has brought the haven demand for the US dollar back in play, as the US dollar index rallied to a fresh two-week high of 98.64, gaining 1.10% on the day. Smashing through the euro, commodity currencies, and even the haven Japanese yen, as investors protect their portfolios from the virus effect and cut their exposure to economies that will be hardest hit from a severe slowdown in China.
That means the US economy is the place to be in, as the US has a smaller exposure to China in terms of exports compared to Europe or Japan. Hence, any Chinese shock might be felt less in the US, which explains the powerful rotation towards US assets.
From the economic front, industrial output and retail sales will be released this week and these data are unlikely to change the friendly dollar narrative. This narrative is supported with the market expectations for the Fed rate cuts to grow, with more than one and a half cuts now priced in by year end, but the dollar has only moved higher in the meantime.
Stock markets around the world; Very volatile movements are likely to continue
even though bullish waves are not excluded from time to time if governments and central banks adopt economic stimulus policies or market supportive policies. But in the slightly longer term, it is highly likely that companies around the world will see their businesses deteriorate. Among the companies that may be affected are energy companies, which were affected by the sharp drop in oil prices, coupled with changing consumer habits. Energy stocks have lost $ 196 billion in market value, according to Bloomberg, and the pressure on companies may continue and income will decrease. Some forecasts indicate that companies ’profits in general will decrease 10% this year, which may maintain great pressure on stock indices in general, until features emerge to prove the spread of the virus in its current form.
Euro Plunges amid broad USD strength, ahead of Trump announcement
The single currency has taken a beating lately, as Investors staged a stampede into the dollar, selling everything else – regardless of yields. EUR/USD hit a low of 1.1050 before the Federal Reserve stepped in to inject $500 billion of liquidity. Recall that, on Thursday, the European Central Bank (ECB) announced an additional EUR 120bn in asset purchases through the end of the year. Additionally, the ECB announced very cheap LTRO loans through June, as well as an easing of the TLTRO-III conditions and costs for the period June 2020 to June 2021.
Moreover, the virus fears are helping the negative impact. There is not much to stop the euro downfall and given how fast is the EUR/USD falling, any negative news on the dollar or positive news for the Euro we could see a huge correction rebound as several traders take profits on their prior shorting positions.
Boris Jonson remarks pushed the Sterling below.
The British Prime Minister's remarks were very disturbing and seemed to signal that Britain would witness a major outbreak of the Coronavirus. Boris Johnson surprisingly said that the British subjects should bid farewell to their loved ones because they might die prematurely, which triggered a wave of panic and great anxiety.
Therefore, we are likely to see further decline of the British pound against the dollar, especially as the British economy is already suffering from a severe slowdown in light of Brexit
Can the Yen suffer anymore?
The traditional haven currency has faced a huge downward pressure last week as US stocks recover. The USD/JPY pair did rebound from the 2020 lows as the equity markets are recovering after one of the worst sessions in history. the Coronavirus narrative is fitting the bill as a pretext for worldwide hysteria and unprecedented alarmist messages from mass media for this pandemic.
furthermore, Stock markets have been among the worst-performing in Asia. Extremely sensitive to increased coronavirus risk internationally. Consequently, The Bank of Japan will announce its decision a day after the Fed on Thursday, and it’s expected to join its global peers in announcing additional stimulus. In addition, the bank probably will increase its purchases of exchange-traded funds (ETF) to stem the decline in Japanese stocks and restore some confidence.
In the economic front, traders will likely ignore the data due out of Japan next week, which will consist of machinery orders on Monday, trade figures on Wednesday and inflation on Thursday, both for March.
Gold investors are wondering when will the scramble for cash end
Gold’s haven status was dealt a blow over the last week as it seems many traders are liquidating their positions in order to have physical cash. The yellow metal suffered due to the high volatility in markets to rush to the US dollar, depleting demand out of the precious metal. Gold closed the week around $1,530, up from the lows, after President Donald Trump declared an emergency over the coronavirus crisis. The patience of many gold bulls has been lost and prices could soon see a very quick snapback once a wrath central bank rate decision signal a lower interest rate environment is here to stay.
Globally central banks seem united in cutting rates further and delivering additional stimulus. The punchbowl will be overflowing with stimulus and for the risk rally to occur it will need to be accompanied with weakening in the spread of the coronavirus for risk appetite to fully return.
The downside scenario on the economy appears likely and the Fed will not want to waste ammunition. The Fed will likely lean towards a more aggressive cut and signal its latest QE program will take the balance sheet well beyond the $5 trillion mark this year. Risky assets will eventually benefit from all this global stimulus, but until a better understanding is reached on the how long this virus will impact everyday life, travel and trade, risk aversion could remain the dominant trend
Low expectation on global oil demand push the black metal downward
Oil prices decreased during the past week one of the worst decline in oil prices since the Gulf War in 1991, but then prices stabilized at levels of $ 30 per barrel for the western Texas oil (WTI). Moreover, there are expectations of a decline in global demand for oil, due to the isolation measures by governments around the world. However, a tug war of market shares has been running between major producers, which gives expectations for a surplus in production starting next month of 6 million barrels per day. therefore, the US President stated that the United States intends to raise its oil reserves by buying oil at the current low prices, and this saves some demand for oil, which may keep the state of fluctuation between high and low within price ranges that may be large and unusual.