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The week Ahead: Market apocalypse; are we heading for a Tougher period?

The week Ahead: Market apocalypse; are we heading for a Tougher period?

22 Mar 2020 10:58 AM

The virus pandemic continues to wreak havoc on the global economy and financial markets, with investors monitoring the spread of Covid-19 and hoping for more stimulus measures from central banks and governments worldwide. While Stocks are in freefall, commodity currencies are getting hammered, and even safe havens like gold can’t shine as the market meltdown is forcing major funds to deleverage by liquidating asset. In this fearful environment, investors are unlikely to pay much attention to economic data, though the US initial jobless claims might be an exception. The big winner from all this mayhem is the US dollar, which has exploded higher amid a dollar liquidity shortage of huge proportions.

  • Financial markets will be primarily focused upon the further implementation of the Federal Reserve’s monetary policy initiatives
  • the next US jobless claims release will be the opening act to a string of terrible economic data releases for the United States
  • the rising impact of the sharp increase in COVID-19 cases will combine with top shelf PMIs and another Bank of England meeting to present significant risk to European markets.
  • Gold prices appear to be stabilizing but is it losing its safe haven status?
  • Falling demand on oil pushing refiners to reduce their rates

The Fed has been very active in delivering stimulus and so has the government.

United States has already passed two phases of virus relief with the big $1.3 trillion economic stimulus potentially set to get voted on early in the week. The lockdown efforts will likely intensify in the US and all eyes will be on how quickly healthcare capacity is reached.  Any slowing in the spread of the coronavirus could prove to be supportive for risk appetite, but all early signs suggest that will probably not be the case.

As for the greenback, the dollar has come back into favor and in a rapid pace, despite a slew of measures from the Federal Reserve to support the economy and ensure the plumbing of the financial markets continues to function. The dollar has been climbing to trade at its highest level since the start of 2017. Expectations to see a lot more focus on emerging markets as a result, particularly those with large dollar-denominated debt and current account deficits.

For US economic Data, how high will applications for jobless claims over the past week go when they are released on Thursday?

The data is about to get ugly for the US economy.  It is a worrying time for many Americans and the next jobless claims release will be the opening act to a string of terrible economic data releases. The tally will begin to inform the magnitude of damage being done to labour markets by the COVID-19 shock and it is among the higher.

Furthermore, if the standard 11-to-1 ratio for the US compared to Canada holds then expect a shocking reading. Canada has already announced that a half million employment insurance applications were filed over the past week. The all-time record high for a single week of jobless claims in the US was 695k in October 1982 followed by the Financial crisis peak in March 2009 (665k). The sudden onset of this shock is the issue.

As for the Headline inflation it is expected to hold steady at 1.7% on a yearly basis with core PCE inflation rising a tick to 1.7%. Modest consumption growth is expected at best given the flat retail sales control group for February.

The UK is not taking the coronavirus lightly

Despite initial criticism against the government, the number of cases now stands at 5018 with 233 deaths, at the of time of writing. Much darker days lie ahead but both the government and Bank of England have announced huge fiscal and monetary easing packages and made clear that they will continue to add to them as the situation develops.

Apparently, the logic at the Bank of England is “You can never hold enough meetings”. After having just cut its Bank Rate by 15bps to 0.1%, increased its bond purchases by £200 billion to £645 billion. The Bank of England will still go ahead with its previously scheduled meeting on Thursday. Prospects for additional policy details and possible adjustments or new tools will be monitored. The day after, it will release minutes to this upcoming meeting and minutes to the March 19th meeting that may further inform perspectives on possible additional policy options.

The pound sold off heavily this week, despite the bank’s efforts, including an incredibly volatile day on Friday in which the currency gave up most of its earlier gains. It’s not likely to get easier for the country or anything associated with it.

On the economic front, UK purchasing managers will arrive on Tuesday. the PMI had been on the mend from September through to February, before the COVID-19 shock hit. What will matter far less is the expectation that core inflation will slip a touch to about 1.5% y/y (Wednesday) and retail sales will likely give back at least some of the large gain in January (Thursday)

ECB surprise Quantitative easing program offset the interest rate cut disappointment

The ECB disappointed the markets by not cutting interest rates at the meeting last week but responded with a massive surprise QE program on Wednesday that made up for it. The temporary bond purchases, until the end of the year, named Pandemic Emergency Purchase Program, took pressure off the rising yields across Europe. Central banks aren’t taking this lightly so we can probably expect more unscheduled announcements for weeks to come.

Reasonably fresher macroeconomic indicators will start rolling in for the Eurozone this coming week in the form of a wave of purchasing managers’ indices. Eurozone PMIs arrive on Tuesday including figures specifically for Germany and France. These readings will deteriorate but how far they go will inform tracking of the magnitude of the hit to growth as Q1 transitions to Q2. The purchasing managers arrive on the same day as the UK figures and with identical logic applied to their significance. Germany’s GfK consumer confidence reading on Thursday will be another such example of how confidence is being damaged.

As for the Euro/dollar, the pair plummeted aggressively lately as the bullish wave for the euro came to an end at a time when a dollar shortage emerged. Troubled companies and funds around the world are rushing to find dollars to secure their future cash flow needs, hedge currency positions, and cover margin calls, all amid a general flight to safety.

The bottom line is that until the market panic subsides, it’s difficult to envision a sustainable turnaround in euro/dollar. That being said, the euro has been remarkably stable against the defensive yen and has even gained against the pound, so this is mostly a dollar story.

Gold prices rebound; a lag effect in motion

The Yellow metal rebounded on Friday alongside the improvement in risk appetite, while falling for much of the week as central banks around the world are taking stimulus measures against the effects of the COVID-19 on the global economy. Their efforts are not in vain but we’re not seeing the surge in demand for gold that we’ve seen in the past when the market is flooded with liquidity. The gold might be in “a lag effect”, with investors still liquidating gold positions to fill holes elsewhere but only time will tell.

Oil Refiners are racing to reduce rates as Fuel Demand Falls Off A Cliff

Refining operations in Europe and elsewhere in the world are being curtailed as gasoline and jet fuel demand is falling off a cliff due to the enormous demand destruction in the spreading coronavirus pandemic. the latest lockdowns in Italy, Spain, and France are crushing oil demand and If the UK takes more measures to curb domestic travel, around 40 percent of Europe’s 7-million-bpd demand is at risk. Global oil demand is set to plunge by more than 10 percent from the typical 100-million-bpd consumption, as the raging coronavirus pandemic forces countries into lockdown, the executive said.

At the end of last week session, the black metal early gains were short-lived and heavy losses followed once again. It’s the perfect storm for oil which is facing a global recession and an oil price war. The latter can be avoided but no side is showing any indication otherwise.

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