Morning Brief – Bears

Bears

Last night’s price action was tumultuous. Asian and US trading sessions are normally characterised by widespread, sluggish price moves and limited volume. It’s unsurprising given that some 80% of foreign exchange sales and trading takes place in Europe and the lion’s share of that in London. However, when serious geopolitical or economic events take place, markets are forced to react no matter what the time zone. Algorithmic trading from London and Europe will contribute to the price action but market participants in the active time zone will also play their part. In turn, market orders placed by European market participants will add to the moves.

Last night was one of those occasions. President Trump addressed the United States to announce a travel ban and stimulus package. All travel from Europe to the United States for the next thirty days has been banned effective midnight on Friday. Those outside of the Schengen (borderless travel zone) Area will not be subject to the ban – including the United Kingdom. The reaction from the White House comes as the World Heath Organisation declared Covid-19 a global pandemic. To support business Trump also called upon congress to afford a $50bn line of funding to support SMEs through the pandemic.

Around the same time last night Italy, a nation under lockdown, ordered the closure of all businesses with the exception of pharmacies and grocery stores. Italy’s reaction came as deaths climbed by 200 in just 24 hours. Earlier on Wednesday Rishi Sunak, Chancellor of the United Kingdom, announced a stimulus package of £30bn to weather the storm. He also took the cap off of NHS funding in order to bolster the national service’s ability to tackle the virus. The taps on financial, monetary and medical support have been opened across the globe to curb the impact of Coronavirus on the world. Yet still, overnight, the same risk-off trade emerged in force. Emerging market currency was sold in droves and equity markets sunk.

The risk-off trade emerged despite the strong response and call for economic stimulus. The sell-off has been so severe that many equity markets have entered bear territory – i.e. they’ve sold off in excess of 20%. The Dow Jones industrial average, a US stock index that tracks the performance of 30 large US corporations, has entered bear territory with many others following close behind. Following the announcement by President Trump Asian equities sold off rapidly. US futures point to a sluggish start for the US stock market later this afternoon.

Over the last 20 days the Euro has gained close to 7% versus the US Dollar. The majority of this shift has taken place since the Federal Reserve announced a 50 basis point emergency cut in interest rates. Central banks around the globe have come to the rescue of their domestic economies creating a synchronised monetary response. Despite admonitions to the world the ECB has yet to adjust policy in response to the virus. Today, however, President Christine Lagarde will lead the European Central Bank in a monetary policy decision. The ECB employs three interest rates: the deposit facility, their main refinancing operation rate, and the marginal lending facility. The Bank also conducts huge outright monetary transactions (QE to you and me). The ECB can and should adjust the majority of these instruments to provide support to the ailing European economy. In turn, the ECB will hope, the Euro will weaken in order to provide further stimulus to the ailing economy.

Discussion and Analysis by Charles Porter

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