Markets still not convinced by central bank action, as dollar gives back some gains

Here’s a quick overview about what is going on in financial markets right now. 

·      Coordinated central bank action, including further Fed rate cuts, does little to calm financial markets. 

·      Volatility remains elevated. 

·      Dollar is giving back gains after strong rise at the end of last week. 

·      European indices suffer deep losses. 

·      FTSE 100: Airlines, betting firms, holiday companies, financial firms and consumer discretionary sectors are the biggest losers. 

·      FTSE 100: supermarkets, online grocery stores, mining companies are some of the largest gainers, although stocks in positive territory are hard to come by. 

·      Some dislocation in financial markets, Associated British Foods saw its share price slip to nearly 0p at one point, before bouncing back.

·      UK manufacturers switching production to help in effort to fight coronavirus. 

·      Pound still reeling as it gets punished following the backlash towards the UK’s laissez faire approach to beating coronavirus. 

These are historic times, the coordinated central bank action overnight, where the US along with other major central banks tried to calm the financial markets by record rate cuts and further asset purchases, has failed to work for now. The vix has spiked once again, and European indices are falling at another astonishing rate. The FTSE 100 is down some 6.5%, the Cac is down more than 8% and the Dax is down some 7%. The oil price has also taken another dive lower, Brent crude is currently down more than 12% on the day, and if the rate of decline continues then it is likely that Brent will be below $30 per barrel by the end of the day. Mass global quarantine, the closing of boarders and the concern about an economic depression on the back of the coronavirus, has been getting worse, and has not been improved by the global central bank action. In the US, S&P 500 and the Dow Jones are all limit down, which means that they are predicting a 5% or more decline at the US open. 

Pound suffers from UK government’s laissez-faire attitude

In the FX market, the pound is holding steady around the $1.23 mark after a sharp decline in most G7 currencies vs. the USD on Friday. In times of panic the world wants dollars, hence it’s large surge at the end of last week. While the dollar index has given back some of its gains at the start of this week, the pound is lagging the euro in terms of recovery vs. the USD today. This may be because of the growing official scepticism towards the UK’s policy of avoiding using quarantine measures to target the coronavirus. It appears that laissez faire does not pay when it comes to a global health pandemic. If the UK government comes out with further, more stringent measures after the latest COBR meeting this afternoon, then we could see the pound tick upwards. Elsewhere, the Aussie and Kiwi dollars are the weakest in the G10, the yen and the Swiss franc remain king of the safe havens. Gold is also weaker to the tune of 3%, as it suffers from the steep rise in the dollar at the end of last week. Right now, gold is not behaving like a safe haven, so it is wise to avoid trading this metal in the short term.

What next for oil 

As mentioned above, oil prices are at risk. Commodities, which are highly correlated to the performance of the global economy, remain a big weak point in the financial markets for the foreseeable future. Brent crude is trading down more than 12% this week. Just when you think it can’t get worse for the oil price, it does. This could be applied to any other sector that is linked to global consumer demand and discretionary spending, which is seeing a massive decline around the world. As global economies prepare to grind to an almost halt for the next four months or so, it is hard to see how commodity prices can bounce back. 

So, what can we do? 

Below, we take a look at three ideas that may help your trading in the short term. Please note, that we remain in unchartered waters, any recovery in financial markets is likely to remain slow and piecemeal, and we doubt that there will be any decent uptrends to jump on the back of in the foreseeable future. Instead, we would urge caution, impeccable risk management and if you are feeling panicky or worried, sit this one out. You need to have your wits about you to trade in these markets, otherwise losses could mount up. 

1, What will calm markets?

At this stage, it is hard to see how airlines, hotel companies and sectors exposed to the consumer, aside from supermarkets and essential goods’ companies, can weather this storm without large amounts of government assistance. Bailouts, halts on trading and moth-balling certain sectors for a period of time, may not seem like the traditional ways to calm stock markets, however, these are exceptional times. The markets need to know that the government is going to do everything it can, including using unconventional methods and methods that are at odds with the neoliberal, free market philosophy, to protect the economy. Thus, ironically, a laissez faire attitude towards economies and financial markets could spell their demise in the coming months. 

Central bank action has not worked because right now companies and individuals do not need cheap credit. Interest rate cuts will eventually boost the economy, once it remerges from coronavirus quarantine, for now, though, it’s about helping companies to survive, not helping them to keep growing. 

2, Think before you trade 

Brace yourselves, the upcoming global economic data and corporate results are going to be ugly, very ugly. While it is important to know the state of companies’ balance sheets and of the global economic data, there is no benefit to using this information to base your trading decisions. The global trading community needs to be mindful of this, and show some kindness as some solid companies look like they could go to the wall on the back of this crisis. Thus, think twice before selling airlines etc. While some will label me a dangerous communist for saying such things, the neoliberal economic order does not work in this environment. Think before you trade.

3, Awaiting the great recovery

While this crisis may change our world and our economy for ever, this will not eradicate globalisation. The global economy is likely to change, M&A activity could be halted for some time, production may be moved back closer to where demand is located, and countries may have to think about setting up local industries to provide food, medical supplies and other essentials rather than relying on global supply chains. Ultimately, this will be good for some of the consumer-based economies like the US and the UK, and bad for the manufacturing mega-centres like China and other emerging markets. The economy will recover, but the price action suggests that we could experience a prolonged period of recession, even depression, before we see economies starting to grow again. In the next few weeks, if the global economy gets the government support that it needs, then we could see equity markets start to price in a recovery. We believe that consumer-based economies could be the key beneficiaries in the medium term.