The financial markets have been volatile for three weeks and expected to be at the same pace in the coming weeks as well. There has been lots of monetary policy and fiscal policy action on board, which is failed to ease the fear. Extreme fear is the ultimate driving machine now. As long as a fear surface on the markets, we don’t expect a recovery. If you are panicked, better stay side-lines either in forex or financial markets, including commodities.
Emergency rates cut spread across the central banks with fiscal stimulus measures which are failed to show a positive impact on the markets. On March 03, the Fed came up with an emergency rate cut of 50bps; the market reaction was negative. This Monday morning (Asia -pacific time) Fed triggered another rate cut to 0%, again the market reaction was negative. Dow eventually closed 3000 points or 12% down, 20k is the near-term psychological support. It is going down as artificial as it can be. Last week we forecasted 20,300 targets on Dow jones, naturally, it hit 20k mark on early Tuesday (Asia-pacific time).
Turning to the ECB meeting, the central bank did not deliver a rate cut and did not change the forward guidance, which is in line to our last week’s forecast.
Recent market mayhem caused by the coronavirus spread outside China and Oil price collapse. Russia and Saudi Arabia have decided to have an oil war, driving the price of oil down to gain market share.
We pencil that, this is going to be a rough ride, especially in the 1H2020. Central banks need to pump enough cash flow to the SMEs.
- Nordea Markets said, “This crisis is very different to 2008. The virus and related quarantines could crush demand, possibly leading to interest payments or loans not being paid. In contrast, the 2008 global financial crisis started with a credit crunch, which then caused demand to collapse.”.
- Vítor Constâncio, former vice-president of the European Central Bank, said: “The recession is coming from a demand deficiency and the disturbance on the supply chains,” FT reported.
- The Independent UK cited, “Coronavirus will bankrupt more people than it kills.” Oman Hassan, the author, said, “Coronavirus’s economic danger is exponentially greater than its health risks to the public.”. The author uses the word “Exponentially,” suggesting a red flag. We use the word “exponentially” when you want to say that something’s increasing quickly by large numbers or two magnitudes. As a result, consumer confidence has been down across the sectors.
The current crisis is going to be a severe impact on the economy and on people. Now no one doesn’t want to know when the recession is coming, but rather browsing for how long it exists. I expect a minimum of 6-7 months period.
After the dust settles, we left with lower interest rates, equity markets like lower interest rates. This is the only bullish factor to me on equities at a longer-term perspective. In the current situation, no corner of the economy will remain untouched. For traders, there is no place to hide; even Gold is failed to provide some shade during the global meltdown. Margin shortfall triggering a collapse in gold prices.
Things will be better: Currently, all the news is negative and painted red. There will be an economic impact, and some businesses may fail, but it is not the end of the world. We cannot predict the future, but we can observe that given the massive amount of negative media, forecasts are likely to be negatively biased. We can also observe that times like these induce irrational panic selling. It is times like these that fantastic investment opportunities arise. I still believe EURUSD has some more headroom available in the near term but within the range of 1.1500-1.0850, whereas EURJPY traced out a medium-term bottom via a double bottom pattern at 115.50. Better to trade on the cross rather than the major. Overall, the lower oil prices will be the most bullish factor to the euro in the near to medium term.
At this difficult times I remind Warren Buffet quote “In the 20th century, the United States endured two World Wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Preview: Looking ahead, German ZEW expectations will be published (Tue). Whereas Covid 19 dominates the news, and no doubt, the volatility to stay here for a long time and is likely to stay elevated.
The common currency last week failed to hold on to the gains logged in the previous three weeks and closed with a 3% loss. The key support level for EURUSD is placed at 1.1050, followed by 1.0980. If the price moves up, key resistance levels to watch out for are 1.1240 and 1.1370. The major resistance from the current level is at 1.1500 psychological number, beyond which the resistance comes in between 1.1550-1.1570.
It’s certainly not easy times, but it will get better. Negative news abounds but hope for the best.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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