Equity markets were marked by wild upside and downside swings this week, moving in a completely random pattern and furiously rejecting all support from governments and central banks.
At this point no one can really explain why the markets behave the way they do, and what may be next. The only thing we can say is this high volatility is bad, whether it is positive or negative.
US stock indices continue setting the global sentiment. The Dow (-3.58%), the S&P500 (-3.39%) and Nasdaq (-3.10%) slumped again on Thursday, sending Asian equities tumbling on Friday. Nikkei slid 3.14%, as the ASX 200 and CSI 300 lost 2.81% and 1.26% respectively.
FTSE (-2.09%) and DAX (-2.40%) are set for heavy losses at the open, as well.
The name of the sell-off: coronavirus, again. Infections approach 100’000 and there is no positive news regarding a vaccine just yet. In between, the virus continues taking lives with first fatalities announced in the UK and Switzerland, and paralyzing life in other places. Schools and offices in Italy are closed, people are asked to work from their homes.
Bulk holiday cancellations, significant drop in all-purpose travels added to anxiety of disrupted supply chains and rumours that China may be lying about the resumption of activity explain why the issue goes beyond governments’ and central bankers’ control this time.
Safe haven capital pile into gold, yen and Swiss franc.
Gold is preparing for its best week since 2016. The ounce of precious metal traded at $1680 and the strengthening positive momentum could encourage a further rise to the $1700 mark. But gold is not virus-proof. There is a large build of speculative long positions in gold and last week showed that the negative correlation between gold and risk assets may suddenly break when speculative longs judge it’s time to realize profits.
WTI crude remains in bears’ hands, even after OPEC agreed to lower production by an additional 1.5 million barrels per day. But the deal is conditional on Russia’s approval. Now, all eyes are on the final decision from the OPEC+ meeting today. If news of a possible 1.5-million bpd cut didn’t trigger any upside move in oil prices, it is certainly because investors remain sceptical about Russia’s response to the proposal. No investor is willing to play Russian roulette in such a moody market environment, especially given that the chances of Russia vetoing further cuts are relatively high. If that is the case, the price of a barrel could sink toward the $40 level. If, however, Russia agrees on deeper cuts, then the OPEC+ action which has topped analyst estimates could send WTI rallying toward $50 per barrel.
In the currency markets, the US dollar continues bleeding. Released yesterday, US factory orders shrank 0.5% in January, more than -0.2% expected by analysts and versus +1.9% printed a month earlier. Labor productivity in non-farm businesses rose 1.2% y-o-y in the fourth quarter, less than 1.4% pencilled in by analysts while manufacturing productivity dropped 0.8% during the same period. Overall productivity grew by most since 2010, giving some margin to take the coronavirus shock on output, but investors were not in a mood to find a silver lining.
Due today, the nonfarm payrolls will either cool off the US dollar sell-off or further break the greenback. A consensus of analyst expectations points at 175’000 new nonfarm jobs in February, less than 225’000 printed a month earlier. A soft read should further revive the Federal Reserve (Fed) doves and weigh on the US dollar. While a second straight month read above the 200’000 should give a sigh of relief to investors, propose a recovery in US yields, but may not reverse the solid dive that factors in a deeper Fed rate cut later this month.
The US 10-year yield plunged to 0.83%. Activity in US sovereign markets now suggests 84% chances for another 50-basis-point cut at the FOMC’s March 15-16 meeting, and 16% chances for a 75-basis-point cut.