Most Asian equity indices rebounded following Monday’s bloodbath and US equity futures rallied as US President Donald Trump announced that the White House and Congress will meet on Tuesday to consider ‘very substantial’ economic relief measures, which may include a payroll tax cut.
The Dow and S&P500 futures surged 3.65% and 3.63% respectively, Nasdaq hopped 4%, following a terrible Monday session, where the S&P500 tumbled near 8%, the worst single day rout since the 2008 financial crisis.
The ASX 200 bounced past 3%, as WTI jumped almost 8%. Nikkei gained past 1%, with 2.28% rise in yen versus the US dollar.
China’s CSI 300 and Hang Seng index recovered near 2%.
The FTSE 100 is set for a 2% rebound past the 6100 mark at Tuesday’s open. BP and Royal Dutch Shell should bounce on the back of a jump in oil prices, after having erased 20% at yesterday’s rout.
Gold found support near 1650 per oz, as investors preferred keeping their gold holdings provided that the kneejerk rally in stocks didn’t necessarily signal the end of the sell-off.
The stock market rally has always been a key proof of success for Donald Trump, and what has been happening in the market recently may pull the carpet from under his feet during the critical year of presidential election. So, if the Federal Reserve’s (Fed) emergency action couldn’t give the market a jolt, then it wouldn’t be a surprise to see Donald Trump stepping in with massive fiscal measures to save the year.
But the market’s reaction to any announcement is yet to be seen. As we have mentioned in our earlier reports, high volatility is a sign of stress, regardless of the market direction. The VIX index, which is a gauge of investor panic, spiked to the highest in a decade. To us, a rebound in stock markets is not necessarily a hint for sustainable correction, the volatility should ease.
The US dollar recovered a part of Monday’s heavy losses. The EURUSD eased to 1.1331 after having tested the 1.15 offers during yesterday’s dollar meltdown. Further relief in US dollar should trigger a deeper downside correction in the single currency before Thursday’s European Central Bank (ECB) meeting, given that European officials cannot just sit and watch the actual market rout; they may be tempted to intervene as well. The ECB is expected to maintain the interest rates unchanged at this week’s meeting, but we do not rule out a surprise action, or a verbal intervention to reassure investors. Due today, the Eurozone GDP may have eased to 0.1% in the fourth quarter from 0.3% printed a quarter earlier. Today’s release doesn’t take the coronavirus impact into account, therefore the lower the figure, the higher the risk of a growth below zero in the first quarter of 2020.
Moving forward, the major slump in oil prices will likely weigh on the European inflation and push the ECB to deploy further easing measures to boost growth and inflation, either through lower interest rates, or another round of targeted loans and balance sheet expansion.
Speaking of inflation, consumer prices in China eased to 5.2% in February as non-food price inflation fell significantly. Yet, food price inflation surged to the highest since 2008 as pork prices which have skyrocketed due to a disease in the recent months surged even more on quarantines and transport restrictions due to coronavirus.
The British pound returned to 1.3020 against the US dollar from near 1.32 reached on yesterday’s heavy USD sell-off. The rise in Cable hides the mounting risks of no-deal Brexit. Therefore, any relief in US dollar should hand sterling back to the bears’ hands and encourage a slide below the 1.30 mark.