Another surprise Federal Reserve (Fed) intervention yesterday helped curbing losses in New York, but the S&P500 and the Dow closed the day circa 3% lower, and Nasdaq was flat. Investors have their hopes tied to the $2-trillion rescue package that needs to get signed by the Congress, yet apparently there are controversies among policymakers on how to spend this money. House Speaker Nancy Pelosi says the help is destined to corporations first, not workers and their families. While spending on climate change related issues are said to pull politicians apart and prevent the deal from getting signed. Yet a delayed deal is damaging for both parties, especially now that the coronavirus-induced lockdowns accelerate across the United States as well.
That’s what the Fed is there for. The Fed pulled out the heavy artillery even before the Congress failed to find a midway and announced a second wave of massive monetary support on Monday, including unlimited Treasury and mortgage-backed securities purchases to set the market’s mind at rest. The Fed announcement couldn’t ease the selling pressure across equities, corporate and mortgage bonds at first, but the US equity futures were better bid in the overnight trading session as leading Asian indices applauded the Fed’s efforts. Nikkei and ASX 200 jumped past 5%, as WTI crude tested the $25 offers.
Activity on FTSE futures (+3.96%) hint at gains in London as well.
How long this optimism would last is yet to be seen.
Markets are going down the rabbit hole and the financial dimension of the coronavirus crisis has gotten to a level where we might see a worldwide economic recession that is worst than the one we experienced following the 2007-2008 breakdown.
If we zoom into data, the preliminary PMI figures showed that manufacturing in Australia held up at 50.1 in March, but services PMI took a heavy hit, falling below 40 from 49.0 printed a month earlier. Australia considers draconian second stage lockdown measures, meaning that the numbers we see here are about to get worse.
Manufacturing activity in Japan slowed significantly from 47.8 to 44.8 as well but beat analyst expectations of 42.1.
In Europe, both manufacturing and services PMI are expected to print their sharpest fall on record in March, after the coronavirus shutdowns took a toll on businesses and public life across the old continent.
Services PMI in the UK is expected to fall to 45 in March, but we already know that this number is subject to a significant downside correction from next month as the UK finally announced a complete three-week lockdown to stop the virus from spreading.
The US dollar index advanced past the 102 marks as safe haven inflows left emerging market currencies and cross-asset markets to feed into the US dollar. At this point, the greenback is the safest haven play provided that most global transactions are denominated in US dollars and the fundamental dollar demand can only fade to a certain level.
Hence, the euro remains capped below the 1.08 mark against the US dollar and soft PMI data could give further support to the bears and encourage a deeper sell-off toward the 1.05 mark.
Cable sees demand below the 1.15 mark, but the crisis situation in Europe leaves little time on politicians’ agenda to talk about bilateral trade deals. We believe that Johnson will have no choice but to extend the year-end deadline by at least six months. With a looming recession, it is perhaps not the right time to rush out of the union without a deal in hand. But until a concrete announcement is made, the pound will likely remain under fundamental selling pressure. Resistance is eyed at $1.20.
Meanwhile, gold rebounded to $1560 per oz, as safe haven currencies lost field against the US dollar. Gold is now behaving as a risk asset, meaning that another downturn in risk sentiment should rapidly wipe out the recent gains.