Here is what you need to know on Monday 2nd March (Asia):
Friday’s squaring of positions and the coronavirus were impacting the markets, with volatility higher still (VIX above 43) and US stocks plummeting. To top it off, surprise rhetoric from the Federal Reserve’s Jerome Powell weighed on the US dollar with the DXY slipping below the 98 handle as markets factor in central bank easing. Despite the prospects of central banks intervening, investors continue to steer clear of risk. Here is a summary of the major headlines for the last trading day of Feb.
Fed will use tools and act as appropriate: The main takeaway was the comments from Powell. Markets had already begun building in the prospects of a rate cut from the Fed, with a huge spike in the probability for a rate cut as soon as March, (a full 25 basis point (bps) cut on March 18th and a 70% chance of 50 bps). Powell said that he is closely monitoring the virus as it “poses evolving risks to economic activity,” and, “we will use our tools and act as appropriate to support the economy”.
Fed speakers: We also heard from Louis President James Bullard and Dallas Fed chief Robert Kaplan. Kaplan advocated for patience and said it was too soon to comment on what the Fed would do with the turmoil in the market. Bullard said the Fed will react if the virus has a major hit on the US economy.
The WHO: Markets are expecting an official global pandemic yet the World Health Organisation has been saying up until now that it is not. However, in a press conference on Friday, they said, he “assessment of risk of spread and risk of impact ofCOVID-19 is now “very high” at a global level. Additionally, the WHO said, “a continued increase in the number of coronavirus cases and in the number of affected countries over the last days is “clearly of concern,” and most alarmingly, the WHO said, “much of the global community not yet ready to implement measures that have contained coronavirus in China”.
Wall Street extends in official correction territory: The severe correction (S&P 500 plunged by over 10% in five trading days) wiped out over five months of gains in just seven days of trading and Friday was another session of painful losses for the committed bulls as the coronavirus fears overwhelm even the most optimistic. The S&P 500 was down 0.8% to end around 2,955. The Dow Jones Industrial Average, DJIA, dropped 358 points, or 1.4%, to finish near 25,409. The Nasdaq Composite bucked the trend, but only slightly, adding 0.1% at 8,567. For the week, however, the Nasdaq was down 10.5%, the S&P 500 was down 11.5% and the Dow tumbled 12.4%. For the month, the S&P fell 8.4%, Dow fell 10%, and the Nasdaq dropped 6.4%.
US, Chinese and Canadian data: The coronavirus has now been in the system since December of last year and will have been taking a toll on not only business sentiment but it will be filtering through to real economic data. On Friday, we had a Canadian Gross Domestic Product for the fourth quarter which arrived at +0.3% vs +0.3% expected. The US PCE core arrived 0.1% lower than expected at 1.6% vs 1.7% – this is the Fed’s preferred measure for inflation and if it can miss expectations prior to the virus fears really kicking in, it’s going to be food for thought for the Fed. Meanwhile, what we got over the weekend in China certainly has begun to show us the direct impact of the virus. China’s economy took a huge punch from the virus due to the lack of business activity as millions of people had been ordered to stay indoors as China battles to curb the spread of a new virus. We saw record low data in Manufacturing at 35.7 vs the expected 45.0, prior 50.0. Non-manufacturing arrived at 29.6 arrived as the deepest in contraction ever recorded vs an expected 51.0 and prior 54.1 This was taking the Composite to as low as 28.9 vs a prior 53.0.
FX, oil & gold price actions: Carry trade unwinds have benefited the euro, (a funding currency), and buybacks as investors sell-out has supported a rally to as high as 1.1053. USD/JPY dropped 170 pips as the US dollar continues to correct, ending the day around 107.90 from 109.68 the high. GBP/USD fell from 1.2920 to a low of 1.2726, ending around 1.2820. USD/CAD was higher, running up from 1.3378 to 1.3468 and ending around 1.34 the figure, hit by falling oil prices. AUD/USD ranged between 0.6434 and 0.6585, ending around 0.6515. Gold lost $59 to $1585 on profit-taking and WTI crude was down $1.05 to $45.26, off the day’s low of $43.88.