Abu Dhabi, UAEWednesday 5 August 2020

CORONAVIRUS

The coronavirus uncertainty makes it a very risky time for the markets

Investors must proceed with caution with US indices set to remain chaotic in the days ahead, says Gaurav Kashyap​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

Traders work on the floor of the New York Stock Exchange. Over the past week, all the US indices have hit circuit breakers. AFP
Traders work on the floor of the New York Stock Exchange. Over the past week, all the US indices have hit circuit breakers. AFP

Only one thing dominates the markets at the moment and that's coronavirus. The number of people infected continues to grow, blunting the risk appetite in global financial markets.

The number of confirmed cases doubled in the last 14 days to more than 182,000. Over the same time frame, the number of deaths has also doubled, sitting at more than 7,000. With the disease now labelled a pandemic by the World Health Organisation, we have seen several governments close borders, restrict travel, impose self-quarantine rules and shut down community gatherings.

The Fed's actions were reminiscent of those taken a decade ago following the collapse of Lehman brothers.

Gaurav Kashyap

At the same time, several central banks have pledged stimulus packages to their respective economies in a bid to prop up fragile financial markets. The US Federal Reserve came to the rescue on Sunday to deliver a strong 100 basis point cut to their federal funds rate to near zero and boost their bond purchases by $700 billion (Dh2.57 trillion) in a bid to cushion the US economy from the effects of the virus.

To increase liquidity, the Fed also reduced the reserve requirement ratio to zero per cent. The reserve ratio typically requires commercial banks to hold on to their reservable liabilities rather than lending or investing. With this now removed, the Fed hopes banks will be more liberal towards lending and investing.

The US regulator also unveiled a co-ordinated effort with other major central banks around the globe to reduce pricing on their swap lines to make it easier to provide dollars to global institutions facing tightening credit situations. The magnitude of this announcement is huge; markets expected the 100bps cut on Wednesday at the scheduled Federal Open Market Committee meeting. The fact it happened earlier shows the severity of the situation from the Fed’s perspective.

Fed chairman Jerome Powell stated the pandemic was having a “profound” effect on the economy and added “the economic outlook is evolving on a daily basis and it is depending on the spread of the virus … not something that is knowable”. The actions were reminiscent of those taken a decade ago following the collapse of Lehman brothers. The difference here is that was a known, while what we are dealing with is unknown. This uncertainty makes it very risky in the markets right now.

Over the past week, we have seen all the US indices hit circuit breakers. A circuit breaker is a regulatory measure to halt trading on an exchange in an effort to stop panic selling. And despite the Fed action late on Sunday, equity markets still remained very fragile.

At the time of writing, the Dow Jones was down 31 per cent from those all-time highs recorded on February 12. That does seem like an eternity ago. It’s been a similar story for the S&P500, down 29 per cent, and the Nasdaq, which is 28 per cent lower. We have not seen the bottom of US indices markets I feel, with 20,000 in the Dow the most logical support level coming up. My advice: don't try and catch a falling knife and proceed with caution as pricing is expected to remain choppy and chaotic for US indices in the days ahead.

Gold is also affected. After hitting $1,703 a troy ounce on March 9, the precious metal has dropped below $1,500 on the back of seven consecutive lower trading sessions lower, even touching $1,451 this week before quickly recovering. Expectations would be that gold should be benefiting from this uncertainty, however, on the back of a stronger dollar and funds liquidating gold positions to free up margin, this has led to anaemic prices. I will stick with my entry level of $1,490 for gold, as we are seeing buying support coming in above $1,450.

Perhaps the only clear beneficiary following the Fed's action has been the US dollar. The Dollar Index has bounced back to 98.50 levels after going as low as 94.61 on March 9. That’s a strong gain of around 4 per cent in a week and I expect further upsides. I have long been a dollar bull and this is only reinforced amid the uncertainty. Therefore, expect Dubai Gold & Commodities Exchange's EUR/USD contract to move towards $1.10 over the next month, with GBP/USD pairing also set to move towards $1.20 levels by the summer.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

Updated: March 17, 2020 05:05 PM

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