Weekly Market Wrap 09-13/MAR/2020

Marius Paun | London, UK | Senior dealer | Friday, 13th March 2020

World markets in full panic mode

On Monday morning crude oil prices plunged 25% hitting multi-year lows, the worst day since 1991. The reason behind it is the disagreement between OPEC, led Saudi Arabia, and Russia over additional output cuts. The talks in Vienna broke down, OPEC+ (OPEC and Russia) appears now to be dissolved and seems like both sides will now ramp up production. US Oil was trading above $46.00 per barrel last Friday only to reach a low of $27.34 the next trading session. It recovered to $33.5 but it feels like a dead cat bounce for now.

We saw an absolute bloodbath on Wall Street on Thursday with stock markets having the worst session since the so-called ‘’Black Monday’ market crash in 1987, down more than 10%. The Dow Jones, S&P 500 and Nasdaq are all down more than 25% from their recent peaks (which put them into clear bear market territory). Trading had to be halted a few times as stocks reached ‘limit down’ – a circuit breaker which keeps shares from falling through the floor in a single session, supposedly creating time for new buyers to be found.

Earlier in the week, the US President Donald Trump said he is trying to put pressure on Congress to pass a nine-month payrolls tax holiday as part of coronavirus relief measures. His office went to such extremes as to ban all travel from Europe for the next 30 days with effect from Friday with the UK being exempted, for now.

However, it appears that on Friday stocks rebounded more than 5% after the opening bell reaching limit up this time with Treasury Secretary Steven Mnuchin saying they will provide whatever liquidity is needed. On top of that, the Fed announced they will pump $1.5 trillion into the financial system to combat potential freezes. Will it work? It remains to be seen, but as soon as Trump started tweeting, the markets seemed to lose faith and retraced most of the early gains.

Meanwhile, China reported it had passed the peak of the coronavirus epidemic as its economy gets back and running again. Most cities are back to business as usual and even Hubei province, the region at the epicentre of virus outbreak is considering allowing people to travel again. Chinese President Xi made his first visit to the city of Wuhan since the spread of the epidemic, state media reported. He said production should be restored step by step.

On another note, China is considering increasing state oil reserves in order to take advantage of the current cheap prices.

In the UK, the Bank of England followed the US Federal Reserve with an emergency rate cut by 50 basis points from 0.75% to 0.25%, taking rates back to record lows. The central bank also announced a new $100 billion funding scheme to support small and medium-size companies combined with new measures to stimulate commercial banks to lend more. Governor Mark Carney expected the economic shock to hit both supply and demand but was also optimistic that it should be temporary. He added that fiscal policy should also be employed to have maximum impact.

Indeed, shortly after, on the same day, the UK Chancellor Rishi Sunak delivered his first Budget, announcing a massive £30 billion stimulus spending package, saying that the coronavirus could cost the UK economy in the region of £7 billion. In reaction, GBPUSD dropped sharply from 1.29 to below 1.25 on Friday afternoon.

The European Central Bank also decided to step in and provided temporary capital and operational relief to banks. Although it left its benchmark interest rate unchanged (not much room to manoeuvre there anyway), the Governing Council expanded quantitative easing by 120 billion. President Christine Lagarde said the virus will slow production and reduce demand and also called for help from fiscal authorities.

Elsewhere in Europe, Italy took the extreme measure of closing down all shops except for pharmacies and groceries. It was yet another desperate attempt to tackle the virus which has already claimed more than 1000 lives. Italy, the worst-hit country after China, is now in complete lockdown.

Like in the sterling pound case, the announcement did little to reassure investors who continued to move out of the euro and into the safety of the US dollar. EURUSD pair was trading just above 1.11 going into the weekend, more the 300 points down from Monday session.

Gold prices did not have a good week either, dropping sharply from over $1700 an ounce to around $1560 by Friday afternoon. While its long-term safe-haven status remains in place it is possible that panicky investors needed some liquid assets to possibly ‘plug holes’ somewhere else. The precious metal is however still in a positive territory from the levels at the beginning of the year.