Things just got even worse for financial markets as rising panic surrounding the coronavirus pandemic pummelled equities across the globe.
Asian shares continued the global slump on Friday plunging deeper into the abyss, while European markets posted their worst one-day drop in history the previous day. Overnight, the sell-off on Wall Street was so severe that the Dow and S&P 500 experienced their biggest one-day declines since 1987, after triggering circuit breakers for only the second time in one week.
Markets are highly volatile with Trump’s travel ban on 26 European countries clearly adding more fuel to the fire, now global stocks are ablaze. It seems the on-going uncertainty from the coronavirus outbreak is set to continue burning the outlook for the global economy.
What is more alarming is that these gut-wrenching declines across stocks have come despite emergency action by the Federal Reserve, Bank of England and European Central Bank to rescue markets. There seems to be little faith over the effectiveness of monetary policy shielding the economy from the impact of the coronavirus, with fiscal measures seen as a better alternative in stabilising conditions.
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Markets currently remain in panic mode with risk aversion the dominant theme. Equities across the globe are likely to remain severely depressed amid the darkening mood, with safe-haven assets like the Dollar and Japanese Yen, the best destinations for safety.
Dollar regains mojo as investors rush to safety
King Dollar stood tall against every single G10 currency last Thursday, as investors sprinted towards the world’s most liquid currency amid the market meltdown.
A sense of disappointment with the government’s response to the rising infections in the United States is fostering caution and unease. The jump in risk aversion is boosting appetite for the dollar, despite expectations around the United States’ Federal Reserve announcing more interest rate cuts, with around 100bp now priced in over the next week.
Focusing on the technical picture, the Dollar Index has staged an incredible rebound on the daily charts with prices trading around 97.50, as of writing. A solid daily close above this level could re-open the doors back towards 98.30. However, should 97.50 prove to be reliable resistance, prices could sink back towards 97.00.
Commodity Spotlight – Gold
Not even safe-haven gold has escaped the brutal market sell-off, as the pandemic panic sweeping global equities forced investors to cover margin calls.
The precious metal depreciated by over 5% last week despite the market chaos, which put it on track for its biggest weekly loss since 2011. An appreciating dollar also added to the pain with prices trading around $1591, as of writing.
Focusing on the technical picture, prices are bearish with sustained weakness below $1600 opening the doors towards $1555. If bulls are able to secure a weekly close above $1600, the next key level of interest will be found at $1620.
Global easing builds momentum, but will CBN jump aboard?
A growing sense of unease and trepidation over how badly the coronavirus outbreak will hit the global economy has left financial markets on edge.
Central banks across the world are pulling the trigger monetary easing to shield their respective economies from the virus outbreak with the Bank of England (BOE) joining the ranks on Wednesday. In a move that caught investors off-guard, the BOE launched its first emergency interest rate cut since the financial crisis.
However, the central banks’ unanimous decision to cut interest rates by 50 basis points is more symbolic, as lower interest rates are unlikely to encourage companies to invest or households to save less amid the health crisis. Given how the widening coronavirus outbreak is set to trigger more supply-side shocks, fiscal policy measures could act as a temporary pain reliever before a cure is found.
With the Federal Reserve, Bank of England and other global central banks cutting interest rates, the European Central Bank was expected to join the team on Thursday with a 10-basis point cut, but it did not. Instead, it expanded its stimulus package.
At this point, the Central Bank of Nigeria (CBN) is unlikely to cut interest rates despite the wave of global easing. The plunge in oil prices has certainly placed Africa’s largest economy on a perilous path filled with uncertainty and danger. WTI Crude and Brent are both trading over 45% lower since the start of 2020, which will most likely hit Nigeria’s foreign exchange reserves and raise speculation around a possible Naira devaluation.
It does not end here. The 2020 budget set the benchmark for oil at $57 with an oil revenue goal of N2.64 trillion. Nigeria’s Finance Minister Zainab Ahmad has said that the country would be cutting down on its budget thanks to the sharp decline in crude oil prices.
As the MPC meeting looms, investors are questioning what steps the CBN can take to support Nigeria’s fragile recovery. With inflation rising for five consecutive months to 12.13% in January, the CBN could go against the grain by enforcing an interest rate hike if consumer prices accelerate in February.
Frontpage January 10, 2020