You wouldn't catch a falling knife

11 March, 2020

Monday 9 March 2020 will forever be remembered as a dark day for global financial markets and only investors with an extreme high appetite towards taking on risk will have the stomach to price in a recovery after financial markets suffered its deepest declines since the global financial crisis. Even following such dramatic drops, the selling isn’t over. This is clearly an enormously fragile environment for investors and just like you wouldn’t catch a falling knife, there isn’t reason to try and catch these markets either. 

While the poker game between Saudi Arabia and Russia over Oil output will bear the blame for encouraging such a disaster in world markets, the performance of global assets over the previous fortnight have been showing signs of a sinking ship. The breakdown in the OPEC+ alliance with thanks to Russia, which was later retaliated by Saudi Arabia can be likened to ensuring the ship drowned faster and pushing everything else with it overboard.

If one were to look for a silver lining from an Oil price crash that took as much as 30% from its valuation within moments of the market open for the week is that it should have helped the commodity to find its bottom.

What this market really needs is a hero to save the day. And this hero isn’t global central banks coming to the rescue or authorities announcing more measures to contain the virus, but announcements from health authorities that a cure has been found to the virus or at least that the outbreak has peaked. Sadly the rising cases day by day rules the latter out of the equation. The villain to this story is the virus and the villain is only getting stronger, meaning the signposts remain unclear with dire clouds for investors to find their way back into stock markets.

The announcement late Monday evening from Italian Prime Minister Giuseppe Conte that strict measures will be extended to the whole country should also force the question to investors whether there is any justification in the EURUSD recent jump from 3-year lows at 1.07 to above 1.14. Should other nations in the European Union unfortunately suffer the same fate that Italy is currently dealing with, the Euro is looking at its most serious risk since the European Debt Crisis of 2012.

At this point, everyone would love the help of a crystal ball to help see what is next for financial markets. But in the form of the virus outbreak, we are looking at a world health disaster that still has the potential to spread further, before it gets any better.

I still hold hope that a global recession can be avoided but the previous week or so that has seen the virus reaching Europe and the United States, with infection cases still rising would overall increase the probability of a world recession.  

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