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Stock markets on slippery slope

11 March 2020

Despite Wall Street’s gains on Tuesday, the tide of risk aversion is rising again in the markets. Most Asian stocks are seeing another selloff, albeit to a lesser extent compared to recent sessions, while US futures are now pointing to losses. The risk-off mode is evident in the price action of safe haven assets: Gold bounced off the $1640 line to edge closer towards $1660, the Japanese Yen is strengthening by about 0.76 percent against the Greenback, while 10-year US Treasury yields are back below 0.7 percent.

Risk assets are expected to have a hard time hanging on to recent gains, as investors adjust to the new reality of the economic threat from SARS-CoV-2, and the global implications from depressed Oil prices. Such downside risks to global economic conditions are expected to fuel a policy easing bias among Asian central bankers, as they shore up their respective economies. The region’s policy easing bias, coupled with its economic vulnerabilities to the coronavirus outbreak, hampers Asian currencies’ ability to push back against the US Dollar over the near-term.

Dollar’s recovery predicated on US economic outperformance

The Dollar index’s break below the 95.0 psychological level proved fleeting, with DXY now strengthening back above the 96.0 line. The recent surge was fueled by hopes that the US government will roll out supportive measures to mitigate the negative impact of the coronavirus on the domestic economy.

Dollar traders have seemingly abandoned their data-dependent stance for the time being, with the Wednesday release of February’s US CPI unlikely to be a major trigger for the DXY, as the US policy response outlook dictates the Greenback’s near-term moves. The Greenback’s recent recovery could be on shaky ground in the near-term, considering that the Fed is make further reductions to US interest rates. The Fed funds futures currently point to another 25-basis point cut next week, with US interest rates potentially driven to zero by year-end. However, once markets fully price in expectations for Fed policy easing, the Dollar is expected to reclaim lost ground, as long as the US economy can outperform its developed peers.

Gold to remain in demand, despite recent dent from Dollar’s rebound

Although $1700 proved unsustainable for Gold bulls, the pace at which Bullion got to that psychological level suggests that investors’ propensity for risk aversion remains elevated. Although the Dollar’s rebound has taken some of the edge off Gold prices, Bullion is expected to remain above its 50-day moving average, as long as fears of a recession weigh on global market sentiment.

Brent’s climb may prove short-lived amid price war

After Monday’s dramatic decline, Brent futures are clawing their way back towards the psychological $40/bbl line. Oil’s supply-demand dynamics still point to a bias for weakness, as Saudi Arabia and Russia engage in a price war that threatens to push global markets into oversupplied conditions, at a time when global demand is being eroded by the coronavirus outbreak.


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