In another choppy day of trading European equity markets finished the day higher yesterday in the wake of further easing measures from the European Central Bank, the Bank of Japan, RBA, as well as another rate cut and another £200bn of bond buying from the Bank of England.
The US Federal Reserve also extended US dollar swap lines to a whole host of smaller central banks including Singapore, Australia, South Korea and Brazil in an attempt to alleviate some of the pressure on their sinking currencies.
These additional measures were in part a response to the sharp move higher seen in yields that we’ve seen in global bond markets this week, as well as sharp currency depreciations against the US dollar, while the US government managed to sign off on legislation to grant one off payments of $1,200 to lower income workers.
By and large the interventions appeared to hit the mark, with the exception of the German bund where yields hit a six-month high. The measures also initially failed to make a dent in the rise of the US dollar which hit a three year high against a basket of currencies, however we have started to slip back a little in Asia trading.
If the Federal Reserve was hoping to slow the sharp rise in the US dollar, in boosting global US dollar liquidity, the move appears to have had the opposite effect, making the move into the US dollar easier, and accelerating the greenbacks move higher. Nonetheless the steps taken yesterday were still necessary in alleviating some of the stresses in the currency markets, as investors continued to liquidate assets in a desperate dash for cash.
We did see some elements of a stabilisation in equity markets, though the gains seen yesterday were small beer in comparison to where we finished at the end of last week. The gains from yesterday have spilled over into Asia today, despite Japanese markets being closed, and is likely to see a similarly positive open here in Europe.
This week we’ve seen the Dow hit a three year low, oil prices hit their lowest levels since 2003, and while we managed to see a nice rebound in crude prices yesterday, it’s still been an awful week for the black gold, while the real gold has also failed to deliver, slipping close to a six month low.
The rebound in oil prices was helped in some respects by recent comments from US officials that the US may well come into the market and top up its reserves, as well as comments from President Trump that the US may get involved in the standoff over prices between Russia and Saudi Arabia.
For now, the US dollar is the only place people want to be, which makes yesterday’s rebound in equity markets, a little bit suspect, and way too early to think that we might have seen a short-term base, after five weeks of declines.
For all of yesterday’s interventions by central banks, there still remains the small matter of a large-scale fiscal response from politicians across the world. Yesterday’s actions by the US government were a start, but markets are likely to want to see more, as infections across the world continue to rise with cases in Italy now exceeding those in China, and the whole of California, in the US, now going into lockdown.
The prospect of large and impending widespread job losses which are coming down the pipe, along with widespread bankruptcies would hollow out the global economy for years, with the resultant loss of demand likely to hamper company profits and tax revenues for years to come.
The pound continued to make new thirty five year lows against the US dollar, with an announcement due later today from Chancellor of the Exchequer Rishi Sunak, where he is expected to outline measures to help companies retain their staff while the crisis lasts, and prevent them going out of business. There is speculation that we could well see significant wage subsidies, being promised in an attempt to keep the UK economy on life support until the worst of the virus has passed.
We’ve seen an example of the types of measures that might help in Australia, with the banks there suspending loan repayments for small firms for six months.
EURUSD – still looking soft and yesterday’s break below the 1.0780 level opens up the 2016 lows at 1.0340. The 1.0780 level now becomes resistance for any rebound and stabilisation, for a move back towards 1.0920.
GBPUSD – the pound has slipped below key support this week, breaking below the 1.1960 area, and could well be on course for further losses towards 1.1000, and even the record low at 1.0500 set in 1985. The break of the 1.1960 area is huge, and we need to move back through here to mitigate the downside risk.
EURGBP – appears to have found a short-term top at 0.9500, but while it remains above the lows on Wednesday at 0.9080 the momentum remains for a move back to the 2008 highs of 0.9800 in the coming weeks. A move below 0.9080 could well see a move to the 0.8980 area.
USDJPY – has continued to rise, moving above the 108.50/70 area yesterday and 200-day MA, as well above the 109.20/30 area. This could see us return towards the highs of last month just above the 112.00 area. The 109.20/30 area now becomes a key support.