The big recovery, and Super Tuesday keep markets on top

Global stock markets have opened significantly higher at the start of a new week and a new month, attempting to reverse some of the losses from last week, which was the worst weekly performance since 2008. The question now is: have markets over-reacted, will this recovery become entrenched, or will markets remain jittery until the World Health Organisation declare that the virus is under control? 

Looking at the facts: Is it time for markets to calm down? 

The weekend’s papers delivered more news about new cases reported in Europe, including a jump in the number of cases in the UK, along with more deaths. However, crucially for financial markets, the number of new cases in China is slowing, which suggests that the peak of the virus could be in sight as we move closer to the spring.  The prospect of containing the virus is now a near impossibility, so the next stage of the fight against the coronavirus is how to live with this new normal while limiting the number of human fatalities and protecting the economy. As time goes on, scientists are uncovering more information about the virus. This is important in the race to get an effective vaccine, but it is also useful to tell us important information about at-risk groups. The most at risk are those aged over 60 and people with underlying health problems, the rate of transmission to children has been very small so far. The at-risk group is largely the inactive part of the workforce, if measures are taken to protect these groups, then the economies of Europe and the US could function at the same time as the virus takes hold. Thus, the latest information about coronavirus could be helping to soothe investors’ frayed nerves after last week’s stomach-churning decent for financial markets. 

Central bank money machine churns into action once more 

The sharp gains for Asian and European stocks so far this morning, including more than 2% for the FTSE 100, and more than 1% for the Dax, have also been driven by expectations that central banks will add stimulus. The Bank of Japan has said that it is ready to inject liquidity into financial markets and to buy assets, if necessary. Expectations are rising that the Federal Reserve could cut interest rates when its next meeting concludes on 18thMarch. The US’s Federal Reserve took an unusual measure on Friday and released a statement that said that the Bank was considering cutting interest rates in response to the “evolving risks” to the US economy from the spread of Covid-19. The ECB is already in loosening mode in response to deteriorating economic outlook, however it has not said that any action specifically in response to the coronavirus, is on the cards. Instead, Italy, the European centre of coronavirus cases, has announced a $3.6bn stimulus package, suggesting that in Europe fiscal policy may be used to limit the economic effects of the virus instead of monetary policy. 

Gold’s bull run not over yet 

Analysts at Goldman Sachs are now expecting a 50bp cut to US interest rates at the Fed’s meeting later this month. This would give a major boost to financial market confidence and is one reason why the rebound in stocks has been so large. However, it is also one of the reasons why gold is higher once again on Monday. Usually gold rallies when stock markets fall, however, it also tends to rally when central banks cut interest rates or add to stimulus measures, as an increase in the money supply reduces the value of money, thus boosting the attractiveness of gold, which has no yield. Thus, in our view, today’s increase in the gold price is not a sign that the stock market recovery is premature, but rather that the market is now expecting central bank intervention to protect the global economy from the effects of the coronavirus. 

The FX view 

In the FX space, USD/JPY is stabilising after a sharp fall last week, although it has struggled above 108.50, and is lingering just above 108.10. it is worth remembering that a 50 bp cut from the Fed later this month could erode the US dollar’s value in the coming weeks, and we would urge caution when it comes to taking on long dollar positions in the short to medium term. EUR/USD is up 0.5% today, and a recovery in risk sentiment along with expectations of a large cut to US interest rates could help this pair to stage a decent recovery in the next couple of days. $1.09 is acting as decent resistance for this pair this morning, however, if it can overcome this hurdle then a return to $1.0970 – the high from early February - and then $1.1150, is on the cards. The strength of the euro is weighing on the pound, with GBP/USD back below $1.28, as the Bank of England has also promised coronavirus stimulus, on the back of last week’s Fed statement. If the ECB joins the coordinated central bank chorus then we could see euro gains limited, however, as mentioned above, we believe that the ECB will look to the governments of the eurozone members to provide fiscal stimulus, rather than monetary stimulus, to protect Europe from the coronavirus outbreak, which could keep the euro in demand in the next few days.

Super Tuesday and the risks to US stock markets 

 Aside,  from the coronavirus, which remains the main driver of markets for the next few days, other things to watch out for include Super Tuesday in the US, where 14 states in the US hold contests for the Democratic presidential nomination, and which could cement Bernie Sanders as the candidate that the Democrats will pick to challenge Donald Trump in the US Presidential election in November. Right now, there are two main front runners, with Bernie Sanders the favourite, followed by Joe Biden, with Michael Bloomberg’s campaign looking like it is running out of steam. Both Sanders and Biden are considered bad for US stock markets: Bernie Sanders’ socialist policies including nationalising healthcare and energy production are bad for these two sectors of the stock market in particular, while Joe Biden wants to increase corporate tax rates, which could also weigh on US indices if he does well on Tuesday. Super Tuesday comes at a delicate time for the US economy. The US economy could slow or contract as a result of the coronavirus, which could make President Trump’s re-election chances considerably lower. If this happens then it may open the door to a less market-friendly Democratic candidate entering the White House. The Vix futures market for October is now higher than it is for September, suggesting that fear levels are rising as we lead up to November’s election. Thus, once the coronavirus is behind us, the focus will shift to the US Presidential election, which could deliver a nasty surprise to US stock market bulls later this year. The outcome of Super Tuesday is worth watching carefully.