Friday, March 20, 2020

Week Ahead: Expect More Turmoil as Recession Risks Rise

NBHM Research Team

The volatility in the market continued this week, with the VIX index rising to its highest level in history. Global stocks declined while the dollar index rallied. Gold defied conventional wisdom and declined as risks rose. Meanwhile, central banks continued to offer relief to the economy. The ECB launched a €750 billion bond purchases program while the Fed provided more measures to salvage the economy. In the US, senate republicans unveiled a $1 trillion stimulus package that will see taxpayers receive $1200 checks.

US dollar: The US dollar rose to the highest level in 18 years as banks, hedge funds, and businesses rushed to cash, fearful that the economy is about to enter into a recession. The rush to cash comes at a time when the Federal Reserve has pumped trillions of dollars into the economy within a few weeks. In the coming week, we will continue focusing on the coronavirus pandemic and whether the Fed will implement more actions. We will also receive a number of important economic data like new home sales, durable goods orders, and the final reading of Q4 GDP data.

Euro: The euro dropped to an 18-year low against the USD this week. The decline happened as market participants rush to the dollar, which is usually considered safe. At the same time, the market was reacting to the ECB’s launch of aggressive Pandemic Emergency Purchase Program (PEPP), which will see the bank purchase bonds worth more than €750 billion through to the end of the year. The bank also increased the range of eligible assets under the program to include non-financial commercial paper. It also agreed to ease the collateral standards that will be required during these purchases. Additionally, European governments unveiled a €1 trillion spending package to salvage the economies. In the coming week, we will receive the preliminary PMI data from Europe, business expectation data from Germany, and consumer confidence data from Italy.

Gold: Gold has often been viewed as a safe haven where market participants run to in times of crisis. This was not the case this week as the price declined to the lowest level since January this year. The reason for the decline is, possibly, that gold holders are liquidating their holdings to fund margin calls. It could also be because of the low demand for physical gold in the marketplace. In the coming week, we will continue to watch the happenings around the world and how the Fed will react. In most cases, the price of gold tends to recover when equities remain depressed.

Crude oil: The price of crude oil dropped to the lowest level in 17 years this week. The decline happened as traders braced for excessive supplies after the pact between Saudi Arabia and Russia ended. On Wednesday, data from the EIA showed that US inventories in the US rose by 2 million barrels to 453.7 million. This was about 3% lower from the five-year average. Still, the challenge is that global demand is expected to decline as more people stay indoors. Industrial and airline consumption is also expected to decline substantially. There was a ray of hope after Trump said he might intervene and ask Saudi Arabia to balance the market. This led to a sharp rise in the price of oil. In the coming week, we will be looking at whether Saudi and the US reach an agreement.

Sterling: The sterling declined to the lowest level since September 2016 as more investors rushed to the safety of the USD. The decline was also because of the surging cases of coronavirus in the UK. Another reason is that Michel Barnier, the chief EU Brexit negotiator, was diagnosed with the disease. This means that talks between the two sides will be suspended for the foreseeable future. This situation increases the chances of a no-deal Brexit if the UK parliament fails to seek an extension. In the coming week, we will receive several important data from the UK like CPI, PPI, retail sales, house price index, and a decision by the BOE.

S&P500: The S&P500 declined by more than 2% this week, wiping most gains made during the Trump administration. The losses happened as market participants lowered their expectations for earnings. They also fear that the US could go through a major recession or depression this year. Meanwhile, states in the US have been asking people to stay indoors, which has affected many industries like restaurants, hotels, airlines, and cruise lines. In the coming week, we will receive a number of important earnings data from companies like Nike, Movado, IHS Markit, RH, KB Home, Lululemon, and Jefferies, among others.

DAX: The DAX index, which is made up of the biggest companies in Germany, declined by more than 6% this week. This decline happened as most companies in Germany started warning about a difficult year ahead. The automobile industry, which is essential for the German economy, announced plant closures as management tries to protect workers. The industry is also preparing for a slowdown in demand as more people avoid buying cars. In the coming week, we will watch the German government fiscal response to the situation. We will also possibly receive more warnings from German companies.

Canadian dollar: The loonie declined to the lowest level since February 26 this week. This happened as the price of crude oil, which is an important component of the Canadian economy, declined to the lowest level in years. It also happened after Canada and the US closed its borders to reduce the spread of coronavirus. In the week ahead, we will likely receive a statement from the Bank of Canada (BoC) and the Canadian government on measures they have put in place to support the economy.​

Recent Articles