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The situation in world markets has clearly deteriorated. Investors are in a state of panic, believing that the spread of the Chinese coronavirus around the planet will cause serious damage to the growth of the global economy.
Global stock indices have fallen markedly since Monday, and nothing can stop them nor optimistic comments by Fed members, such as Fed vice president R. Clarida, who said on Tuesday that it's too early to talk about the effect of coronavirus on the American economy, nor the adviser to the US president L. Kudlow that he "does not think at all that there will be an economic tragedy" because of this misfortune.
Therefore, it seems that the markets are seriously scared, not by the fact that there is a real pandemic of the virus, but by the fact that it will have a restraining effect on the growth of the world economy. If investors have somehow "reconciled" to the fact that the Chinese economy will suffer noticeably, hoping that the US will stand up, then the latest data on production indicators from America make them doubt it. But besides these important reasons, in our opinion, a strong and long-term technical overbought stock market played a role here. It is likely that major players took advantage of the market panic and adjusted their positions. And they will actively buy cheaper assets after the first glimpses of stabilization of the situation appear.
The currency market responded to all these events with the weakening of the US dollar, as the market began to appear that the Fed would be forced to start lowering interest rates again. But so far, there has been no continuation of a noticeable weakening of the dollar, as members of the Federal Reserve do not make it clear that the regulator can think about it.
We also believe that there is no good reason for a sharp change in the Fed rate. We believe that we can even witness a sharp reversal of its course against major currencies as soon as panic in the markets fades away. We are confident that the absence of new apocalyptic news on this topic will lead to an increase in demand for stocks of companies, to what is called the demand for "risk". In this case, the dollar can get good support. And the fact that the markets as a whole consider the situation around the coronavirus bloated clearly shows the dynamics of gold, which, after a strong increase on Monday, was already corrected down on Tuesday.
Moreover, we believe that the incoming news in the coming days will be an important indicator of the continuation of the panic or its end. If these sentiments begin to fade, then it will be possible next week to observe a noticeable appreciation of the American currency, which may already begin smoothly this week or even today. In any case, the dynamics of futures for US stock indices, as well as a sharp increase in the yield of the treasuries, hint at this.
Forecast of the day:
USD/JPY is trading above the level of 110.00. Now, if market sentiment improves and technically the pair holds above the level of 110.00, we can expect its local reversal and growth towards 112.20.
Spot gold is consolidating above the level of 1632.45. Again, a decrease in panic will put pressure on it. If quotes declined below the level of 1632.45, it is likely that the price will continue to decline to 1611.00
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