Markets rebounded this week as the Fed intervened and Bernie Sanders nomination prospects dropped dramatically, writes Adam Button.
Markets erased 80% of Wednesday's gains 40 minutes into the cash session amid news of more Coronavirus cases in New York and reports of testing for over a dozen cases at the U.S. Pentagon. Also, some U.S. senators have announced the White House's goal of setting one-million tests by end of week cannot be reached.
If you were to sketch out an ideal scenario to counteract market sentiment related to Coronavirus at the start of the week, it might have gone something like this: 1) Central bank rate cuts 2) Bernie Sanders falters in the Democratic race. The one-two punch of central banks and politics is exactly what unfolded and it led to a big rebound in risk assets on Wednesday. Until things changed again.
As you can seen on the chart below of various markets, volatility has been high.
Market developments will entirely hinge on the outlook for the virus. Signs of spread continue to percolate but many questions remain unanswered including how deadly it is, how many people get only mild symptoms and how easily it spreads. We don't have answers to those questions but the central bank and political moves are worth recapping.
The Bank of Canada cut 50 basis points as we warned on Wednesday to follow the U.S. Federal Reserve and Reserve Bank of Australia a day earlier. An MNI sources story also said the ECB was pondering rate cuts next week while incoming Bank of England Governor Bailey hinted at action. All are forecast to continue to ease. Had there been no virus, that would have been an extremely powerful signal.
Combine that with the latest political developments. Just four days ago Bernie Sanders was a 70% favorite for the Democratic nomination but with all the moderates coalescing around Joe Biden and the results of the Super Tuesday votes, he's now at about 25%. A Trump vs Biden election is a significantly more market-friendly contest and that was clearly reflected in 10% rallies in U.S. health insurers Wednesday.
Wednesday's one-two punch of central banks and politics is the market's best shot for a reversal. When the virus does turn for the better, it sets risk assets up for a remarkable rebound. For now, however it's competing against a virus that threatens to devastate economies everywhere. Just 12 days ago there were five confirmed cases in Italy and today the government announced the shutdown of schools, cinemas and public events nationwide. The European Commission is already warning about a recession in Italy and France.
The aforementioned one-two punch appears to be the market's best chance at a turn, as well as the best chance for to sell rallies, because it will be impossible to sustain upbeat economic sentiment until there is a clear picture of the impact of the virus, along with answers to the virus questions we posed above.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
