Markets rebounded with the help of global central bank stimulus and promises of more, reports Joe Perry.
In the face of fears that the global economy will be shut down due to the rapid spread of the Coronavirus, many central banks took action last week to help stimulate their economies. Australian, Canadian, U.S. and Saudi Arabia central banks have all cut rates to help support markets. There are expectations (not to mention competition) that many additional central banks including the European Central Bank (ECB) and the Bank of England (BOE) will follow suit. In addition, the markets are pricing in more rate cuts for the U.S. Federal Reserve at their scheduled meeting next week.
In addition to monetary policy, many countries have announced fiscal stimulus plans. And the counties that have not done so yet, are expected to do so within the next few days. Japan has been providing fiscal stimulus for the past few weeks already. Japan’s Prime Minister Abe also announced a second package today worth ¥430.8 billion ($4.1 billion).
Italy is reportedly planning to increase its 2020 budget deficit above 2.5% of GDP (previously 2.2%). In addition, Italian Prime Minister Conte has added the entire country to the “red zone” area, in which movement will be restricted (previously it was only Northern Italy). They are also closing schools and universities through April 3.
The number of cases in Spain increased by roughly 25% since the previous day. Banks have granted additional loans to small businesses and individuals who have been affected by the virus. The Spanish Parliament has suspended sessions for the next week, as one lawmaker has been tested positive for the Coronavirus.
In Germany, Chancellor Merkel will try and meet with unions and employers to discuss the effects of the virus. They will provide an additional €1 billion ($1.13 billion) in additional funds to help with the crisis. She has said that liquidity is what is needed, not classic stimulus (Reuters), hinting that something is on the way.
The UK is set to release the Spring Budget for 2020. There will be measures within the budget to help with the Coronavirus.
The U.S. Congress has approved $8.3 billion to help combat economic disruptions and fallouts from the Coronavirus. Tuesday, President Trump teased a plan regarding a payroll tax cut, however no official plan had been released.
Markets were rebounding in Asia and Europe Tuesday afternoon. However, after President Trump’s press conference when no official stimulus was announced, they began to wane.
After rallying from 102 to 105 earlier in the session, the Japanese yen began to rollover as market felt Trump did not deliver on the payroll tax cut. Support comes in at the 50% retracement level of this week’s range near 103.21, then a band of support from 103.05 down to 102.70. Below that, final short-term support is 101.18, this week’s low (see chart).
Source: Tradingview, FOREX.com
Remain vigilant in these volatile markets. Markets can be extremely volatile and move rapidly if, for example, the US announces the payroll tax deduction. Plan your trades accordingly!
Tuesday Trade Update: Flight to Safety - Canceled
Tuesday was an interesting day. The S&P 500 moved from Limit up overnight to briefly negative early in the day, and finally closed over 4.8%. This was primarily due to comments from U.S. Government officials regarding Coronavirus. Investors were hopeful overnight that President Trump would introduce a payroll tax cut, to provide some relief. In the morning, the President said they were not ready to announce any kind of economic relief. There were concerns by Democrats that payroll tax relief would not reach all workers who might need help. Markets gave back all their gains and briefly turned negative. However, later in the afternoon Treasury Secretary Steve Mnuchin met with Speaker of the House Nancy Pelosi and he said that there is a bipartisan urgency to pass a Coronavirus economic relief package. As a result, stocks roared higher as markets hoped something will get done!
As stocks continued to rebound, the flight to safety trade was unwound. On a 240-minute timeframe, the U.S. dollar/Swiss franc pair (USD/CHF) moved from a of .9182 to .9411, completely filling the gap from over the weekend (see chart).
Source: Tradingview, FOREX.com
All is right again, right? Not quite. Although the S&P 500 closed up 4.8% on the day, it could not fill the gap from Sunday night at 2916. The actual gap fill is Friday’s close at 2984.25. Price is still more than 100 handles away from that point. The first resistance is 2916 (the gap open) and the second resistance is 2984.25 (see chart).
Source: Tradingview, CME, FOREX.com
What does this mean? The Coronavirus is still out there. A fiscal stimulus package is helpful, but as Fed Chair Powell said regarding the 50-bais-point interest rate cut last week, stimulus will not stop the Coronavirus. It will just help those who are affected by it. This means that although U.S. government officials are finally moving in the right direction, stocks can still move lower. Because stocks did not fill the gap from Sunday night, there is still a lot of work to be done if they want to move higher. USD/CHF bears are still watching the flight to safety trade. They are hunting the trade in which stocks turn lower and they can jump in again and look to take out the February 2018 lows.
The markets will continue to be volatile over the next few weeks based on news. If stocks move lower, watch for USD/CHF to move lower as well.
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
