Financial market research and analysis

Dow drops into bear market, S&P to follow after Trump speech

Trump managed to spook an already spooked market. European share markets are set for sharp opening losses. The FTSE is on course to tank 300 points to take it down 30% off its May 2018 peak. The Dow Jones entered a bear market, falling over 20% from a record peak and more big losses are expected today following a disappointing speech from the US President.

The US President outlined new measures the United States would take to fight the coronavirus in a speech Wednesday night, including a 30-day ban on travellers from Europe, excluding the United Kingdom. The travel ban is a decisive step to prevent the spread in the US but will cripple trade between the two continents. Goods will still flow but presumably at reduced pace and trade in services will almost grind to a halt.

The biggest source of disappointment on Wall Street was the lack of specific ways to support people and SMEs of the sort that were announced in the UK budget. Paid sick leave, free testing and a solution for uninsured Americans were all missing. The acrimony between the Republican White House and Democratic Congress since impeachment seems to be making it harder for the US to respond with the speed and vigour required. A scheduled 1-week recess by Congress starting Friday means further delays to new policy is likely.

Haven flows moderated slightly overnight following comments from the Governor of the Bank of Japan Kuroda. Kuroda said the Japanese central bank will aim to “stabilise the markets with asset purchases.” The Nikkei finished off its lows but the Australian ASX index was pummelled lower by 7% as commodity prices continue to slide.

UK Budget & BOE review

Assuming the coronavirus does take hold in the US and UK like it has in Italy. The stronger British government response might finally see UK shares outperform Wall Street counterparts in the eventual recovery. The biggest increase in spending for 30 years will mostly funded by a large increase in borrowing. In other circumstances, the higher borrowing might have risked the UKs credit rating. With interest rates so low, an emergency to tackle short term and low productivity to tackle long term, the response to the budget from markets has been constructive.

The British pound fell after the surprise 50 basis point cut to UK interest rates but quickly rebounded to turn higher on the day. The turnaround came as Rishi Sunak announced a £30 billion stimulus package to combat the economic damage from the coronavirus outbreak in conjunction with a big-spending long-term budget.

There is an element of traders rewarding the more proactive central banks. In terms GBPUSD, it’s probably more a matter of buying pounds to sell dollars before the Fed cuts rates again at its March 18 meeting.

ECB Preview

There are two things markets care about right now; the coronavirus and policy accommodation.

Taking a look at how markets are positioned right now, we don’t see any big expectations for the ECB. European stock markets are tanking and the euro has taken off. That could mean the ECB can hop over a low bar but it is hard to see how with such little room for manoeuvre.

Staff forecasts will be out of date since they needed to be submitted two weeks ago before the big coronavirus outbreak in Italy. The focus will all be about the decisions taken. From a trading perspective the 12.45 policy announcement could for once create bigger waves than the 1.30 press conference.

To have any real impact on the economy, the only thing the ECB can do is inject liquidity and offer backup to bank loans targeted to people and businesses most in need, probably via targeted TLTROs. If the ECB is looking to prevent a negative feedback loop from the turmoil in financial markets hitting the economy, with rates at the zero bound, the only solution is more QE.

Opening calls
FTSE set to open 306 points lower at 5570
DAX set to open 575 points lower at 9863
S&P 500 to open 106 points lower at 2635