Market Overview

23 March 2020

Markets Are Ready to Fall Deeper After New York Shutdown

All over the past week the market community asked itself a simple question: is there a serious chance that local upside corrections may have already turned into one big global rebound? But the market situation provides a simple answer: not now. After several attempts to build on limited gains during four days and a half, the market close on Friday clearly demonstrated that nothing is over. New sale-offs rattled markets after the news of New York City shutdown following the California state lockdown.


Now more than 60 million people in the United Stated have to follow restrictions on relative isolation and to work remotely. The modes of forced self-isolation are different. For example, in some regions of Spain people are allowed to follow the designated route to their work, walk with their dogs or to go to the food store, and some neighbours even share each other's dogs to be able to leave the house. American quarantine does not even prohibit skateboarding or jogging in city gardens if people clearly confine a distance of at least two meters from each other while doing any activities. But in economic terms these or some other options of quarantine would paralyze a number of its segments and many companies for at least two or three coming weeks. After returning to normal life it may be possible to expect a solid return to usual indicators for production and sales or even a return to proper revenue for companies, but every sober mind understands that for the 1st and 2nd quarter of this year that losses will most likely be very impressive. So, a positive outcome would be if average losses of most companies would not exceed 20%.


Online services are in a better position for now, because they could invent more ways to get more profit from essential goods delivery or streaming broadcasting, including live training courses and entertainment. But most of them also suffer from the lack of demand for any durable order of goods that people prefer to postpone for better times and many households are just pausing their expenditures to save their money. Therefore, it's too early even to think about investing in companies whose activities do not seem to be directly related to offline production: their share prices may go down more along with the rest of the market. However, it may be a good idea to keep an eye on the shares that are sinking less, holding more steadily and recovering some of their losses relatively quickly.


In fact, the authorities have no other choice now but to continue doing what they are doing already, simply trying to buy some time for doctors who can gain more experience in treating patients and scientists to probe vaccines in a hope that it will be enough to keep as many people as possible unaffected and to reduce the speed of the virus spread. As a response to all this rather sad reality and no less gloomy expectations, the S&P 500 stock index and the Dow Jones Industrial Average index were down more than 3.5% on Friday, extending their slide to about 15% for one week as the state of New York ordered all non-essential workers to stay home. After all of these challenges, one after the other, the S&P500 futures undoubtedly opened this week even with a gap of 3.95% lower on Monday.


As for the European markets, the Stoxx 600 was more than four % lower before Monday afternoon, the French CAC40 and the German DAX30 moved down in a similar manner. The only relatively good technical news for the European indexes are that they all still trade above previous week's support areas, which were not broken through on Friday. Nevertheless, a further drop might be just a question of time. Crude oil WTI Futures were below $21 per barrel after Friday's close at $23.66, Brent oil traded under $25 again in Asia, and in general, prices for other commodities and metals remain suppressed.


During these circumstances the markets will not be very interested in the upcoming publication of GDP and other data of various countries for the past periods. Most investors realise that even the gradual recovery of the Chinese economy to its previous state may be already starting as the virus is well controlled in China. However, as Western countries are only now entering the epidemic vortex, they will have little demand for Chinese products.


Further changes in values of the US Dollar versus emerging market currencies, such as the Turkish Lira or the South African Rand, as well as dynamics in currency pairs, such as GBP/USD, AUD/USD and NZD/USD, may serve as some kind of indicators in a sense of the market's attitude to risk. As long as the Greenback continues to strengthen, similar to the fall of 2008, this may indicate an urgent need for the US Dollar to cover the damage suffered, including margin calls or some necessity to trade Dollar-nominated instruments like commodities or other assets. Any signals pointing towards the end of a US Dollar strong move may eventually become a hint to the appearance of a moderate number of calm buyers in shares again. But the reverse process may be seen as unlikely in the next couple of weeks.


It's difficult or almost impossible to predict the amount of possible further decline in the price of particular assets. In this regard it's more correct to say that there is a time factor, the drop may be significant in some cases and quite small in other cases, and that some asset prices are able to slip as much as they can before the whole situation reaches a certain turning point at some D-day. But can someone responsibly point to this particular D-day by making a forecast for the future from the present moment? Any such predictions could be doubted.


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