Key Takeaways

  • Coronavirus (COVID-19) spreads, impacting global supply and demand.
  • FX markets mixed and volatile as investors seek safe havens.
  • Key commodities - oil and copper - slump.
  • World central banks struggle to course-correct. US Fed cuts rate by 0.5%.

As the novel coronavirus (COVID-19) moves to pandemic status, nations, companies, investors and consumers struggle to keep a sound footing in a dramatically volatile market. What’s more, heightened media attention, the push-pull of interrupted supply chains and softening consumer demand, are testing efforts to mitigate exposure and continue “business as usual”.

What happened?

Coronavirus (COVID-19). As nations, states, and municipalities worldwide seek to mitigate the spread of the disease, closures of entire cities, cancelled large-scale events, and ‘self-quarantining’ by citizens are dramatically impacting global supply and demand. The compounded effect of supply-chain interference and softened demand have left investors, companies and markets increasingly uncertain and struggling for stability, manifesting in a seesawing market and push-pull effect as investors seek to mitigate potential losses. As a result: by end of February, the Canadian dollar fell to its lowest level since June 2019, the Australian dollar is at its weakest since 2009, and the Chinese renminbi fell to just above 7 RMB/USD – an important psychological inflection point in FX markets.

Brexit-ed. Now that Britain has exited the EU, it is free to renegotiate trade deals globally. Notwithstanding the impact of COVID-19, some project a post-Brexit trade deal with the US could boost the UK's gross domestic product (GDP) by 0.07% to 0.16% over the next fifteen years. Even so, FX markets remain bearish on the pound—potentially until a new UK-EU trade agreement is reached by end 2020.

What's in play?

Central bank cuts. Hopes that central banks worldwide would cooperate to cut rates to forestall weakening markets did not come to fruition. Rather, without concurrent and contemporaneous cuts by other nations, it is believed the US Fed’s 0.5% rate reduction ended up signaling that the United States was anticipating further downward momentum in the markets. The upshot is the rate reduction failed to bolster markets. However,  economists reserved optimism that a quick rebound of markets may be expected following virus containment, the biggest question remains: when? Some investors and analysts anticipate the Fed will cut rates further twice more during the year, leading the US dollar to weaken in 2020.

World productivity. Even if the virus were to be contained today, losses in major sectors are likely not recoverable. One of the first to be hit, the air travel sector has already reported that the industry can expect losses for 2020 to exceed $100 billion. And, as the global economy is more entangled than any time in history, losses continue to cascade into other sectors, prompting many to wonder if world productivity figures will continue to slide. Concerns of a protracted epidemic have some once again raising the possibility of a recession.

Trade agreements. Trump has said he aims to have a trade deal with Europe in place before the elections in November. Indications are the President may revisit trade agreements with EU members, with a focus on German autos and a digital tax likely to be negotiated this year. Anticipation of a potential trade war between the US and EU members dragged the euro versus the US dollar down by about 2% through February.

WHO report. A February 28 report from the World Health Organization (WHO) had startling results regarding infection rates in China, stating “China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic.” Continuing, “This decline in COVID-19 cases across China is real.” Still, China remains shut down. As a global supplier and voracious importer, news of any sort of stability in the region offers investors some hope for recovery. The Chinese yuan continues to be a strong performer and safe haven for investors.

What's next?

Central banks may follow US lead. The European Central Bank could well cut interest rates even though President Christine Lagarde would prefer EU countries, especially those with fiscal surplus’s (such as Germany and the Netherlands), to increase fiscal spending as a preferred tool to stimulate economic growth. With liquidity in member nations high, some analysts anticipate further spending by EU members could strengthen the euro 10%-15% in 2020.

Commodity prices likely to decline. Dragged by COVID-19, demand for commodities is down worldwide. Oil and copper (considered leading economic indicators) have slumped. In fact, OPEC oil prices fell to $45.83 a barrel—the lowest level in 12 months. And copper has fallen from $2.90 to $2.40 per pound in the last 6 weeks. Additionally, the Bloomberg Commodity Index continues a decline to levels not seen since 2016. Most economists do not see a strong rebound in commodity prices in 2020 even if global trade stabilizes and central banks keep interest rates low. Currencies associated with commodity exports like the Australian dollar and Brazilian real, already at historically weak levels, will continue to fight an uphill battle.

USD to weaken. As investors take haven in safe harbor currencies, the USD has been weakening. Investors can expect the dollar to weaken further and emerging market currencies, which previously suffered from trade wars and central bank uncertainty, to strengthen.

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Laurence Hayward

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