Daily Wrap up: The main reasons why the currency markets are in full panic mode even after the short-term pullback.

10 Mar 2020 02:05 PM

Global Markets are Crashing, and Central banks are unable to react

Following the Fed’s surprise 50 bps cut to its fed funds rate target on March 3, another 50-bps cut is anticipated at its next meeting on March 18. The Federal Reserve's emergency rate cut had a limited positive effect and only opened markets' thirst for more moves. The Fed is one of the only central banks that has ammunition – it entered the crisis with an interest rate of 1.25%.

In Europe, it’s now the turn of European policymakers to decide whether to follow suit. The ECB will conclude its meeting on Thursday and while markets are convinced rates will be cut by 10 basis points to -0.6%, many economists disagree. The fact is many official in the ECB are divided on this matter. these policymakers represented by large economies such as Germany and France believe that the current monetary policy is already extremely accommodative, as any more stimulus would do next to nothing to boost the struggling economy.

Meanwhile the Bank of England's borrowing costs are only 0.75%, And in Japan, the interest rate is negative at -0.10 as well. Moreover, even if the interest rates cuts happened it could merely be useless move as cutting interest rate encourage spending but with Coronavirus outbreak people are scared and could not be easy to convince them to spend or to buy flight tickets or even go for sporting events. In addition, the closure of factories or suspending work over there cause a supply shock and lowering interest rates can only address demand.

Markets are aggravated by Oil drops

The fact people are staying indoors and unable or refined from traveling is weighing heavily on oil prices. Moreover, the last OPEC meeting in order to cooperate to cap productions and try to support prices higher has fallen out on Friday. Resulting on threats from Saudi Arabia in launching an all-out war with Russia lowering its rates for the Black gold. This move has dropped the oil prices further causing greater damage and could force US companies to shutdown their operations. This could weigh on the economy and put huge pressure on manufacturing

Nonetheless, After the sharp declines that made many financial markets called this day as the Black Monday collapses, the markets are facing bullish pullback due to US administration statements indicating for a government intervention to stimulate the economy. But at the same time, it cannot be confirmed that anxiety has faded from the markets.

High uncertainty on the Coronavirus cases could cause mentality challenge

The number of coronavirus infections in the world increased to more than 114,000, as the number of existing cases increased to more than 46,000 cases. However, financial markets are more comfortable with the case numbers slowdown in China. Yet the death rate is increasing in Europe, Especially in Italy. This raise the question on are the Chinese numbers are accurate? Are there any different strains on the Coronavirus? These questions continue puzzle the majority of the global public.

Moreover, it is becoming harder to forecast the global economy trajectories as many analysts dismissing a US recession, but now there are growing concerns are in the opposite direction and they are increasing in numbers as some of them see the latest pullback as a “V Shaped Recovery”.

This could result on making many investors in doubts and whenever they are doubts some of them stay out of the market. the mentality of these investors, small and large are alike as so the "buy the dip" approach could disappear, and it could take time to for them to return to this approach. It is hard to detect the bottom in the sell-off.

Slow US policymaker’s response

President Trump has opened the door to fiscal stimulus in addition to specific budgeting for treating the virus. Nevertheless, these may be too little and too late.  Previously, the President, has been dismissing the damage from the disease and offering only limited measures such as providing paid sick leave. This could inspire little confidence, and many suspects that when the numbers of infections increase this could cause for surging economic fallout.

 

 

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