Virus Risk – Equities Sink Like a Stone but FX Unfazed

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Market Drivers February 24, 2020
Nasdaq Futures down -2%
IFO better
Nikkei closed Dax -2.83%
UST 10Y 1.39%
Oil $51/bbl
Gold $1678/oz
BTCUSD $9775

Europe and Asia:
EUR IFO 96.1 vs. 95.3

North America:
CAD Wholesale Sales 8:30

Equities were sharply lower in Asian and early European trade today with US stock index futures off as much as 2% on fears that the coronavirus is now turning into a global pandemic as the infection spread through Italy, South Korea, and Japan over the weekend forcing some of the governments to institute limited quarantines.

Investors are finally becoming concerned with the potential long term impact of economic disruption as large swaths of Asia and now some parts of Europe remain on a virtual lockdown ceasing all business activity for the time being. With equities trading near all-time highs as the coronavirus spreads around the world the potential for a massive social as well as economic panic now exits in earnest.

Surprisingly FX markets were rather placid with USDJPY only slightly lower as it traded to a low of 111.30 while USDCHF held steady at .9800. There were reports that the SNB may have been trying to prop up the EURCHF pairs at 1.0600 in order to hold off euro relentless decline which has only been further aggravated by the coronavirus issues in Italy.

Still the muted price action in currencies versus the panic selling in equities reflects the very different dynamics of the two markets at the current time. Equities have risen to record highs mostly on the back of the very easy liquidity from central banks and are now coming under attack as fundamental factors overwhelm those flows. Currencies, on the other hand, remain in a very low volatility environment for the very fact that G-11 rates remain suppressed by the very same central bank liquidity. With rate differentials essentially all converging towards zero the movement in FX is much more restrained.

With no major releases on the docket today the key question ahead for the market is will equities stabilize in North American trade. Typically big Monday morning declines have been reversed – sometimes completely – by North American flows which remain skewed towards the long side. But with investors now starting to take the global impact of coronavirus seriously buy the dip mentality could morph into sell the rally attitude especially if the infection rate begins to increase.

Boris Schlossberg
Managing Director

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