Stocks Crash, Euro Cracks & Risk Currencies Tumble

US stocks sold off for the third day in a row and today’s losses were the sharpest. The Dow Jones Industrial Average tumbled 6.9% or 1,800 points the biggest one day drop in 3 months. Risk aversion was in full swing with currencies falling across the board and oil dropping by its largest amount in 2 months. The US dollar traded sharply higher on safe haven flows. The Australian dollar was hit the hardest with the Canadian and New Zealand dollars trailing not far behind. Sterling also fell sharply and surprisingly euro was the most resilient but it also succumbed to end of day losses. There’s wasn’t one but many catalysts for the meltdown in stocks. Instead, the lack of additional stimulus from the Fed, Powell’s cautiously optimistic tone, profit taking and worries about a second wave of coronavirus cases after spikes in Texas, Arizona and California all contributed to the decline.

The fear of a second wave is real. COVID cases are increasing in 21 states with 14 seeing new highs. Florida reported its largest single day increase in coronavirus since the pandemic began. The same was true for Texas which reported over 2,500 new cases and in Arizona, cases have risen 49% from May 26 to June 9. That’s 14 days (the incubation period of COVID-19) after Memorial Day. Anyone who thinks that the US has won the battle against COVID is wrong and in states where the curve has been flattening like New York, it still remains to be seen whether protests have shifted the trend. Fed Chairman Powell warned yesterday that if a virus second wave happens locally, it could hamper the economy so he doesn’t know for sure if the labor market bottomed.

Investors sought safety in the US dollar, driving the greenback higher against all of the major currencies with the exception of other safe havens like the Japanese Yen and Swiss Franc. The sell-off in USD/JPY and USD/CHF are consistent with the slide in stocks and Treasury yields. Weekly jobless claims and the producer price index had very little impact on the greenback. PPI rose more than expected in May but excluding the recovery in energy prices and food prices, PPI fell for the second month in a row. Jobless Claims were slightly lower, with 1.5 million new benefit filings, down from 1.89 million the prior week and from the 6.89 million peak at the end of March. The University of Michigan’s consumer sentiment index is scheduled for release tomorrow and given the rally in stocks up to this week and state reopenings, we expect further improvements in sentiment.

Unlike other currencies that have experienced sharp declines today, euro’s losses are more moderate in comparison. Its hard to pinpoint the specific catalyst for the euro. It could be the continued re-openings, the relaxation of travel bans or the lack of meaningful upticks in new infections in Europe as they ease restrictions. Eurozone industrial production is due for release tomorrow and a deeper decline is expected. We continue to look for a correction in EUR/USD especially if stocks continue to fall as the move becomes overstretched.

The Australian dollar and New Zealand dollars were hit the hardest by risk aversion. Unlike the US, both countries have effectively flattened the curve. Only 9 cases were reported in Australia today while New Zealand has had only 7 cases in the last month and zero in the past week. Yet these currencies are extremely sensitive to the market’s tolerance for risk, particularly after strong moves in May and June. Tensions between China and Australia are heating up with China telling Australia to take a hard look at their current problems. China is punishing Australia for questioning Beijing for allowing the spread of COVID-19. They instituted tariffs on barely and put an almost A$38 billion education revenue stream at risk. The Canadian dollar also fell sharply on the back of sharp declines in crude prices. USD/CAD broke above 1.35, enjoying its strongest rally in more than a month.

Sterling is in focus tomorrow with UK monthly GDP, industrial product and the trade balance are scheduled for release tomorrow. Considering that these are April data, when manufacturing PMI hit a record low, the risk is to the downside for these reports.