Βυ Han Tan, Market Analyst at FXTM
Asian stocks can’t seem to catch a break as the region’s main indices are falling on Wednesday, despite all three major US stock indices posting solid gains on Tuesday.
Although US equities were buoyed by the prospects of President Trump’s $1.2 trillion stimulus package for the world’s largest economy, investors are not getting giddy with hope that a global recession can be averted. US stock futures currently point to losses, while Gold and the Japanese Yen are advancing.
The short-lived gains in global equities of late show that investors remain sceptical about the huge swathes of support measures being rolled out around the world by central banks and governments.
Global economic activity has already taken a huge hit judging by the hard data out of major Asian economies, with the heightened travel limitations and quarantine measures across continents adding to the dire outlook. Unless the coronavirus outbreak can defy expectations and show it will stabilise in the immediate term, investors fear that the current economic trajectory will only point to a dreaded global recession or even something worse.
Dollar eases after recent surge
The Dollar index has made an impressive V-shaped recovery in less than a month, gaining over 4% since breaking below the 95 psychological level on March 9. As the Fed used up most of its conventional tool box to try and mitigate Covid-19’s impact on the domestic economy, we saw typical Dollar weakness accompanying US monetary policy easing.
More recently, the Greenback has benefited from a surge in demand for the safety it provides amid tumultuous market and economic conditions. Significantly, liquidity stress has come into play with gains reflecting USD funding demand.
Although $1.2 trillion in fiscal stimulus could stem the risk of a US recession while offering some measure of calm for investors, the economic outlook remains highly uncertain at this point in time and does not yet warrant venturing out significantly into more risky assets. Such broad caution should ensure a supportive environment for the Greenback until the coronavirus-inspired fears start to fade away with infected cases starting to recede.
Gold prices to find floor once market panic subsides
Gold’s safe haven status has been challenged of late, with risk-averse investors displaying a marked preference for King Dollar at the expense of Bullion. Once the liquidity squeeze eases and Gold prices find a more stable footing, investors concerned about the global economic outlook should eventually come back to the precious metal and send prices towards $1600.
Supply and demand disruptions set to drag Oil lower
Brent futures are now languishing below $30/bbl, trading at levels not seen since 2016. Barring active steps by OPEC+ to intervene and rebalance the markets, the supply-demand shock may eventually drag Brent down to the $20/bbl floor. The heightened risk of a global recession and worse, coupled with the threat of cheap supplies flooding the markets, ensures that Oil’s downside bias remains intact for the time being.
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