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Markets pay scant heed to IMF’s dramatic downgrade

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By Han Tan, Market Analyst at FXTM

Asian stocks and currencies are mixed Wednesday, while US equity futures are pointing south, offering a relatively subdued reaction to more dire warnings about the fate of the world economy. The IMF predicted that global GDP will contract by 3% this year, which would mark the steepest recession in almost a century.

According to estimates by the IMF, as well as Wall Street, the global economy could lose anywhere in the range of $5-9 trln of growth through to 2021 because of the coronavirus. The signs are already there, as the likes of JPMorgan and Wells Fargo announced billions of Dollars being set aside in anticipation of more loans going bad, while reporting a steep drop in their respective Q1 net incomes with shares in both banks marking two consecutive days of losses.

 

Markets’ path dictated by longevity of Covid-19

Stocks’ ability to post sustained gains appears predicated on how quickly major economies can restore some semblance of normalcy, while acknowledging that the lifting of quarantine measures may not necessarily mark an immediate return to business-as-usual. Lingering fears over the coronavirus could well put a lid on consumption and alter spending habits, while leaving corporate earnings stunted for an extended period.

Still, the US stock market has now retraced more than 50% of its losses during the corona-crash as investors turn a blind eye to the deteriorating near-term financial metrics of listed companies and focus solely on hopes of their eventual recovery, aided by the unprecedented supportive policies that have been rolled out around the world.

However, should the coronavirus be back and force another round of lockdown measures, we could very easily see stocks turn substantially lower, leaving markets to question the efficacy of quarantine efforts, as well as the timeline for the eventual economic recovery. With the market outlook still mired in tremendous uncertainty, gains in equities remain far from a one-way bet.

 

Safe-havens steady as outlook sours

Gold prices seized on a waning Greenback to notch its highest level since November 2012, before moderating towards the $1700 mark. The Japanese Yen is currently the sole G10 gainer against the US Dollar, with USDJPY briefly strengthening past the 107 psychological level, while 10-year US Treasury yields have fallen by more than 3% to drop below 0.73% early Wednesday.

As alarm bells over the state of the global economy ring louder, safe-havens are strong this week and appear ready to seize any opportunity to claim further advances.

The $1800 handle may well be within Bullion’s grasp and the Japanese Yen could mark a sustained move south of 107 against the Dollar, as long as risk aversion continues and the Dollar remains subdued.

However, should the pandemic show more signs of stabilising over the near-term and major economies confirm plans to reopen, that could prompt the unwinding of recent gains in safe-haven assets.

 

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