Even Dead Cats Bounce on $2 TrillionCreated: 9th Apr 2020

Jerry & Adrian discuss the majoy market reactions to the unprecedented $2 Trillion stimulus package approved in the US last week, including one of the biggest Stock Market rallies of all time, and some pretty major moves on the USD. But where can the markets go from here? Is this the start of the major recovery, or is this nothing more than a Dead Cat Bounce.

 

In-depth market analysis

 

BST started yesterday. So normal time difference between UK / Europe and US resumed – with 5-hour diff.

So, US stock markets back to 2.30pm Open and 9pm close.

Far East markets recovering from the open overnight, initially reacting to the late sell-off in the US Friday evening and the further slide in oil prices…. with US Oil slipping below $20 for the first time in recent memory.

 

Some astonishing moves last week, that are worth noting.

Review

FTSE +319  + 6.16%  DOW +2,462 +12.84%  S&P +236 +10.26%  DAX +703 +7.88%

Nikkei  +2,836 +17.14%

European markets had suffered more than US markets previously hence the smaller magnitude of the bounce.

US markets enjoyed their best three day run mid-week for decades as investors reacted to the $2 Trln stimulus rescue deal agreed by Congress and finally signed off by Trump last Friday.

Many of the beaten-up stocks and sectors saw some relief as investors reappraised valuations. The hospitality and travel sector which had lost up to 60% to 80% encouraged value buying or bottom fishing as some may refer to it.

However, US stocks are still 25%below their peak from 19th February.

EURUSD +4.34  +4%  GBPUSD  +7.90 +6.7% 

Big falls in US Dollar as risk correction saw USD fall sharply. The whole situation remains volatile as investors rush for cash and inevitably the US Dollar.

 

Th Federal Reserve unleashed more firepower by effectively announcing that QE would be unlimited.

Last week’s initial jobless claims will underline how serious the economic hit will be for the US and globally as claims rocketed from 282K the previous week to 3.2 mln as workers were laid off in their droves.

Gold +120 +8%

Big run up in gold. Exacerbated by correction in USD and the temporary shutdown of gold refineries in Switzerland and South Africa making the market vey jumpy.

Gold has not behaved the way traditionalists would like it.

Normally a safe haven asset Gold, has been tracking equities more closely. Mainly because in times of panic traders also are selling anything, including Gold, and going into cash.

US Oil -1.6  -6.8%  UK Oil  -2.29 -8.4%

As oil demand slumps, with gasoline and aviation fuel demand falling , the outlook looks bleak whilst the developed world remains in lockdown.

Add in the price war started by Saudi Arabia with Russia and US Shale the likely ones to suffer, the outlook looks even worse.

 

So, a significant global economic slump resulting in a global recession this year.

In the past Chinese economic activity, more than offset any bumps in the road but China is suffering like the rest of world’s economies – China announced that industrial profits plunged by $60 bln year on year.

Central banks have done almost as much as they can with a massive monetary stimulus, adopting extreme policy shifts as governments around the world lay out their plans to counter the catastrophic effects of the Covid-19 epidemic.

The problem faced by all governments is the unknown, and this is also therefore affecting the markets in the same way.

The old saying that investors and traders don’t like uncertainty is very much the issue here.

No one knows how the pandemic will progress. Epidemiologists keep updating the government and then feedback from other countries experiences changes the advice – Because we don’t anything for sure.

 

The social distancing being practiced around the world in at least a third of the world’s population, where it is practicable, will have an effect of spread of the virus over the coming six weeks, but it is also having a devastating effecting on economic activity.

A significant number of businesses simply cannot function by working from home but are not deemed critical industries.

Workers have been paid off or furloughed.

Either way there is a significant cost to many workers, many businesses and also the government.

The social distancing strategy is designed to flatten out the infection curve and relieve pressure on medical services at the height of the infections – which is expected in about three weeks’ time.

 

We talk about uncertainty – Some optimistic people amongst us expect restrictions to be lifted in 3 weeks.

If anything, it’s the opposite as recent advice suggests extending the lockdown further will save many more lives.

 

The government are rushing to procure alternatives to ventilators and UCL and Formula One have developed a CPAP (Continuous Positive Airways Pressure) machine that will cut down the pressure on ventilators by 50%.

 

So, markets will remain very volatile as participants attempt to price in the risk correctly.

The news that the lockdown and easing of restrictions may not be over for six months is something that markets ill also now have to consider.

The testing regime will be increased significantly as governments identify clusters of infections and also identify those that may have already had the disease without knowing it.

 

Data / events

As always, the markets will be dominated by any news related to Covid-19.

Even the appalling weekly US employment claims did not dent the rally last Thursday.

There is no scheduled central bank meeting this week, so we rely on economic releases and government updates.

The main event is NFP, but we already have seen how bad this is going to be with appalling initial claims last week.

 

Monday

 

Tuesday

China Manufacturing PMI                       confusing data from China but remember the whole of China was on extended holiday for three weeks in February.

 

Wednesday

US       CB Consumer confidence                        Steeps fall expected – probably worse than forecast. A leading indicator if ever the was one needed now.   

Thursday

US weekly initial unemployment claims                      Horrendous

 

Friday

 

NFP                -81K               Surely will be worse than this.

Unemployment rate3.8%

 

 Accirding to the FT, the St Louis Fed, are forecasting 50 Mln unemployed in the US – that’s 32% unemployment!! I wonder if that’s priced in!?!

Trump believes America will be back to work in a few weeks. Those views will surely have to change if the US is to tackle this epidemic and save tens of thousands of lives.

Category: Podcast

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