The beginning of the last week of February will be quite well remembered in the stock markets. Yesterday's sessions in Asia, Europe, and the United States ended with another strong decline in stock indices. Today, like yesterday morning, futures indicate a stabilization of the situation.
During yesterday's session on Wall Street, the second-worst day for market bulls was recorded since October 2018. The main reason could be the increase in coronavirus cases and fatalities outside China. There is also a warning from the American Center for Disease Control and Prevention about the possibility of coronavirus spreading in the United States. In the USA, 57 cases were confirmed, of which 6 people recovered. At the close of yesterday's session in New York, the S&P 500 declined by more than 3 percent, Dow Jones lost 3.2 percent, and Nasdaq lost 2.8 percent. From the historical high of February 19, the S&P 500 has already fallen by more than 8 percent only during four sessions. At the same time, the German DAX lost 7.3 percent, and today in the morning futures contracts indicate a possible decline in the index by about 0.7 percent.
Increased concerns about the spread of the epidemic also have an impact on the currency market, where the AUD/USD pair deepened the 11-year low along with strong declines on the national stock exchange, which has also recently set a record of all time. It seems that all this is happening because of fears of a strong slowdown in economic growth in a country with strong economic links with China.
It is also worth noting the increase in expected volatility, which can be seen in the currency options market. The implied volatility for the weekly USD/JPY options increased to 8.66, the highest since September 2019. Data from the option market also indicates that investors may be looking for hedging against falling shares on the stock exchanges. They may do this by increasing the demand for put options relative to the call option, which is visible on the monthly options.
Investors' fears also increased when indicators from the Chinese economy confirmed in February that the coronavirus outbreak slowed down production and consumption because factories remain below production capacity and transport is limited, according to Bloomberg. Meanwhile, PMIs for the manufacturing and service sectors will be announced on Saturday.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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