The huge expectations of investors for the actions of central banks or governments that can support the economy seem to lead to a strong correction in the stock market. We could see it after yesterday's rally on Wall Street. The Dow Jones index, after an earlier record-breaking decline, yesterday has the biggest daily jump since 2009.
The Dow Jones rose 5.1% on March 2, S&P 500 rose by 4.6%, and Nasdaq increased by 4.5%. Such significant increases are a possible effect of waiting for the firm action of the Fed and the US government. The Fed may cut interest rates and provide liquidity to the financial markets and could resume an asset purchase program if needed. The interest rate market is currently valuing 100% chances of cutting the range for the federal funds rate by 50 basis points on 18 March. President Donald Trump, in turn, talks about tax cuts and once again criticizes Jerome Powell, chairman of the Federal Reserve, for slowness and too high interest rates compared to Europe, Australia, and other countries, venting his frustration in subsequent tweets.
It seems that the Fed may be under enormous pressure. We will soon find out if it meets these expectations. Consequently, the US dollar could lose value and the euro gain. The expected volatility for the EUR/USD pair increased significantly in February and early March, which in turn may lead to cover a carry trade positions, which could have been carried out for cheap borrowed euros. With possible fast rate cuts in the US and an increase in volatility, carry trade seems less profitable and riskier. It is also worth mentioning that the positioning on the contracts on the euro has been the greatest for three years – according to CFTC data. This, in turn, can lead to the short squeeze, i.e. the rapid closing of short positions.
Today, the most important event for the markets seems to be a conference of representatives, which will include finance ministers and central bank governors from the G7 countries. Approx. 13:00 measures to address the coronavirus epidemic and economic consequences are to be discussed. As reported by Reuters, suppressing the expectations of market participants, at this stage the draft G7 statement includes a commitment to cooperate but does not take into account specific fiscal and monetary measures. Today's afternoon may, therefore, pass again under the sign of greater volatility that has appeared in many markets.
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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