U.S. and European Stocks Have Suffered Greatly, But May Fall Even Deeper Before a Big Recovery
25.02.2020, 12:52

U.S. and European Stocks Have Suffered Greatly, But May Fall Even Deeper Before a Big Recovery

The Stoxx Europe 600 index on Monday had its biggest one-day loss since June 2016, just after it reached its fresh all-time highs last week. The French CAC40 and the Deutsche Xetra DAX 30 indexes performed in a similar manner, while the FTSE MIB in Milan was the main loser among all European indexes with a fall of5.43% on Friday's closing, due to numerous messages related to the spread of the coronavirus in Northern Italy.

Several Middle East countries, including Iran, were dealing with their first cases of infection yesterday, adding fuel to the negative side, and the Chinese ambassador, who was in Russia, together with the Wall Street Journal reported on a possible vaccine, which calmed markets. Anyway, all possible reasons and excuses for the strong technical correction were widely exacerbated by market's "bears". It should be remembered that that the whole downside movement was ready to start a week ago, after Apple Co warned that the company probably would not be able to meet its revenue targets for Q1 and Q2, and then the markets swung up and down several times, with a final strong sale-off accord.

Surprisingly, weak business activity data from the United States on Friday contributed to the downside. The US Services Purchasing Managers Index (PMI) was below 50, which is the lowest it has been since February 2016, with the same figure in the Composite PMI. The service sector represents more than 70% of the American economy, and any PMI level below 50 indicates a decline, so these events were particularly depressing in contrast to the excellent data for the previous five months.

The S&P500 index fell by a total of 5.5% from last week's historically high levels, while the Nasdaq100 index of technology companies lost more than 7.5% from the top. The Japanese Nikkei225, after a national holiday in Japan on Monday, dropped more than a thousand points (-4.4%) immediately from the opening on Tuesday. However, shortly after that, Japanese and other Asian shares sell-off paused a little, with stock and commodity markets finding some fragile stability. A small bounce in the US indexes allowed investors to take a breather from coronavirus fears. But the break may be temporary, a new slide to the deeper price levels of world indexes and shares may be expected today in the early hours in America. The slide may even continue throughout this week before some big or even full recovery "cards" appear on the table again.

Gold ran into profit after hitting a seven-year peak near $1,690/toz overnight and it is now trapped in a narrow price range between $1,635 and $1,655/toz. Brent oil is in doubt between $55/bbl and $57/bbl, captured by contradictory tendencies.

The long-term support factor for the world markets is still Phase One of the deal between the US and China. Both sides continue to demonstrate their commitments to the agreement, even amid the coronavirus disaster. Most of the economy indicators also look strong in the United States, and the tax cuts for American companies facilitates the achievement of high profits. The loan rates cuts by the People's Bank of China (PBoC) and hundreds of billions of additional liquidity the PBoC provided to the Chinese stock market, could probably mitigate the effects of the slowdown that is expected in the coming two or three months at least.

The ultra-dovish monetary policy of the European Central Bank (ECB) acts the same way in Europe, and now bond investors bet on more rate cuts by the US Federal Reserve (Fed) too. The Chicago Mercantile Exchange (CME) futures for the Fed funds rate have surged in the last few days to price in a 50-50 chance of a quarter-point rate cut as early as April, with an almost 20 percent chance of more than 0.5% reductions by year end.

"While we still think that it would take a significant deterioration in the outlook for the US economy for policymakers to cut rates, they may feel compelled to do so if the virus spreads and leads to continued falls in the stock market and inversion of the Treasury yield curve," said Jonas Glotermann at Capital Economics.

The potential contraction of the present interest rate difference between the United States and Europe, which favours the US Dollar for the long time, nudges the Euro, which edged up a little from its recent three-year lows. The Greenback dipped a little against a basket of reserve currencies, which even includes the Japanese yen. Yields on 10-year Treasury notes are at 2016 lows near 1.35%, down almost 20 basis points in just three trading sessions, so it may be a more and more difficult task now for some investors to decide what currency-denominated financial instruments are better, as they pull out from the shares.


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