Despite more central bank firepower being unleashed over the weekend, sellers continue to dominate.
09:00 The chaos continues
Global equity benchmarks are in full sell-off mode as the near-complete shutdown of Europe gathers pace and markets largely shrug off the Federal Reserve's monetary easing as well as a globally-coordinated central bank effort to ease dollar liquidity. Make no mistake, what the Federal Reserve did last night was remarkable, but the global economy is grinding to a halt – no amount of central bank liquidity can contend with that. Markets are pricing for 2020 earnings to tumble and for a global recession. The kind of damage will be lasting in many sectors, far longer lasting than the virus outbreak itself.
The US travel ban has been extended to the UK and Ireland. Airlines are in total meltdown and face an existential crisis – EasyJet (EZJ) talking about grounding almost its entire fleet, while International Consolidated Airlines (IAG) plans to reduce capacity in April and May by at least 75 per cent. Four more Carnival cruise brands are taking a month-long pause. The chaos in travel & leisure is only just beginning. IAG opened -17 per cent, while EasyJet was 18 per cent lower.
The Fed pushes panic button
The Federal Reserve has panicked. It didn't just fire its bazooka, it dropped an atom bomb of liquidity and monetary stimulus. The Fed slashed rates 100bps and announced$700 of QE. Jay Powell, the Fed chair, also slashed rates at the discount window emergency rate by 125bps and cut banks' reserve requirements. There was also a coordinated central bank action by the Fed along with its counterparts in the UK, Europe, Japan, Switzerland and Canada to ease the flow of dollar liquidity. This should help stem some of the moves in FX markets but I fear that there is still an almighty dollar squeeze. the RBNZ also cut rates by 75bps and the BoJ is stepping up ETF purchases. Policymakers are really starting to panic – this ought to be good for markets but the uncertainty over the economy and the outbreak mean everyone is derisking, everyone is seeking shelter in cash. The collapse in gold prices in the last week in the face of this volatility has been likened to the biggest margin call in history.
Markets are shrugging off the Fed's actions. US futures hit limit down quickly in Asian trade, while shares across Asia tumbled overnight. The ASX 200 tumbled by the most on record in a single day. Options markets still indicate significant volatility – min 5 per cent swings daily for equities is standard right now. The FTSE 100 dropped 5 per cent to 5100, the DAX tumbled 5.6 per cent in early trade. There will be more losses and more volatile – the bottom is not yet in.
What we don't know is how bad things would be in markets today if the Fed hadn't acted - a considerable amount of easing was already priced in. We don't know how quickly the economy will recover, nor we do know how much damage to earnings and GDP will be wrought. What we do know is that China has suffered a serious knock to growth, with figures overnight revealing industrial output down 13.5%, retail sales down 20.5% and fixed asset investment down 24.5%.
Now that Europe has moved to lockdown, it could take a long time for the economy to get moving again. The US – and UK – seem set to follow suit in the coming days. The whole of Europe is heading for, if not already in, complete lockdown. NYC, Las Vegas and LA are heading for lockdown too. On Friday, Donald Trump declare a national emergency to deal with the crisis, which initially helped US markets to rally as the Dow closed one of its best days ever to ease the losses for the week.
Crude tumbles
Elsewhere, crude oil is weaker along with risk assets, the collapse in aviation fuel demand we are seeing is instructive. WTI declined but found support at $30. Donald Trump pledged to buy up crude to fill the strategies petroleum reserve to the top, but this little bump hasn't held as the effort somewhat appears like a pimple on an elephant's backside when you consider a complete global economic meltdown and a Saudi-led price war. BP and Shell were more than 5% weaker in early trade on Monday as crude slipped.
Neil Wilson is chief markets analyst at Markets.com
