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Plumbing the depths

The most difficult part of a market sell-off is calling the bottom. It really started two weeks ago, when US equities (like the S&P 500) spent the entire week declining about 15% from multi-year highs. The Greenback held out through the end of February and only really followed suit last week. The Euro—which due to low exchange rates had attracted lots of borrowers—has risen nearly 5% over the past two weeks, resulting in a scramble to repay increasingly expensive loans. As you would expect, most commodity business inputs—such as oil or copper—dropped markedly, while the classic safe-haven gold rose to 2012 highs.

Last week, we explained that this reversal of the classic risk-off dynamic—during times of stress funds usually run to the USD and flee the Euro—had the potential to extend further, if sentiment became even more dire. And over the weekend, it did. Saudi Arabia, one of the largest oil producers and member of the OPEC+ cartel, has been attempting to persuade Russia to agree to additional production cuts, in order buoy oil prices in the wake of virus-induced demand declines. 

At the weekend, the Saudi’s were tired of being spurned and turned 180 degrees, cutting prices. Brent Crude, which was returning to normality, has sunk to over 30% to $36 per barrel.

Also of note, many commodity currencies—nations who’s natural resource production makes up a sizable portion of their economy—and emerging market currencies have been sold heavily into this morning’s market open, signalling a further decline in business expectations. Australia and New Zealand Dollars were both down 5% early this morning, while the Mexican Peso and South African Rand were down 8% against the Dollar. At the same time, bond yields are falling in anticipation of further rate cuts from central banks. It was only last week that the Federal Reserve cut rates by 50bps at an emergency meeting, but the market is expecting a further 75bps of cuts for next week's official meeting.

Bottom line: The problem of calling a bottom is one of choosing the correct frame of reference. Last Monday, we were talking about the erasure of year-to-date US equity gains, while this week we’re talking about one-year retrenchment. The question remains one of value. Many who thought last week was the end of the story and started buying were punished this morning, but as we slide furtherthough sentiment turns worserelative value is improving all the time. The UK FTSE 100 is approaching referendum lows, perhaps that might be enough to induce some more brave individuals to call a bottom. Time will tell.

The week ahead


Sterling began last week range-bound, trading between the 1.2740 and 1.2850 interbank levels against the US Dollar, but gained significantly through Thursday and Friday to end the week almost 2.5% higher. The impetus for the movement has been Dollar sell-off rather than the presence of any fundamental UK economic drivers. This week, Sterling news is dominated by the UK’s annual Budget, where the government will provide markets with the forthcoming year’s expected fiscal expenditure. The UK’s Chancellor has re-written part of his Budget in response to the developing coronavirus epidemic amid warnings that it could halve global growth.

  • The data week begins and ends for the UK on Wednesday as month-on-month GDP growth will be released for January. It’s forecast to come in at 0.2% after the previous 0.3% reading.
  • Industrial Production for the month of January is also due out on Wednesday morning. The expected figure is for a 0.3% increase after last month’s 0.1%.
  • Chancellor Rishi Sunak will outline the government’s fiscal objectives for the year in the UK’s annual Budget, also released on Wednesday.


The US Dollar Index pared losses last week, peaking just shy of pre-crash highs before dipping again to its 50-daily moving average. Interest rates markets are pricing in aggressive rate cuts from central banks across the world, with the Federal Reserve taking the most action. A rate cut of 75 basis points is currently priced into the market, which could cause the US Dollar to tick back towards recent lows. Economic data releases may not bring much volatility to the US Dollar this week as markets continue to predict the economic effect of the coronavirus outbreak.

  • US inflation data is predicted to show 0.2% growth in the core February reading. The broader measure, which includes more volatile goods, is forecast to print at 0.0% growth.
  • On Friday afternoon, the preliminary University of Michigan Consumer Sentiment number is pegged to fall to 95 from 101 last month. Sentiment surveys are likely to be the first to signal economic damage from the coronavirus outbreak.


The trade-weighted Euro Index finished last week 2.5% higher as expected interest rates across the globe converged with Eurozone interest rates, making the Euro more attractive to hold. With the rapid spread of the coronavirus across the world causing a dramatic shift in financial markets, economic data releases are unlikely to drive markets, although leading indicators such as economic surveys may take more interest from investors. Thursday’s European Central Bank (ECB) meeting is expected to bring a 10 basis point cut to interest rates as well as other measures of monetary stimulus to combat a widely expected economic fallout from the coronavirus outbreak.

  • On Monday morning, the Eurozone Sentix Investor Confidence survey posted its worst reading since Europe’s debt crisis in 2013. The data came in at -17.1 vs a forecast of -11.0.
  • On Thursday morning, Eurozone Industrial Production is expected to show 1.4% growth, after the previous reading's contraction of -2.1%. 
  • The Final Consumer Price Index readings for February from Germany and France will print on Friday, and the forecast is 0.4% and 0.0% respectively.  

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