Financial markets were in turmoil last week and price action over the weekend was if anything more brutal, with oil prices and Asia-Pacific equities and currencies collapsing and FX volatility spiking.
The S&P 500 fell by a combined 5% on Thursday and Friday with equity markets showing little confidence that the Federal Reserve’s inter-meeting 50bp rate cut on 3rd March will do much to arrest the slump in global economic activity. US 10-year government bond yields, on the slide since early February, fell below 70bp on Friday.
Over the weekend global risk appetite plunged further, sparked in part by a 30% collapse in crude oil prices to about $34/barrel after OPEC countries and Russia failed to reach an agreement to curb oil supplies. Asia-Pacific equities fell in tandem, with the Chinese Shenzhen composite index, Japanese Nikkei and Australian ASX closing down respectively 3.8%, 5.4% and 7.3%. S&P 500 futures were limit down (-5%).
Currencies stood little chance and the AUD/USD cross fell to 0.645 in early trading, its weakest level since February 2009, before bouncing back to 0.654 at time of writing. The Kiwi Dollar has fared little better, with NZD/USD tanking to 0.6175 before staging a mini come-back to 0.6275. US 10-year government bond yields are currently trading at a barely believable 45bp.
Pain for these markets has meant further gains in European currencies. EUR/USD has climbed above 1.14 for the first time since early 2019 and GBP/USD has spiked to a 5-week high of 1.3175. Unsurprisingly perhaps, the safe-haven Swiss Franc has continued to power on, with USD/CHF threatening to fall below 0.92 and the trade-weighted index at its strongest level since August 2011.
The Dollar trade-weighted index is up about 1% since Friday, with the greenback also making gains against the Canadian Dollar and Mexican Peso.
Markets are now pricing aggressive rate cuts across the board, including 68bp of Fed rate cuts in the rest of March and 100bp of cuts by early 2021 and a full 25bp Reserve Bank of Australia cut in April. There is also talk that some central banks will be forced to introduce quantitative easing programs (e.g. RBA) or beef up existing ones (e.g. European Central Bank).