Volatility has inevitably remained a key market feature with rapid and substantial moves across all asset classes.

Volatility has inevitably remained a key market feature with rapid and substantial moves across all asset classes.

US equities posted strong gains on Friday amid expectations of a more aggressive US fiscal stimulus.

The dollar secured notable gains to 2-week highs amid a global shortage and drive for liquidity.

Ahead of Monday’s open, the Federal Reserve cut interest rates aggressively by 1.00% to 0.00-0.25% and re-introduced quantitative easing. The dollar lost ground immediately after the move as banks also increased measures to ease funding pressures but recovered from lows amid underlying currency demand.

The Bank of Canada also cut rates to 0.75% and the Bank of Japan introduced fresh measures to boost credit supply.

Equity markets still weakened sharply on Monday despite rate cuts as global dislocation increased with weak Chinese data.

Sterling recovered only slightly after heavy losses on Friday with EUR/GBP at 6-month highs. The Australian dollar dipped to fresh 11-year lows while domestic equities declined sharply.

According to EU officials, Euro-zone 2020 GDP growth is liable to see a potential decline of around 1.0%. European Commission President Von der Leyen announced a EUR37bn response initiative. The ECB attempted to reverse damage caused by Lagarde’s comments on Italian bond spreads and yields declined, but Euro-zone confidence remained weak.

The US University of Michigan consumer confidence index declined to 95.9 for March from 101.0 previously. There was a negative impact from coronavirus concerns and weakness in equities, although the overall data impact was very limited.

The dollar also secured further strong gains during the New York session, especially with robust demand for the US currency into the weekend as risk conditions dominated. There was also further evidence of a dollar shortage which boosted the US currency and EUR/USD declined sharply to near 1.1050 before a slight recovery. CFTC data recorded a huge dip in Euro short positions, reinforcing evidence that the Euro had gained from short covering with overall dollar longs at a 2-year low.

Ahead of Monday’s open, the Federal Reserve took further drastic action with the Fed Funds rate cut by a full percentage point to match record lows at 0-0.25% while it also introduced a $700bn programme of bond purchases. The dollar opened sharply lower, but recovered ground as confidence in the global outlook remained very fragile with EUR/USD around 1.1135.

President Trump declared an emergency over coronavirus which will allow a release of Federal funds. The US currency maintained a strong underlying tone even when equities dipped and USD/JPY strengthened to highs near 108.50 as the US S&P 500 index closed over 9% higher before settling just below 108.00, the sharpest daily gain for close to 7 years.

CFTC data recorded a large decline in yen shorts to a net long position, limiting scope for further distress yen buying.

President Trump again threatened to dismiss Chair Powell, although the Fed then acted dramatically and USD/JPY immediately dipped to near 106.50 while US yields dipped sharply. Global banks will also increase swap lines to boost liquidity. The Bank of Japan brought forward its policy meeting and increased liquidity support measures while ETF buying will be increased. There were no changes to interest rates with longer-term yields still targeted at 0.0%.

China reported a 13.5% annual decline in industrial production for the January to February period with a 20.5% decline for retail sales. Equities declined despite aggressive Federal Reserve action with USD/JPY below 106.50 after failing to hold above 107.00. G7 leaders will hold a conference on Monday to discuss a co-ordinated response, notably on fiscal policy.

Bank of England minutes from Tuesday’s emergency rate cut stated that there were a number of options available to the bank, including a further cut in interest rates if the Monetary Policy Committee needed to provide further stimulus.

Sterling bounced higher in early European trading, but selling pressure quickly resumed as global fear dominated. There were further fears that the UK economy would be damaged by a sharp downturn in global trade. Selling pressure intensified late in the European session as the dollar secured very strong gains with GBP/USD below 1.2300. For the week, it declined more than 5%, the weakest performance since 2009, to trade at 5-month lows.

President Trump extended the ban on flights to the US to cover the UK and Ireland which will further damage confidence.

Economic Calendar