Risk appetite remained extremely fragile during Monday as global growth fears remained intense due to global coronavirus fears.

Risk appetite remained extremely fragile during Monday as global growth fears remained intense due to global coronavirus fears.

Global equity markets registered very heavy losses with major bourses declining by over 7% on the day with US bourses at 9-month lows. There was a correction on Tuesday with hopes of more substantial US economic support measures and global action, but volatility remained extremely high.

US bond yields increased from record lows as equities recovered. Fed futures still priced in a further 75 basis points of easing this month.

The dollar remained under pressure on a lack of yield support and fears over capital outflows before recovering sharply from 13-month lows on Tuesday. USD/JPY rallied strongly to near 105.00 from 102.00 as equities recovered. Sterling failed to hold its best levels with choppy trading across commodity currencies.

Stronger than expected German industrial production data had little impact while the trade data recorded unchanged exports or the month with a 2.1% annual decline. The Euro-zone Sentix investor confidence index declined sharply to -17.1 for March from 5.2 previously and below consensus forecasts of -11.0, reinforcing underlying Euro-zone growth concerns.

As equity markets declined sharply, there were stronger expectations that the ECB would cut interest rates at this week’s policy meeting. There were also increased fears over the Italian outlook, especially with heavy selling in the banking sector.

Nevertheless, the Euro still gained an element of defensive support and short covering given the very strong current account position. Volatile trading continued with Euro/dollar volatility at 35-month highs as US data releases had no significant impact.

Markets expected further aggressive action by the Federal Reserve with futures markets indicating a 100% chance that the Federal Funds rate would be 0.50% or lower following the March 18th policy meeting. The on-going slide in US yields continued to undermine the dollar, although it did recover slightly from 13-month lows with EUR/USD settling around 1.1450.

After the US close, the Italian lock-down was extended nationwide to help contain the coronavirus which limited Euro support. The dollar also rallied more significantly on hopes for US support measures with EUR/USD retreating to lows below 1.1350.

Global equity markets remained under pressure ahead of the New York open with USD/JPY trapped lose to 102.0 against the Japanese currency as the underlying flow of funds into defensive assets continued. US equities were suspended for 15 minutes shortly after the market open as S&P 500 index declined 7% before a tentative rally.

The US 10-year yield was held only just above 0.50% which further eroded underlying US currency support. There were fresh USD/JPY losses to near 102.00 as Wall Street indices came under sustained pressure once again, but the support level held.

Risk appetite strengthened in Asia on Tuesday with the main catalyst President Trump’s promise of a fiscal support package. There will be a press conference on Tuesday and Treasury Secretary Mnuchin also fuelled expectations of support measures.

The Bank of Japan also indicated that further stimulus measures will be sanctioned if necessary at next week’s meeting. Markets also remained wary over potential Bank of Japan intervention to curb yen losses. Equity markets rallied sharply with US yields also recovering ground and USD/JPY strengthened sharply to 105.00 before retreating to below 104.50.

Sterling maintained a relatively firm tone ahead of Monday’s New York open despite very weak global risk conditions and the slide in oil prices. GBP/USD peaked at 1-month highs around 1.3200 before correcting while EUR/GBP was held below 0.8700 in choppy trading. Underlying volatility inevitably remained high with markets also waiting for the government’s latest coronavirus update, but there was no immediate shift in advice. UK sources indicated that the government would table a number of legal texts including a draft Free Trade Agreement before next week’s latest round of trade talks with the EU.

There was also an element of caution ahead of Wednesday’s budget statement, especially with uncertainty over potential spending commitments. There was also some speculation that the Bank of England would cut interest rates in a co-ordinated move.

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