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Market Wrap – February 2020

   

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All financial markets have been concerned about for the last month has been the Coronavirus out of China, which has now infected tens of thousands of people around the world.  As regular updates emerge about the coronavirus and how quickly it is spreading, markets and investors around the world have been gripped by fear with the rapid spread of the coronavirus.  Equity markets have plummeted and generally across the board we have seen a surge in volatility. U.S. Federal Reserve (Fed) Chair Jerome Powell has previously said the rate cuts last year kept the economy on solid footing and no further decreases were needed unless the outlook darkened.  Well now with the virus, "Uncertainties about the outlook remain, including those posed by the new coronavirus," Powell said at a recent media conference. "There is likely to be some disruption to activity in China and globally" from the virus. "It's too early to say what the effect will be" in the U.S. "We are monitoring it carefully.", he added.


EURUSD

During the month of February, the EURUSD has been on a rollercoaster ride falling sharply from a key level in 1.11 down to down to a three year low below 1.08 before a very strong rally to close out the month has seen it climb back to another key level in 1.10.  During the month it has found some support and resistance from the key 1.10 level, although most of the current levels including 1.10, 1.11 and 1.12 have played a significant role in the last six months or so alternating between providing support and resistance. After having traded in a wide range generally between 1.10 and 1.12 for an extended period, this latest move throughout February is quite significant.  The 1.10 level has propped up the currency pair several times in the last few months, so it is significant that this level is now broken.   

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Recent comments from European Central Bank (ECB) President Christine Lagarde about China’s coronavirus outbreak haven’t helped the Euro’s outlook as the central bank feel that effects will be felt everywhere as it is disrupting the world’s second largest economy.  “While the threat of a trade war between the United States and China appears to have receded, the coronavirus adds a new layer of uncertainty,” President Lagarde said in a press conference recently. Following their recent rates decision, ECB President Christine Lagarde said rates will “remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”  

GBPUSD

Compared with the EURUSD, the GBPUSD has experienced a very mild February moving very little.  It has spent most of the month trading just below the current key level of 1.30 applying buying pressure to this level however being constantly pushed away with resistance.  It has also been receiving short term support from around 1.28 which has kept the sterling within a tight range for most of the month. There isn’t much more to add about what the GBPUSD has been doing recently as it continues to trade around the 1.30 level.  It had shown some more volatility of late when it surged higher to its highest level in more than 18 months above 1.35 before falling sharply back down to the current key level of 1.30 which has been significant for the last three months, however this volatility has dried up as it has consolidated around 1.30.  

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The Bank of England (BOE) have taken their turn and made public comment about the latest pandemic.  BOE Governor Mark Carney said to the House of Lords economic affairs committee that the economic impact of the coronavirus is already bigger than that caused by the SARS pandemic in 2003.   "While there are some signs of slowing in the pace of infections in China itself, it's still very, very early days. This is, from an economic perspective, already bigger than SARS and it is just too early to say the overall macroeconomic impact,” he said.  Mr Carney remains confident that U.K. banks are resilient enough for any jolt to the country’s economy after stress tests. He added, "In general, the experience has been with pandemics that they can have quite significant impacts but much of it is recovered in subsequent quarters."

AUDUSD

Similar to the EURUSD, the AUDUSD only headed in one direction in February – down.  Throughout the month, the AUDUSD fell strongly from around the key level at 0.6750 down to an 11 year low approaching 0.65.  Due to this multi-year low, there are no obvious support levels available, although the AUDUSD may very well be propped up at different levels.  The AUDUSD is likely to meet resistance at 0.6750 if and when it is able to rally higher. In the last two months the AUDUSD has generally fallen sharply from a six-month high above 0.70 down to the current lows although it did enjoy some solid support from another key level of 0.6850 before dropping down to 0.6750.

AUDUSDDaily (4)

Towards the end of the month, the Australian Bureau of Statistics reported the unemployment rate has moved from 5.1 to 5.3%.  Interestingly the Reserve Bank of Australia (RBA) cited an increase in the unemployment rate as the most likely trigger for another interest rate cut, following three rate cuts last year to a historic low of 0.75%.  The markets are keeping an eye on the central bank with many expecting another cut before mid-year and if the jobless rate was to increase again, another cut would almost be a foregone conclusion. Meanwhile, RBA Governor Philip Lowe has warned that Australia is paying an economic price for climate change.  In a recent forum, Dr Lowe also said that drought and the bushfires have impacted consumer sentiment. The central bank governor did concede that the RBA should "stick to their knitting" with the general economy, however they cannot avoid the financial impact of climate change.

US30

The US30 index had enjoyed a steady February before falling sharply towards the end of the month down to its lowest levels in six months below 25500.  The move lower has been significant after it did well to remain above the support level at 29000. For two weeks prior to the sharp drop, it had been trading in a narrow range between the key 29000 level and 29500, enjoying support from the former, however this has now given way and would be expected to offer some resistance whenever the index is able to rally and return to this level.  Even the 27000 level, which has been a level of significance in the last 18 months was not able to offer any support to the index during its sharp decline and now may even provide some resistance to the index should it rally.  

US30Daily (1)

As the number of coronavirus cases outside China have grown, especially in South Korea and Italy, fears have grown about an extended global economic slowdown which has sent global equities sharply lower, led by U.S. stocks.  Cleveland Federal Reserve (Fed) President Loretta Mester said that she doesn’t favour cutting interest rates any time soon, despite conceding the risk that the current coronavirus presents. “My current view is that monetary policy is well calibrated to support our dual mandate goals, and a patient approach to policy changes is appropriate unless there is a material change to the outlook,” Mester said in remarks delivered in Washington, D.C.  Meanwhile well-known investor Warren Buffett has weighed in on the coronavirus saying it has impacted the U.S. economy, however it is still healthy. “Business is down but it’s down from a very good level,” Buffett said.

Gold

Quite different to most, gold enjoyed a reasonably strong February pushing higher to its highest levels in more than seven years near $1700.  It did just ease and consolidate a little in the last week of the month which is not expected given its strong surge higher. In the last two months or so gold has found solid support from the $1550 level and even though it has been pressured a lot in that time, the support level has stood up well.  It was able to climb to a three-week high above $1590 several weeks ago, and was quickly sold off before enjoying support from $1550 again, reinforcing how significant this level has become. The $1550 level has clearly established itself as a level of support and is likely to play this role again should gold decline from its current seven year highs, however should this level be broken, it is equally likely to provide some resistance to any future rallies.

XAUUSDDaily (4)

Recently, gold has been well supported by fears on several different fronts from the virus, to Brexit to the U.S. economy.  The head of the International Monetary Fund (IMF), Kristalina Georgieva said the new coronavirus outbreak is the “most pressing uncertainty” facing the global economy currently.  Already under pressure from trade wars and Brexit, the global economy is now facing something more significant in the coronavirus which the IMF “did not anticipate in January”. “It is a stark reminder of how a fragile recovery could be threatened by unforeseen events,” the IMF head posted on their blog.  It is clear already that the virus has dented China’s economic growth this year. “If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon,” she added. “Spillovers to other countries would remain relatively minor and short-lived, mostly through temporary supply chain disruptions, tourism, and travel restrictions.”

UK Oil

Despite starting the month of February well rallying strongly from a one year low near $53 back up towards the key $60 level, it has since reversed and finished out the month moving strongly lower again down to a 15-month low near $50.  Previously UK Oil collapsed from multi-month highs above $70 down to its lowest level in one year as it was struggling to receive any support from anywhere. This was accompanied by a significant increase in volatility. It has previously enjoyed some support from a key level in $63 however this was short lived and other key levels of $60 and $58 were called upon to attempt to prop up prices, however both have failed in the last month.  Significantly these levels are now likely to offer some resistance should UK Oil rally again.  

UKOilDaily (1)

A month ago, UK Oil pushed through the key $68 level to its highest level in seven months before being sold off and enjoying support at the $68 level before its surge higher to above $71 before its strong fall.  

Oil prices have been subdued of late as markets assess the potential impact on future demand due to the coronavirus outbreak.   China is the world’s the second-largest oil consumer and largest oil importer therefore a decrease in demand could significantly impact oil prices.  In a recent report on the future of oil, the International Monetary Fund (IMF) said global oil demand will peak around year 2040, or “much sooner”. This will obviously have a “significant” impact on oil-exporting countries, predominantly those in the Middle East.  “Growth of global oil demand will significantly decelerate, and its level could peak in the next two decades,” the IMF said in its report entitled, “The Future of oil and fiscal sustainability in the GCC Region”.

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The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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