On 16th-17th March, this
calendar year, all financial markets - stocks, commodities, bonds, bullion,
made lows of the recent past - in many cases lows of at least a decade - due to
the scare of pandemic spread by Corona virus. With the G-7 nations committed to
providing stimulus within the capacity of their respective economies, many of
them have injected liquidity in the form of physical cash, reduction of
interest rates, deferment of taxes, etc. Federal Reserve held two unscheduled
meetings in March to announce various stimulus measures.
The mayhem in the financial markets normally occurs on account of reduced liquidity and lack of commitment on part of the members to buy. Forced selling in one segment leads to high volatility in that particular segment/ market leading to higher margins on positions and thereby leading to further forced selling to liquidate positions in the same as well as other segments to provide for the increased margins and to cover up losses. Normally in such situations the government bonds and bullion are the safest places to park money, but this time the intensity of the fall was so high that nothing got spared. The markets across the globe were butchered. The US stock market, which was hovering at +2 Standard Deviation of its long-term moving average, fell down to -2 Standard Deviation within three weeks of March 2020. This is like an economic reset and reboot.
The extent of bearishness in terms of magnitude and time happened almost instantaneously, current valuations thereby being indicative of discounted potential earnings two years hence. The stock markets after such a crash normally bounce back with a vengeance. Barring certain sectors like tech, telecom, pharma and others which have benefitted tremendously from the current situations, markets have remained subdued primarily on account of uncertainty of full restoration of pre-covid economic activities.
Lockdown of the key global economies led to crude oil trading in negative territory mainly due to lack of demand and lack of storage capacity due to excessive production because of reluctance on part of OPEC to cut back production.
As the lock down opens up progressively in various countries, the countries themselves are likely to remain isolated due to fears of corona virus spread through a second wave, bringing international travel to a grinding halt. Many of the international airlines are on the verge of bankruptcy while a few have already declared themselves bankrupt.
The local economies are likely to limp back to normalcy as they open up under respective guidelines of relaxation of operations and release of social distancing norms. Structural shifts in demand patterns resulting from the necessity of work/ operate from home has affected locomotion and consequent demand in the automotive sector. The fear of corona virus has accentuated and accelerated the shift in behavioral, spending and demand patterns of the local populations, the results and outcomes of which will crystalize and be visible in due course of time and some of these patterns may become permanent for times to come.
In all this pandemonium there is a silver lining which can hopefully cushion and support weak financial markets, albeit for a very short term of a month or two.
A weak dollar may lead to increased local consumption which may potentially bring buoyancy to international trade. The weakness of USD reflected in the charts may be the result of lower volumes in international trade, lower oil demand and probable general weakness in the currency.
Here are two charts which are indicative of probable weakness of the USD.
While dollar may remain bearish till end of 2021, it can at best only cushion the fall of bearish global financial markets.
For more charts and continued guidance, the author can be contacted at: riskadvisory@outlook.com.
DISCLAIMER:
These extracts from my trading worksheets/books are for the purpose of education only. Any advice contained therein is provided for the general information of readers and does not have regard to any particular person's or institution’s investment objectives, financial situation or needs and must not be construed as an advice to buy, sell, hold or otherwise deal/ trade in any single or set of commodities, currencies, indices, securities or other investments of any other form(s). Accordingly, no reader should act on the basis of any information contained therein without consulting a suitably qualified financial advisor in the first place.
