All it took was for the U.S. Centers for Disease Control and Prevention to issue a press release, warning that the coronavirus could cause a pandemic, to spark panic on Wall Street yesterday. That set the tone for equity and FX markets overnight and kept the Canadian dollar on the defensive as a result.
The Dow Jones Industrial Average (DJIA) plunged 3.15%, S&P 500 lost 3.03%, and the NASDAQ gave up 2.77% by the time U.S. stock markets closed yesterday. The plunge spooked traders in Asia, and even though the major equity indexes closed with losses, they were far less dramatic than the American experience. European bourses sank at their open, but prices are well off their lows. US equity futures are suggesting gains to start the day.
The South China Morning Post said there were 81,184 confirmed coronavirus cases worldwide, with South Korea, the Diamond Princess cruise ship, and Italy with the most cases, outside of China.
Markets are pricing in two U.S. Federal Reserve rate cuts in 2020, which is a marked change from January when no cuts were expected. Traders expect the Fed to react to counter the risk of an economic downturn because of COVID-19. However, yesterday, Fed Vice Chair Richard Clarida threw cold water on that notion when he said, "it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook."
President Trump is blaming the media for the market reaction to COVID-19. "He said Low Ratings Fake News MSDNC (Comcast) & @CNN are doing everything possible to make the Caronavirus look as bad as possible, including panicking markets, if possible. Likewise their incompetent Do Nothing Democrat comrades are all talk, no action. USA in great shape!”
Trump has a point. San Francisco Mayor London Breed appears to have over-reacted when declaring a "local emergency." San Francisco does not have any reported COVID-19 cases.
EUR/USD spiked to $1.0908 in Europe and just as quickly dropped to 1.0864 in early Toronto trading. Fears that the virus will spread throughout Europe fueled speculation that the European Central Bank would be forced to cut rates. Traders are pricing in a 0.10 bp cut by the end of the year.
There are no actionable economic reports from Canada or the U.S. today, leaving FX traders at the mercy of Wall Street and coronavirus headlines.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
