Risk off: Although stock indices were down only slightly at the time of writing, there has been a sharp reversal in risk appetite for other assets including FX and
crude oil, which took a battering again. Travel and leisure stocks, and miners, were the among the weakest this morning. FX traders moved into the
safe-haven Japanese yen and US dollar, and out of growth sensitive commodity dollars. The
euro and
pound also dropped noticeably sharply.
Lockdowns here to stay for longer: It looks like investors are paring back some of their excessively optimistic growth projections and end of lockdowns timing. They are realising that though there might be light at the end of the tunnel, it is proving to be an extremely long tunnel and we are still nowhere near the end of it. A surge in virus cases in mainland Europe, where the rollout of vaccines has been painfully slow, has cast doubt on resumption of travel in the region. This is why the German government has decided to extend the nation’s lockdown to 18 April and will shut down almost completely over the Easter holiday to defuse another wave of Covid infections. Among other things, this is hurting demand projections for crude oil and holidays. Everything else being equal it means that growth will be slower to pick up and inflationary pressures are likely to be weaker than previously thought. Hence, yields have also fallen on German and UK government debt, allowing gold to edge higher.
Pound-ed: Meanwhile, the pound was hit by weakness in UK jobs data. Although the unemployment rate fell unexpectedly to 5.0% from 5.1%, this was overshadowed by a big upsurge in jobless claims. They rose by 86,600 applications during February, much higher than a 9,000-increase expected by analysts.
Coming up: Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell are set to face lawmakers in Congress. It will be interesting to see whether Yellen will push for more spending given the sky-high government debt. Powell will probably re-iterate the same message he did at the FOMC presser last week, namely that although the economy is progressing well, it is still far from complete and so the Fed will continue to provide monetary support.
EUR/USD: Keep an eye on this pair as concerns over lockdowns in EU and slow progress on vaccines relative to the US could see the exchange rate drop further lower after recently breaking and now holding below the key 1.20 handle. The 200-day moving average is in sight now at 1.1850, below which there is not much further support until the lower trend of the bear channel at 1.18ish:
Source: ThinkMarkets and TradingView.com