March 3, 2020

The Dead Cat Bounce

The Dead Cat Bounce

European and US futures are trading lower after yesterday’s dead cat bounce. It was the biggest one day move for the US equity markets since 2009, the Dow Jones soared 5.09%, the S&P500 index surged by 4.60% and the Nasdaq index increased by 4.49%. Investors bought into the idea that the Federal Reserve is going to soften the blow of Coronavirus by lowering the interest rate.

There is no doubt that central banks need to play their part as we do seem to be witnessing a breakdown of the economic system due to the on-going virus situation. The fear of a long period of poor global growth pushed stocks lower – last week, the US stocks had their worst week since the financial crisis—and a rebound in equities was expected.

However, I am skeptical that the worst is over for the US equity markets. In order to understand this, one needs to look at important factors more closely, US treasuries are still trading near record low levels, gold is still holding on to its gain and the volatility index hasn’t dropped off the cliff either.

Basically, yesterday was nothing more than speculators pushing the markets higher before the powerful trend takes over again—meaning the stocks are likely to continue their downward move. Why? The Coronavirus situation is still awful, more than 89K people have been infected and over 3K have lost their lives. Airlines are still in a process of canceling their total flights to major infected countries or reducing their frequency leaving  passengers stuck in unwanted locations. Productivity is low because workers are still not working, and consumers aren’t spending for they do not feel safe in public places. The US and Chinese economic numbers are bound to print horrible readings and investors aren’t going to like it.  

In the commodity trading space, Crude oil price has come off from its low due to two main reasons. Firstly, traders are hoping that the upcoming OPEC+meeting is going to bring good news for them. They are expecting a supply cut because Russia has agreed to this. Finally, the hopes of a coordinated action by central banks to rescue the global economy are also having a positive influence on the price. Having said this, crude oil is still trading below the critical price level of $50 and the bulls aren’t going to commit to any bigger bets unless the price moves above this mark. I think the bounce in oil price is temporary and we may see the price moving lower soon.

As for the economic docket, the RBA cut the rates by 25 basis points to soften the blow of coronavirus. The Australian economy is highly dependent on Chinese growth. Further rate cuts are anticipated. If we compare the RBA situation with the Federal Reserve, the Fed does have some competitive edge because it has made some room for itself to provide support for the markets. The Fed has more capacity to lower the interest rates and this means more weaker dollar.