April 1, 2020

US Futures Plunged Despite Upbeat Chinse Caixin Number

US Futures Plunged Despite Upbeat Chinse Caixin Number

US futures and European markets have tumbled today as investors have started to show their concern about worsening coronavirus figures in the US. In his speech yesterday, President Trump talked about a bright future for the US but only once the virus outbreak is under control. Now,  investors are suffering from this pain today.

The sharp increase in infection rate in the US and an increase in the death rates are the factors that matter for now. The infection rate and the death rate in the US are likely to drive the equity markets.

The economic numbers have little to no importance. This is because if it was for the economic numbers, then we should not be looking at the massive plunge in the US futures today.

We had another positive economic reading out of China. It echoed the same message that we received yesterday—meaning things are improving in China, and normality is returning to the country.

The Chinese Caixin manufacturing number released today wasn’t bad at all. In fact, the reading of 50 shows that the sector has moved back into the expansion territory because any number below 50 represents contraction.

Hot on the heels of the worst quarter (for the global equity markets) since the financial crisis, the global equity markets have started the new quarter on the back foot. It is highly likely that the US markets may not only test the recent low formed on the 23rd of March, but it may break that low.

If the magnitude of the sell-off picks up the same pace as the last time, we could reach that level by the end of this week. Remember, the S&P500 had one of its smallest trading range-days on Monday and yesterday it broke that range again.

When it comes to the US markets, what traders should be looking at is the low of the 25th of March, the moment we break that low, it is pretty much a given that we are going to retest the 23rd  of March’s low.

As for the liquidity crisis, the Federal Reserve took another step to address it yesterday. The Fed is ready to allow any bank to swap any Treasury security that sits with them for cash.

For the record, this is again something that we didn’t see during the financial crisis and this points to the fact that the Fed is fully committed to keeping the liquidity concerns under control. One needs to ask this basic question: Just how much more cash can the Fed print?

Of course, there is a limit for everything, and for the Fed, that day isn’t far at all. If the Fed continues like this, the dollar’s value will decline sharply because the public will lose their trust in the Fed’s printing machines.

As for the commodity markets, the rout continues for oil prices. The current sell-off is likely to impact the financial system because the pain for the oil producers have become unbearable, and they will have no option but to close their shops because the product is selling well below their cost price.

If the fiscal and monetary policy support wasn’t existent, we would have seen many bankruptcies in the US and also in Russia. The bottom line is that until and unless we do not find a solution to the excessive oil supply, the price is likely to stay at its current low levels, if not lower.

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