Despite Wall Street’s gains on Tuesday, the tide of risk aversion is rising again in financial markets. Most Asian stocks are seeing another sell-off, albeit to a lesser extent compared to recent sessions, while US futures are again pointing to losses. The risk-off mood is evident in the price action of safe haven assets as Gold bounced off $1640 support to edge past $1660, the Japanese Yen is strengthening by about 1.3 percent against the Greenback and 10-year US Treasury yields are back below 0.7 percent.
Risk assets are expected to have a hard time hanging on to recent gains, as investors adjust to the new reality of the economic threat from SARS-CoV-2 and the global implications from depressed Oil prices. Such downside risks to global economic conditions are expected to fuel a policy easing bias among central banks, as they shore up their respective economies. This outlook, coupled with the economic vulnerabilities of the coronavirus outbreak, will also hamper emerging market currencies’ ability to push back against the US Dollar over the near-term.
Dollar’s recovery predicated on US economic outperformance
The Dollar index’s break below 95, a level not seen since the end of 2018, proved fleeting with DXY now strengthening back towards 96. The recent surge was fueled by hopes that the US government will roll out supportive measures to mitigate the negative impact of the coronavirus on the domestic economy.
Dollar traders have seemingly abandoned their data-dependent stance for the time being, with the Wednesday release of February’s US CPI unlikely to be a major trigger for the DXY, as the US policy response outlook dictates the Greenback’s near-term moves. Still, a prolonged recovery could be on shaky ground in the near-term, considering that the Fed is set to make further reductions to US interest rates.
Fed funds futures currently point to another 25-basis point cut at their meeting next week, with US interest rates potentially driven to zero by year-end. However, once markets fully price in expectations for Fed policy easing, the Dollar is expected to reclaim lost ground, as long as the US economy can outperform its developed peers.
Gold to remain in demand, despite recent dent from Dollar’s rebound
Although $1700 proved unsustainable for Gold bulls, the pace at which Bullion got to that psychological level suggests that investors’ propensity for risk aversion remains elevated. Although the Dollar’s rebound has taken some of the edge off Gold prices, Bullion is expected to remain well-supported above its 50-day moving average, as long as fears of a recession weigh on global market sentiment.
Brent’s climb may prove short-lived amid price war
After Monday’s dramatic decline, Brent futures are clawing their way back towards the psychological $40/bbl line. However, Oil’s supply-demand dynamics still point to a bias for weakness, as Saudi Arabia and Russia engage in a price war that threatens to push global markets into oversupplied conditions, at a time when global demand is being eroded by the coronavirus outbreak.