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Market Wire
Markets Plunge as Governments Flail

Karl Schamotta March 18, 2020

Stocks, bonds and currencies suffered another bout of volatility this afternoon after President Trump said he would invoke the Defense Production Act to address the coronavirus outbreak – but failed to provide substantive detail on how this authority would be used, or insight into the stimulus package currently being negotiated between Treasury and Congress.

As has happened with virtually every presidential press conference in the last month, markets went into freefall when Mr. Trump began speaking. The S&P 500 index plummeted 8.5%, triggering the second trading halt in three days, and the Dow Jones Industrial fell below 19,200 – wiping out its post-inauguration gains. West Texas Intermediate dropped to an astonishing $20.55 per barrel before recovering slightly, while Brent, the international benchmark, briefly fell below $24.75.

But these moves pale in comparison with what is occurring in currency markets as the economic consequences of the coronavirus epidemic continue to outpace changes in government policy.

With almost every major government, large business and bank in the world preparing to borrow truly unprecedented amounts in the American funding markets, bond markets began preparing for a surge in tax cuts and fiscal spending measures that will suck up previously abundant capital. The benchmark 10-year Treasury bill spiked to 1.22% from yesterday’s 0.994% close, and the dollar soared against its counterparts.

Borrowing countries like Australia, Canada, the United Kingdom are coming under severe stress as financial conditions tighten, and prospects worsen for domestic economies. The Aussie and loonie are in freefall despite fiscal rescue packages announced in both nations -and the British pound is down more than 5% on the day, well below its post-Brexit nadir.

In fact, the pound is now trading near lows established in 1985 – another time in which the greenback had surged to new heights and the global economy was under severe strain. That ended with the Plaza Accord – an agreement between France, Germany, the United States, the United Kingdom, and Japan to lower the dollar exchange rate against the Japanese yen and the German Deutsche mark – which drastically reset the expectations of market participants and triggered losses for those on the wrong side of the dollar.

We bring this up, because the odds are rising on some form of international coordination between monetary and fiscal authorities to act against the “sudden stop” of unknown duration that now threatens the global economy – and with many benchmarks hitting levels last seen during the financial crisis, markets are increasingly vulnerable to a reversal.

Just a reminder that in 2020, nothing is certain – not even death and taxes.

Stay safe out there.

Karl Schamotta
Chief Market Strategist

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