Butterfly Effect. Fears about the spread of coronavirus around the globe provoked a 3.4% drop in th S & P 500, which is the worst result for the last 2 years. Stock index, which accounts for 44% of the capitalization of the world stock market lost $ 927 billion per day and $ 1.33 trillion since its closure on 19 February highs. The sharp deterioration in the global risk appetite allowed a long time being in the black body of funding currency in the face of the euro and the yen back in the game. And the last shall be first?
The reaction of the immune system for treatment is often more painful than the virus itself. In scale Chinese epidemic is not comparable to the earthquake in Sichuan province in May 2008, which killed more than 69 thousand people and go unnoticed by the economy of China. Now a completely different story. Fear of the virus spreading across the country faster than the virus itself. In Hubei Province, 60 million people are in quarantine, the economic activity of the region is paralyzed, and pessimistic projections suggest that China's GDP in the first quarter slowed down to 3%.
Until recently, global stock indices ignored epidemic, suggesting that the US economy is locked, where the share of exports in GDP is insignificant, show resistance to external risks. Nevertheless, the spread of the coronavirus in Italy, Iran, and South Korea has become a catalyst for sales S & P 500. In still dominated by the idea of the market that the Fed will rescue the stock market index from falling, so the probability of growth of two monetary expansion acts in 2020 from 46% to 63 % amid the collapse of US stocks should not surprise anyone. As another inversion of the yield curve. Rates on 10-year Treasuries at arm's length close to the historic lows that occurred in 2016 during the time of a referendum on Britain's membership of the EU. Their spread with 3-monthly bills absorbed in the red zone, that is a strong signal approaching recession.
Dynamics of the US yield curve
Source: Financial Times.
The euro had speeches of the heads of central banks of France and Italy Villarua Francois de Gallo and Ignazio Visco, unanimously called on eurozone governments to fiscal stimulus. According to them, the monetary policy of the ECB, and so is too accommodative, its room for maneuver is limited, so it is doubtful that the controller can cope with the looming disaster. Especially dangerous is the situation for Italy, which is due to coronavirus may face a technical recession in January-March. Let me remind you of its GDP sank at the end of October-December by 0.3%.
The GDP in Italy
Most likely, the current correction of EUR / USD is technical in nature, caused by the return of investors to the funding currency for the period of deterioration of global risk appetite. Rollback may well continue in the direction of 1.092 and 1.095, if the loss capitalization S & P 500 increase. In contrast, the stabilization of the stock index return attention to the problems of the eurozone, which will lower the "bulls" on the euro down to earth.
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