The now-global coronavirus outbreak is still the main driver behind the markets – no surprise there. And after last week’s record falls ended with a small rally into the close on Friday, traders were looking for good news over the weekend to keep the rally going.
But what they got instead was very mixed, and I’m not optimistic about this week.
As we’ve discussed before, traders are looking mainly at three factors to calm markets: the response to the outbreak from public health agencies, any help from central banks to ease the pain, and a solid but prudent response from national governments on travel restrictions and borders.
Over the weekend, central banks were the most helpful. The Fed, the Bank of England, and the Bank of Japan all issued emergency statements, saying they were ready to inject liquidity into the markets and ensure stability.
That sent Dow futures up several hundred points overnight. Fed Funds Futures contracts (the instrument that traders use to hedge positions based on upcoming rate changes) now show almost all traders betting on the Fed lowering rates on March 18.
But most of that upswing disappeared by the time markets opened this morning. The reason is that on both public health response and on government policy, traders are worried.
We’re digging in for a long siege – and that means, paradoxically, we’re likely to see some “crisis jumps” ahead.
It may seem counter-intuitive, but most big single-day market gains come during otherwise down markets. Central banks, especially the Fed, cutting rates or injecting money into the market would give stocks a big boost for a day or two.
D.R. Barton, Jr.