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Stocks Crash, Euro Cracks And Risk Currencies Tumble

Published 06/12/2020, 04:54 AM
Updated 07/09/2023, 06:31 PM
U.S. stocks sold off for the third day in a row, and today’s losses were the sharpest. The Dow Jones Industrial Average tumbled 6.9%, or 1,800 points, the biggest one-day drop in three months. Risk aversion was in full swing, with currencies falling across the board and oil dropping by its largest amount in two months. The U.S. dollar traded sharply higher on safe-haven flows. The Australian dollar was hit the hardest, with the Canadian and New Zealand dollars trailing not far behind. Sterling also fell sharply and surprisingly the euro was the most resilient, but it also succumbed to end-of-day losses. There’s wasn’t one, but many, catalysts for the meltdown in stocks. Instead, the lack of additional stimulus from the Fed, Chairman Jerome Powell’s cautiously optimistic tone, profit-taking and worries about a second wave of coronavirus cases after spikes in Texas, Arizona and California all contributed to the decline.  
 
The fear of a second wave is real. COVID cases are increasing in 21 states, with 14 seeing new highs. Florida reported its largest single-day increase in coronavirus since the pandemic began. The same was true for Texas, which reported more than 2,500 new cases, and in Arizona, cases have risen 49% from May 26 to June 9. That’s 14 days (the incubation period of COVID-19) after Memorial Day. Anyone who thinks that the U.S. has won the battle against COVID is wrong and, in states where the curve has been flattening, like New York, it still remains to be seen whether protests have shifted the trend. Powell warned yesterday that if a second wave happens locally, it could hamper the economy, so he doesn’t know for sure if the labor market bottomed.
 
Investors sought safety in the U.S. dollar, driving the greenback higher against all of the major currencies with the exception of other safe-havens like the Japanese Yen and Swiss Franc. The sell-off in USD/JPY and USD/CHF are consistent with the slide in stocks and Treasury yields. Weekly jobless claims and the producer price index had very little impact on the greenback. PPI rose more than expected in May, but excluding the recovery in energy prices and food prices, PPI fell for the second month in a row. Jobless claims were slightly lower, with 1.5 million new benefit filings, down from 1.89 million the prior week and from the 6.89 million peak at the end of March. The University of Michigan’s consumer sentiment index is scheduled for release tomorrow and, given the rally in stocks up to this week and state reopenings, we expect further improvements in sentiment.
 
Unlike other currencies that have experienced sharp declines today, the euro’s losses are more moderate in comparison. It's hard to pinpoint the specific catalyst for the euro. It could be the continued reopenings, the relaxation of travel bans or the lack of meaningful upticks in new infections in Europe as restrictions ease. Eurozone industrial production is due for release tomorrow and a deeper decline is expected. We continue to look for a correction in EUR/USD, especially if stocks continue to fall as the move becomes overstretched.
 
The Australian and New Zealand dollars were hit the hardest by risk aversion. Unlike the U.S., both countries have effectively flattened the curve. Only nine cases were reported in Australia today, while New Zealand has had only seven cases in the last month and zero in the past week. Yet, these currencies are extremely sensitive to the market’s tolerance for risk, particularly after strong moves in May and June. Tensions between China and Australia are heating up, with China telling Australia to take a hard look at their current problems. China is punishing Australia for questioning Beijing for allowing the spread of COVID-19. It instituted tariffs on barely and put an almost A$38-billion education revenue stream at risk. The Canadian dollar also fell sharply on the back of sharp declines in crude prices. USD/CAD broke above 1.35, enjoying its strongest rally in more than a month.
 
Sterling is in focus tomorrow, with UK monthly GDP, industrial product and the trade balance scheduled for release. Considering that these are April data, when manufacturing PMI hit a record low, the risk is to the downside for these reports.

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