Euro target is in the range of 1.1665 to 1.1875

If yesterday’s equities rally is following the pattern since Mar 4, stocks should gap down at the open on Monday.

It was only yesterday that we discussed about visibility on a game plan and action on the coronavirus issue. Trump’s press conference late in the day was reassuring and cohesive. A big bold private - public partnership to address the health crisis, which includes widespread drive - through testing positively surprised markets and the markets went limit up.

In US morning, Mnuchin (treasury secretary) committed to a sort of “whatever it takes” approach including unlimited liquidity (from the Fed). He also made it clear that they are committed to helping industries “to get through this situation”. Which means airlines, cruise-lines, hotels, etc. Trump also mentioned that they are important to the country. Heads of major airlines were also invited to the White House.

So, if you follow the money (i.e. government support), there should be some great bargains in some of these industry scripts as most stocks are beaten up badly.

Without any much analysis, one stock that could do phenomenally well during this crisis situation is Amazon. Will be interesting to see their results in the coming quarter.

Trump also announced he’ll be buying oil at these prices for the strategic petroleum reserve. This is a big response and oil was up by almost 5 pct.

A fiscal response should be ironed out over the weekend. It was also announced that G7 leaders will hold a video conference on Monday. So, next week should be promising for the markets as well. Let’s have a look at the various asset classes.

Equities

It was a very strong and late rally on Friday with the Dow closing up 1985 points or a rise of 9.36 %. Despite the day’s advance, the index was down 10.36 % for the week, which shows what an extraordinary week it has been.

With yesterday’s rise, very few participants must have gone short. Starting at the countertrend rallies on Mar 4, 6, and 10th, the market stopped at top tick for the advance. In each instance, the next trading day the market gapped lower at the open. Another way to look at it is from Mar 4. The Dow is down 4000 points as at yesterday’s close but 4 out of the 8 days it has closed at or near the top tick for the day.

Investors keep thinking the low is in, buying into the close, and the shorts are afraid to remain short. Both the Dow and S&P closed yesterday right at the high for the day. If yesterday’s rally is following the pattern since Mar 4, stocks should gap down at the open on Monday. But the fiscal policy responses and the outcome of the G-7 will determine the direction next week. Remember you also have monetary policy decisions on 18th Mar. So many things to consider for market participants.

Bonds

In four and a half days, the 30 year bonds declined 20 points which is an unusual move. The rally from Oct 9 must have completed its structure. If so prices should not rise much above its trend line resistance which comes in at 183^05 to 183^15 next week. The idea is yields should rise again but not sure if it will immediately. The expectations for the rise are in the range of 2.40% to 2.65%.

Euro

The Euro declined to 1.1055 retracing 61.8% of the move up. Think the Euro should make a 5-wave advance that carries prices above the recent 1.1495 high. Targets are in the range of 1.1665 to 1.1875.

Gold

Gold traded wildly yesterday. The lesson we can learn from yesterday’s move is that there is no consistent correlation between any two assets. It never has been. You cannot forecast the trend of one asset based on the trend of another. What happened yesterday was stocks declined sharply yesterday and gold declined too. Then stocks rallied strongly and gold declined more. Yesterday gold broke below Feb 28 low reaching almost a five wave decline target of 1500. Actual low was 1506.85.

Yesterday’s decline was the largest daily selloff in nearly seven years. There is greater bearish potential if prices move below the target level. Eventually, Gold will touch much lower levels which we will discuss as prices progress in the coming days.

Wish you all safe travels and restful weekend!

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.