The COVID-19 pandemic has been more than a health crisis. With people forced to stay indoors and all but the most essential services stopped for multiple weeks, economies have suffered and financial markets have crashed. Perhaps the most public and spectacular fall from grace during the early stages of the pandemic was oil. With travel bans in place around the world and no one filling up at the pumps, the price of oil plummeted.
Prior to global lockdowns, US oil prices were trading at $18 per barrel. By mid-April, the value had dropped to -$38. The crash was not only a shocking demonstrating of COVID-19’s impact but the first time crude oil’s price had fallen below zero. A rebound was inevitable, and many traders were quick to take long positions, which meant futures prices remained high. However, with stocks piling up and demand sinking, trading prices suffered. Unsurprisingly, it’s not the only market that’s taken a knock since COVID-19 struck.
Financial Markets Fluctuate During Pandemic
Shares in major companies have dipped. The Institute for Fiscal Studies compiled a round-up of price movements for industries listed by the London Stock Exchange. Tourism and Leisure have seen share prices drop by more than 20%. Major airlines, including BA, EasyJet and Ryanair have all been forced to make redundancies in the wake of falling share prices. The automotive industry has also taken a knock, as have retailers, mining and the media. However, in among the dark, there have been some patches of light.
The forex market has been a mixed bag. As it always is, the US dollar has remained a strong investment option. With emerging markets feeling the strain, traders have poured their money into traditionally strong currency pairs like EUR/USD. Looking at the data, IG’s EUR/USD price charts show a sharp drop in mid-March from 1.14 to 1.07. However, after the initial shock of COVID-19 lockdowns, the currency pair has steadily increased in value back up to 1.12 (June 25, 2020). The dominance of the dollar has been seen as a cause for concern among some financial experts. In essence, the crisis has highlighted the world’s reliance on it.
Currency Movements Divide Economies
In any walk of life, a single point of authority is dangerous. Indeed, if reliance turns into overreliance, it can cause a supply issue (not enough dollars to go around. More significantly, it could cause a power shift that gives the US too much control over economic policies in other countries. Fortunately, other currencies have performed well during the pandemic. Alongside USD and EUR, the GBP has also shown a degree of strength throughout the crisis. However, these positive movements haven’t been shared by all currencies.
The South African rand took a 32% hit during the early stages of the pandemic, while the Mexican peso and Brazilian real dropped 24% and 23%, respectively. Like the forex market, other sectors have experienced contrasting fortunes. Yes, shares in airlines and automotive manufacturers have fallen, but food and drug retailers have seen stocks rise. In fact, at one point, orange juice was the top performer across multiple indices. With the health benefits of vitamin C a hot topic, futures prices for orange juice jump up by 30%. The sudden surge had analysts predicting 60% gains as we move into a post-COVID-19 world.
Looking Towards the Future through Financial Markets
The future is always unknown and, due to COVID-19, it’s more uncertain than ever. However, the financial markets do provide an indication of how things may change. The performance of USD and EUR in the forex markets suggest there could be a lot more trade deals negotiated between the US and Europe. The surge in orange juice futures suggest that health and wellness will become a much more important part of our lives. Even though it was already a multi-billion-dollar industry, the realisation that a virus can alter the face of humanity has given more people pause for thought.
Then, of course, there’s the move towards remote working and socially distance entertainment. From Zoom to Slack, more people will be working and playing from home in the coming years. The world is always changing, but recent have events have made us appreciate this fact more than ever. The financial markets aren’t a crystal ball, but they can offer a glimpse into what we can expect in a post-COVID-19 world.
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Dollar firms on sudden spike in U.S. Treasury yields
By Karen Brettell and David Henry
NEW YORK (Reuters) – The dollar index lifted off a seven-week low on Thursday after yields on 10-year U.S. Treasuries jumped as high as 1.6% following weaker than expected bids in a U.S. government debt auction.
The move was the latest example of currency markets taking their cue from bonds, which have been moving on the changing outlook for economic growth and inflation following unprecedented government stimulus and monetary easing along with increasing COVID-19 vaccinations.
The dollar was up 0.13% against a basket of currencies in the early New York afternoon after dipping as much as 0.26% to 89.677, its lowest since Jan. 8.
The 10-year Treasury yield was 1.50%, still up 11 basis points on the day.
The rise in bond yields, after adjusting for inflation, has accelerated in recent days, indicating a growing belief that central banks may begin to pare back ultra-loose policies, even as officials maintain a dovish rhetoric.
“It has been a global move,” said Vassili Serebriakov, an FX strategist at UBS in New York. “Those higher bond yields are a symptom of expectations of a strong economic rebound after the pandemic.”
Data on Thursday showed that fewer Americans filed new claims for unemployment benefits last week amid falling COVID-19 infections.
Federal Reserve Chair Jerome Powell reiterated on Wednesday that the U.S. central bank would not tighten its policy until the economy improves.
Commodity-linked currencies, including the Australian, New Zealand and Canadian dollars, all hit three-year highs earlier in the day as their bond yields surged.
“The U.S. has actually lagged a lot of these other countries in terms of the yield moves,â€ said Erik Nelson, a macro strategist at Wells Fargo in New York, noting that New Zealandâ€™s 10-year government bond yield had gained 18 basis points on Thursday.
The Aussie reached $0.8007 against the greenback and was last down 1% at $0.7882. New Zealand’s kiwi hit $0.7463 and then fell, last off 0.8% for the day.
The Canadian dollar got as far as 1.2468 per U.S. dollar, but was last at $1.2569.
The euro rose to a three-week high, gaining 0.5% before backing off. It was last up 0.04% at $1.2175.
The safe-haven Japanese yen, which tends to underperform when global growth improves, weakened as far as 106.29 yen per dollar.
â€œSome of the currencies that typically donâ€™t do well in a global rebound are lagging,â€ Serebriakov said. Changes in the dollar have been different against different currencies recently. “Itâ€™s not just across the board the way it was last year when everything was driven by U.S. real yields falling and selling dollars across the board.â€
(Reporting by David Henry and Karen Brettell in New York; Editing by Kirsten Donovan)
Shares and commodities keep climbing, so do bond yields
By Marc Jones
LONDON (Reuters) – World stocks headed back towards record highs with a third day of gains and the dollar dropped to a three-year low on Thursday, after top Federal Reserve and European Central Bank officials took aim at rising bond market yields.
There was a lot to keep tabs on. A renewed retail frenzy re-ignited the likes of GameStop, bets on $70 a barrel oil and a decade high in copper prices drove a commodity currency rally [/FRX] and bond yields were still rising too. [GVD/EUR]
A near 1.9% jump in oil and gas shares ensured European markets followed Asia’s overnight gains [.T][.SS]. MSCI’s main world index, which spans 50 countries, was up 0.5%.
“There are two clear stories now” said CMC Markets senior analyst Michael Hewson. “You have the concerns about rising yields and they are continuing to move higher today, and then you have got an economic recovery story, which is helping lift the more moderately-valued parts of the market.”
Federal Reserve Chair Jerome Powell said on Wednesday that U.S. rates could remain low for years, while ECB board member Isabel Schnabel was out early on Thursday saying it would fight any big increases in inflation-adjusted market rates.
“A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery,” she said. “Therefore, we are monitoring financial market developments closely.”
But bond markets are still not playing ball. Ten-year German Bund yields climbed 3 basis points in early trading. U.S. 10-year Treasury yields were near one-year highs at 1.42% and on course for the biggest monthly rise since Donald Trump’s 2016 U.S. election victory jolted markets.
In the FX markets, the safe-haven U.S. dollar slumped near three-year lows as the Fed’s stance, ongoing progress with COVID vaccination programmes and commodity market uplift boosted riskier currencies.
The Australian and Canadian dollars both hit three-year highs of $0.7978 and C$1.2503 per U.S. dollar respectively.
The euro touched a one-month high of $1.2183. The safe-haven yen and Swiss franc both weakened.
“It is pretty clear that there is a pretty strong concentration in the commodity currencies,” said Saxo Bank’s John Hardy. “Even with emerging markets you are seeing it to a degree,” he added, pointing to how big energy importers like Turkey’s lira had faded.
MARATHON NOT A SPRINT
Crude oil climbed to 13-month highs after U.S. government data on Wednesday showed a drop in crude output as a deep freeze in Texas disrupted production last week. [O/R]
Copper prices steadied near $9,500 a tonne in London. It’s now at its highest level in almost a decade and could log its biggest monthly gains in 15 years this month.
In a possible sign of a renewed retail-driven frenzy in equity markets, GameStop’s Frankfurt-listed shares trebled as they opened on Thursday, overshooting the videogame retailer’s 100% surge on Wall Street overnight.
Other so-called “stonks” – an intentional misspelling of “stocks” – favoured by retail traders on sites such as Reddit’s WallStreetBets had also leapt again, although explanations for the moves were tenuous.
Some online stocks watchers had even pointed to a picture posted by an activist GameStop investor of a McDonald’s ice cream cone with a frog emoji as a cryptic sign.
“It’s a marathon, not a sprint. Whatever happens resist the urge to sell. The longer we hold the higher it goes,” said @catchme1fyoucan, one user in Italy of the retail trading platform eToro, in a discussion on GameStop.
(Reporting by Marc Jones, editing by Larry King)
Sterling steadies above $1.41 as risk currencies gain
By Ritvik Carvalho
LONDON (Reuters) – A rally in risk currencies on Thursday helped Britain’s pound steady near $1.41, a day after it hit its highest levels in nearly three years.
Sterling surged to $1.4295 on Wednesday, as analysts maintained a positive outlook on the currency.
Bets that Britain’s vaccine rollout will enable a quicker reopening of its economy and relief over a Brexit trade deal have pushed the pound up 3.5% against the dollar, making it the best-performing G10 currency this year.
U.S. Federal Reserve Chair Jerome Powell on Wednesday calmed fears that higher inflation would also lead to a tapering of monetary stimulus, saying the central bank would not change policy until the economy was clearly improving.
On Thursday, a broad risk-on tone in markets after Powell’s assurances spurred a rally in commodity-linked currencies such as the Canadian, Australian and New Zealand dollars and the Norwegian crown, pushing the dollar and other safe haven’s lower. [FRX/]
“Classical FX havens are weakening (CHF, JPY) and risk currencies such as GBP and NOK are performing well as U.S. rates are now rising in tandem with equities and commodities,” said Lars Sparresø Merklin, senior analyst at Danske Bank.
The pound is correlated with risk and growth and tends to gain along with risk-on plays in markets. It traded 0.1% higher at $1.4163 by 0911 GMT. It was 0.1% lower to the euro at 86.22 pence.
Issues over Brexit still simmer, although analysts maintain they won’t hurt the pound in the short to medium-term.
Northern Ireland’s first minister upped the ante on Wednesday in a dispute between the UK and the European Union over trade with the province, calling on Prime Minister Boris Johnson to “step up and protect the United Kingdom”.
Earlier, the UK and the EU held talks and agreed to press on with work to resolve the difficulties that have impeded deliveries of goods, notably food, from other parts of the United Kingdom to Northern Ireland and caused some shortages in supermarkets.
The dispute, which was heightened when the EU involved Northern Ireland in a COVID-19 vaccine ban, has cast a shadow over a post-Brexit trade deal agreed late last year and threatens to further sour future ties between the neighbours.
(Reporting by Ritvik Carvalho; editing by Larry King)
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