There appear to be some interesting trade setups taking place across three different asset classes (the S&P 500, gold and EURUSD), all of which seem to be related to the corona crisis. You can think of the coronavirus as the catalyst, rather than the cause. US stocks had been looking overbought long before Covid-19, gold had started its most recent rally as far back at 2018 and EURUSD has been steadily declining since its peak back in 2008.

S&P 500 bear market rally?

After topping-out in February, we have seen a brutal sell-off in US equities as the market finally came to terms with just how serious the coronavirus is. This is when it became clear that no matter how insulated you thought you may have been, the virus was soon to be heading to a town near you. What followed was a crash that officially took US stock markets into bear market territory, the S&P 500 lost more that 36% of its value in just over a month.

What we have seen since then is a great deal of bottom-fishing by investors, either encouraged by positive headlines as to Covid-19 treatments, or the Federal Reserve’s unprecedented liquidity injections, which have now gone beyond just purchasing government bonds to essentially purchasing corporate debt.

It took a mere 17 days for the S&P 500 to rebound off its recent lows and reach the 50% retracement level at around 2800. After pushing through it, it now appears to be coming back to re-test that level again. As it begins to dawn on investors just how severe the consequences of Covid-19 and the resultant lockdown will be, this recent move up could be revealed to be a bear market bounce and just one of many lower-highs to follow. Even if it doesn’t, keep in mind that bear market rallies can last for a very long time, anywhere between 2-5 months, so even if we push higher from here, we’re not out of the woods yet.

Gold to new all-time highs?

Gold broke through the $1700 level bullish in April. The last time it did this was in 2011. In 2011, breaking $1700 led gold up to its all-time highs against the US dollar in just a few short weeks. Are we likely to see a repeat? Well, one thing this gold rally has going for it is that the by most metrics this particular crisis is looking as though it’s going to be much worse than that of 2008.

2008 was a meltdown in the financial system that had knock-on effects on other areas of the global economy. 2020 will be remembered as a health crisis that spread to a financial system that, in many ways, had failed to heed the lessons of 2008 and was even more fragile when tested.

Gold’s drop in March back to $1450 coincided with the S&P 500 rebounding from its recent lows. This is a relationship that we are likely to see continuing as investors sell gold to either service margin calls on riskier assets, or attempt to buy the bottom. This process also works in reverse, the more the Fed expands its balance sheet, the more certain investors will begin to fear inflation and the debasement of the dollar and thus flock to gold. Keep in mind that in the last crisis the S&P 500 bottomed in 2009, while gold topped in 2011, so it’s almost certainly not a straight path upwards from here.

EURUSD to parity?

Europe has many problems. It had many problems before coronavirus and the present situation is only going to exacerbate them further. Aside from the fact that it was home to the second epicentre of the crisis, its very structure as an economic union of disparate nations makes centralised decision-making an incredibly difficult thing to coordinate. Its combination of open borders between different sovereign nations has left it incredibly vulnerable to the virus.

In March the ECB joined the QE infinity party in its second “whatever it takes” moment in less than a decade. When you factor in that Europe was already weaker than the US pre-corona virus, and that it never managed to generate the growth required to increase inflation expectations and return its interest rates to anything approximating “normal,” you can also expect it to fare worse than the US post-corona.

We can already see this in how its own stock markets haven’t bear-bounced anywhere near as convincingly as the those of the US. When you look at long-term charts of EURUSD you clearly see a series of lower-highs gradually returning the exchange rate to its 2003 lows. If it breaks this level then the only thing left is to test dollar parity.