Confidence is everything

In current markets average daily ranges have seen rapid increases. Currency pairs that normally move 50-80 points a day have been finding that they move 300-600 points. Equity markets which previously moved around a maximum of 1-2% a day are now moving up to 10% in a single market session. These are volatile times indeed. Intelligent traders are responding the following way:

  1. They are widening stop losses; instead of using narrow stop losses, they allow for heightened volatility.
  2. They do not use high levels of leverage; traders are ensuring they allow for the huge ranges by reducing their risk in their trades.

What is the general market outlook, and when will the recovery take place?

The current market outlook remains dire. With the rapid spread of the coronavirus, equity markets have been plummeting around the world and the outbreak will only get worse as more and more cases increase. The S&P500 has fallen over 13% this month, the Italian FTSE over 15% and Nikkei over 9% with more downside to come. The only thing that can change the current market outlook is if there is some effective cure or treatment found. Otherwise, we can expect a rapid rise in unemployment, many more deaths, and most likely continued falls in the equity markets. These are very sad times.

How do we know when the recovery takes place?

Well, for some workers this will be a good time. They have kept their jobs and they are now saving up their disposable income. When the quarantine period comes to an end, then the income will be spent and a boost to the economy will be given. However, many others have lost their job and, even with government support, will find that they start to default on loans. We are about to have a surge of consumer defaults. Businesses will fold, one after another, and aid packages are coming. Will it be enough? Which group will win through? Those who have money to spend, or those who have lost jobs and defaulted on loans?

Will those who have kept their jobs be enough to pull the economy through? Will the helicopter money be enough?

No. Most likely, it won’t be. A crisis like this is going to change consumer behaviour. Even those who have kept their jobs are going to be thriftier. Why? Because they don’t know how secure their job really is. Also, they will be trying to economise and brands that were premium before this crisis will no longer have the same appeal. There was a similar effect post 2008/2009 and now we have two crises to shape consumer behaviour. Perhaps the fiscal stimulus measures will be enough to limit defaults, but it’s not convincing. Some will not recover from this blow and it is going to be the lower-paid, unskilled workers, who get hit the hardest. Again.

Take a closer look at March consumer confidence on Tuesday from the UK to get a handle on how the consumer will be hit. Spoiler alert, it is not going to be good.