Absolute carnage and mayhem across the board in the financial markets

Today the financial markets with the exception of bonds plunged. The Dow Jones industrial average lost almost 3000 points in trading. Analysts are citing the global COVID–19 (coronavirus) as the primary trigger for this selloff. There is also the question as to whether or not central banks including the Federal Reserve have any tools still available to help the global economy avoid a major recession.

Make no mistake this particular selloff presents a very different set of circumstances than the 2008 financial crisis. During the financial crisis the Federal Reserve along with other central banks were able to enable the global economy to begin a recovery. Most used quantitative easing as their primary tool to do this. This technique involves lowering interest rates and making money available by increasing the liquidity of banks.

During this crisis the actions of the Federal Reserve had the exact opposite effect. Rather than calming investors by lowering rates to near zero after the Fed’s surprise announcement yesterday. Instead of holding its planned FOMC meeting on March 18, it had an emergency rate drop of a full percentage point.

Dow futures were projected to open sharply lower, and the exchanges were ready to trigger a first level circuit breaker if that action occurred. The first level circuit breaker occurs when the S&P 500 drops by 7% which triggers a pause for 15 minutes. If the market continues to drop they will issue another circuit breaker if stocks fall by 13% on the day. The third level of circuit breaker occurs if a 20% drop unfolds in the S&P 500 which would stop trading for the remainder of the session.

Monday morning in Australia gold gapped higher on the open. Considering that gold closed on Friday at $1517, and opened at $1563. At the same time Dow futures were predicted to open down by 2000 points and it seemed at first that there was a decoupling of the tandem downside correction evident in both gold and stocks. That was short-lived at best as gold turned south trading to a low of $1495.50 in trading today.

Gold is currently trading at $1508.80, which is $22 higher than the New York close. As reported in MarketWatch, Chintan Karnani, chief market analyst at Insignia Consultants said that traders were “exiting everything which is giving them profit, with a technical selloff triggered when gold fell below $1,500. However, gold’s inability to fall below key support at $1,440 resulted in short covering and subsequent buying in gold, including good physical demand in Asia.”

At some point this author believes that investors will once again begin to move investment capital back into a safe haven asset such as gold, however that is not occurring at this time. 

Wishing you as always, good trading,

Gary Wagner