Increased concerns about the spread of coronavirus provoked a 3.4% drop in the S&P 500 index, which was the worst result in the last two years. During the day, the stock index, which now accounts for approximately 44% of the capitalization of the global stock market, lost about $927 billion. A sharp deterioration in the global risk appetite made it possible for the funding currencies in the form of the euro and the yen to return to the game.
Until recently, global stock indices ignored the outbreak of a new virus, believing that the US economy, whose export share is insignificant, will remain resistant to external threats. However, an increase in the number of coronavirus cases in Italy, Iran and South Korea has served as a catalyst for the S&P 500 sales. Investors still rely on the Federal Reserve to save the stock index from falling. Against the backdrop of the collapse of US stocks, the chances of the regulator implementing two acts of monetary expansion in 2020 has increased from 46% to 63%. At the same time, rates on ten-year treasuries have come close to record lows since the referendum on UK membership in the EU. Their spread with three-month bills deepened into the red zone, signaling the risk of a recession in the United States. This is an alarming bell for a greenback.
The EUR/USD pair managed to cling to the foundation of the 8th figure, also thanks to comments by ECB Vice President Luis de Guindos. In his view, a strong labor market and low interest rates support economic growth in the eurozone. The regulator has long held the position that internal strength provides some protection against global risks, as evidenced by the latest data on European business activity. In February, the composite index of procurement managers rose from 51.3 to 51.6 points. Production PMI rose to an annual high of 49.1 points. Service PMI reached its highest value in the past six months - 52.8 points.
Even despite the publication of encouraging PMI statistics, Capital Economics experts believe that eurozone GDP is still lacking momentum. They kept the forecast for economic growth in the region in the first quarter at 0.1%. Thus, the rise of PMI may turn out to be nothing more than market noise.
Support for the single European currency was also provided by speeches by the heads of the central banks of France and Italy - Francois Villeroy de Galhau and Ignazio Visco, who called on the national governments of the eurozone to fiscal stimulus. According to them, the ECB's monetary policy is already too soft, the regulator's room for maneuver is limited, so it is unlikely that he will be able to cope with the impending disaster alone. The situation is especially threatening for Italy, which, due to the coronavirus epidemic, runs the risk of facing a technical recession in January – March. Recall that in October – December, national GDP fell by 0.3%.
The main currency pair crossed the 1.0850 mark against the background of the publication of unexpectedly strong indicators of economic sentiment in Germany from the IFO Institute. However, technically, the bulls lack momentum, and this is nullifying attempts to restore EUR/USD. Therefore, growth above the 1.0870–1.0875 area should be considered as a convenient opportunity for selling. The round level of 1.0900 should stop the bulls. If this barrier is still taken by them, then a short compression may follow, which will throw the pair to resistance at 1.0955. In this case, the next target for the bulls will be the key psychological mark of 1.1000.
Immediate support is now at 1.0800. The lower boundary of the annual downward trend channel passes below the level of 1.0770. Its clean break will target the bears to the next round mark – 1.0700.
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