The emergency airdrop of fiscal and monetary support provided to fight back in the battle against the coronavirus impact on the global economy continues to prevent further dives in world markets. This battle is of course not receiving a helping hand from the climbing numbers of the disease and fatalities, which at time of writing stands close to 344,000 cases globally and more than 15,000 fatalities across 187 countries.
There is a need for reality for those who might think a floor in world markets should be approaching after weeks of viscous declines that global markets can still drop much further. For all the declines seen in world markets, some equity markets that are only just approaching 2012 levels and even US stock markets are at 2016 levels, having at the end of last week erased the gains made since President Trump was elected.
Should the situation get further out of control, and there is still a stronger probability of this being the case than a miraculous cure developed anytime soon there is a likelihood that world equity markets can decline as much as 65% from their peaks. If this is accurate, then taking only US markets into account we are still only at the half-way line of the possible market carnage.
In the event that world stock markets decline towards 65% from peaks, the 2020 world health disaster that is known as the coronavirus will far eclipse the beyond 50% declines experienced during the historic global financial crisis twelve years ago.
As unfavorable as the above reads, there is also an unfortunate reality of which emerging markets need to be aware that collectively they are still at the early stages of the journey for market chaos. Both the Indian Rupee and South African Rand declined to new record lows today, while the Indonesian Rupiah weakened beyond 3.8%. USDMYR has approached 4.44, and it looks in this environment to be just a matter of time before the Malaysian Ringgit approaches 4.50. For the Indian Rupee, 80 is possible. And for USDZAR 20 is realistic.
Emerging markets are also facing an episode of double trouble arriving from both world stock market volatility, as well as driving demand for the USD. The Dollar Index appears to be on the road to gradually advancing to 105, which resonates to carnage for emerging markets currencies as well as the EURUSD, GBPUSD, AUDUSD and of course Gold. Questions do remain over how long the USD can remain above 100 for, although I do not think a direct intervention in the market is possible because this will risk spooking investors even further in a fragile environment.
EURUSD is at time of writing valued 1.0684, although the situation in Italy and other EU nations that is progressing in a worse case suggests that only a significant decline in USD demand can prevent the Eurodollar falling towards January 2017 lows.