Global Markets and INR – Morning Brief for 16th March 2020

INR likely to open around 74

While Friday saw one of the biggest market rebounds in history, this week continues to be uncertain, as the virus rampages through the EU and the US. Risk appetite came back with a bang on Friday, with the DOW surging 2000 points, and USDJPY moving from the 104 handles to 107.30 level. NIFTY staged the largest ever intra-day comeback to close 350+ points higher. The market hoped for a support package from governments and central banks to counter the impact of the virus on the economy.

The US Fed delivered its biggest “shock and awe” bazooka in an emergency meeting yesterday. It cut rates back to zero and announced a 500 billion USD QE. Yesterday’s decision was in lieu of the scheduled FOMC meeting on Tuesday. So, officially we are back to the ZIRP days, and going by Powell’s press conference, we are unlikely to move from the zero rates any time soon. While one would expect that this move would have led to a market surge, the exact opposite happened, as the US equity futures tanked 5% (currently the trading is stopped as they are “limit down”) and USDJPY fell to 106.70. Markets are taking this Fed action as a sign of panic and of things to come. If a step of this magnitude fails to stabilize the markets, the Fed would be left with no other options until the US congress approves drastic moves such as negative rates, direct stock-buying, etc.

The Coronavirus is spreading at an alarming pace across the EU and now the US. Italy saw 3500+ new cases yesterday. The worrying factor is that the fatality rate continues to be high, and the hospitals in that country are entirely overwhelmed. Spain is fast emerging as the next hotbed, with 1500 cases a day, courtesy the International Women’s Day march, which led to a broad contagion among its participants. The US is moving towards a rate of 1000 cases a day, and it is just a week to 10 days before one can expect an Italian style lockdown of the entire country. This week could see Germany, France, and Switzerland moving towards a full lockdown. India is witnessing an increase in cases, to 112 now. But, this week is critical to understand whether there is any community spread. As of now, all cases are related to those with travel history. The various state governments have been relatively proactive in shutting down avenues for large gatherings. The earlier social distancing measures are implemented, the higher the chance of flattening the epidemic curve and ensure adequate hospital care.

The Rupee would continue to have a depreciation bias as markets move towards safe-haven buying.