Marketsrunintoroughweather

In an interesting turn of events, the US markets have suddenly got besieged by the thought that there can be a second wave of the pandemic and the shape of recovery can no longer be confirmed to be V. It can be W, U , S or some other letter in the alphabet.

The Dow Jones was down by 1862 points or 6.89% which was the biggest daily decline since 16^th March.  WTI futures dropped close to 8.2%, 10 year treasury yields came down to 0.66% and the gold jumped up 1.1% to 1739 $/oz. The Hang Seng and Nikkei are both down in the initial trade whereas the safe Japanese Yen has strengthened. Emerging market currencies have also been hit with the risk off wave as ZAR, MYR, IDR, BRL etc show different degrees of losses.

The jobless claims data which released yesterday showed that the another 1.54 million US workers filed for unemployment benefits last week, bringing the total initial claims to 44.2 million since mid March. The number of continuing claims declined suggesting that some of the workers are returning to their jobs as the economy slowly opens up. It is important to note that the Fed in its assessment on Wednesday had showed concerns that some of these jobs might be lost permanently.

Now we have written previously that Mr Market alternates between throes of despair and euphoria. What event would trigger a change in his mood is hard to predict. The response to the same statement can be different on different days. Generally a dovish Fed statement is followed by a market rally as it gets comfort that policy will be accommodative in the future too. Similarly, the market drops when the Fed’s assessment of the economy is bullish which implies that it can remove the crutches of bond buying and low rates - we all remember what happened in December 2018. But any asset market, be it stock, currency, oil or bonds, is never a single trick pony. These markets depend on a myriad of complex factors like current and future liquidity, market positioning, leveraged bets, rule changes and interlinkage between the participants. 

Physicist and economist John Buchanan, in his book The Forecast, compares markets with the weather system. He writes that in meteorology the basic conceptual base of all the models is simple, that the hot air rises from the equator and flows towards the poles, then cools off and flows back to the equator. The weather forecasters then deal with local temperature and pressure differences, curvature of earth, solar angle etc to arrive at the forecast for a particular point. Sometimes the interaction between the various components gives rise to is unprecedented results. He writes that similarly in markets, the conceptual base about the flow of money is well understood but the interaction between various components and the results thereof is something hard to define.  

Indian assets are also not unscathed from the global risk off mood. The stock markets have opened down by 2.2%  and Indian Rupee is trading at 76.05, breaching 76 for the first time since the end of April.