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Market analysis - March 18, 2020

Market analysis - March 18, 2020

The stock markets failed to resist the pressure and defense mechanisms; two levels of limit-down were reactivated in the American indices with a slight recovery before the end of the session.

The same was true of the European stock markets that ended up in negative territory.

The scenario has been that of a global capitulation. Not only equities were sold, but also fixed income.

In Europe, sovereign bonds suffered a severe fall, with a significant widening of the risk premium of countries such as Italy and Spain. The Bund increased its yield by more than 20 bps.

The notable increase in public spending that governments will have to face due to the effects of the crisis is the reason behind these movements.

On very few occasions in the market, these types of flows are observed. Typically, in a financial crisis, sovereign bonds act as a refuge in an influx of "fly to quality." This capitulation is due to the massive closure of investment fund positions that have to adjust their portfolios and reduce general exposure due to reduced operating margins.

On this occasion, however, neither the usual commodities nor at least the Gold, have been used by the market for this purpose. Brent Crude, as we anticipated yesterday, has broken down the support levels of $27.80 and $25.11, reaching trading at $24.11 before a slight technical correction. Technically, analysts say that the bearish path is cleared, and it is expected that it can reach levels of $20.

The US Dollar, as anticipated by most market analysts, has been the great winner of this battle, partly due to the tension of short-term swaps but also because it finally acts as the last refuge. The Dollar Index rose to levels not seen in the previous three years, as in the graph below:

US Dollar rose 4% against the Pound, the currency hardest hit, primarily due to the lack of measures taken by the British government in the face of the pandemic.

EUR/USD abruptly broke the support of 1.1050 and reached 1.0800; from this level, it has corrected to 1.0885, 38.2% Fibonacci retracement of the last bearish leg (as seen in the chart).

The following resistances are located at 1.0909, 50% Fibonacci and 1.0935, 61.8% Fibonacci, levels that if reached will probably be used to add new short positions.

In a market where the Dollar will continue to be a haven and given the worsening of risk premia in the peripheral European countries, the single currency will continue to suffer downward pressure.

By: Miguel A. Rodriguez Ruiz

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