The impact of the coronavirus outbreak on Chinese demand for raw materials has already made itself felt in the commodity futures markets, pulling key industrial inputs oil and copper down 21% and 9% respectively between January 6 – the last day before reports of the virus reached the international media – and February 4.
As concerns about the impact of the virus on the broader global economy continue to grow, the second-order effects are being felt in disparate markets across the world, even those that might at first glance seem to be removed from the epicenter in Wuhan.
Cash Looking for A Home
European repo activity on CME’s BrokerTec platform saw a brief spike in early February as the severity of the coronavirus became clear.
The negative impact of the virus outbreak and the efforts to contain its spread on the Chinese economy led to a major sell-off of equities in markets around the world in late January. This withdrawal of investment from equities left many firms holding more cash than would be typical in normal trading conditions, leading some of them to turn to the repo market as a home for these larger-than-normal cash holdings.
The next working day after the major sell off in equities on January 31, when the S&P 500 Index fell 1.8% day-on-day, BrokerTec recorded its busiest day of the year as participants made use of the European repo market to place proceeds from equity liquidations whilst pondering future investment strategy decisions.
The correlation between the performance of the equity markets, which has been driven in recent weeks by the news from China, and European repo activity is noticeable. The announcement on February 2 by the Chinese government of a major stimulus package intended to boost economic activity levels sent equity markets back to their pre-virus levels and saw BrokerTec’s European repo business return to more typical volumes.
Focused on The Fed
Although the links between the spread of the coronavirus, equity prices and European repo have been strong, the still larger U.S. repo markets have not experienced the same phenomenon. This is likely because, although the U.S. has experienced the same pattern of equity sell offs and recovery in early February, the market is more focused on the activities of the U.S. Federal Reserve.
The Fed introduced significant “repo operations” in the wake of the repo funding issues experienced in September and has since become the major supplier of liquidity to the U.S. repo markets, dampening multilateral repo activity and limiting the impact on the U.S. repo market of external factors like the coronavirus.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
