Sygnum Market View – 19 June 2020
The impact of Coronavirus “second wave” fears
Options are on the rise
The impact of Coronavirus “second wave” fears
From a European perspective, it appeared as if the Coronavirus pandemic was finally getting under control. Then came the worrying news from the US and China of rising infections and new outbreaks. Combined with the overly strong stock market recovery since mid-March that technically looked prone for a correction, these factors played a strong part in the significant price drop since last week.
Over the weekend, it was reported that new Coronavirus cases were reported in a food market in the Chinese capital, Beijing. The district was put under strict lock-down and tourists were denied entry, fueling fears for a second Chinese wave.
It does not appear that containment of the Coronavirus is likely in the short-term. A real-time forecasting model from the University of Washington predicts a second wave of infections starting in September 2020, partially caused by many states relaxing their lockdowns too early. In states like Florida, new record highs of daily infections are already being recorded.
With new Coronavirus cases spiking worldwide, it is clear that we have not yet reached the peak of the crisis yet. The re-opening of large parts of the economies, particularly in the United States, may be reversed.
It is worth looking at the efforts of governments to calm markets and support their economies, as the flood of cheap money by central banks has in part disguised the real impact of the Coronavirus.
First with the Fed in the US, who look to be continuing their aggressive monetary strategy with more multi-billion dollar injections in the pipeline. Their Secondary Market Corporate Credit Facility (SMCCF) program is designed to ensure that US corporations, who have experienced sharply rising financing costs, are able to secure fresh money at acceptable terms. On Tuesday, they made the surprise announcement that the scheme would be expanded through the direct purchase of corporate bonds. Previously, the Fed could only invest in corporate bonds through the purchase of ETF's.
Elsewhere in the US, President Donald Trump is considering freeing up an additional $1 trillion for infrastructure projects to further stabilize the economy, according to Bloomberg. On top of traditional projects like roads, the money will also be spent on expanding 5G mobile networks to provide rural regions with broadband internet.
It is worth noting that the US government’s financial aid packages, equaling 14.3 percent of GDP, are significantly lower than the massive 47.8 percent of GDP in Germany.
On Tuesday along with its rate decision, the Japanese Central Bank also announced that
It will provide more money to companies struggling with the impact of the Coronavirus – 110 trillion Yen, up from 75 trillion.
Options are on the rise
The worrying news from the US and China indicate that any second wave of the Coronavirus will further affect markets, including digital assets. The correlation of Bitcoin to traditional markets has again increased and became primarily headline driven.
Directional plays in the short term can be very costly, especially in times of elevated volatility. In such situations professional traders make use of Options to cover their downside risk. CME – one out of the two regulated exchanges in this field (the other being Bakkt) just reported that its Bitcoin Options offering had grown tenfold in the past month. The open interest on the exchange exceeded USD +400m and the average daily volume hit record highs since its inception in January 2020. This development clearly illustrates the rapidly growing institutional investor interest.
''The CME's BTC Options product is on track to smash its record-breaking volume of May 2020'' source @skewdotcom
Disclaimer
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affiliates and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.