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YENzo Profile

Enzo. Worked over 20 years as a foreign exchange dealer at U.S. banks like Citibank, and British banks like Standard Chartered, and other foreign banks. Currently, as a top professional trader, he trades currencies, the Nikkei 225, Nikkei options, and individual stocks. He is the representative director of ADVANCE Co., Ltd., which focuses on delivering investment information. He has deep knowledge not only of major currencies such as the dollar and euro, but also of emerging currencies including Asian currencies in his dealing. He also has strong relationships with traders and fund professionals overseas.

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Risk-off moves accelerate as the novel coronavirus spreads

In the last week of February 2020, the novel coronavirus outbreak spread beyond East Asia to countries around the world. The rapid spread in Italy, in particular, raised infection risks for Europe, which had a significant impact on the markets. This movement likely reflects fear of an invisible virus infection. This area of behavior may be comparable to the response to the nuclear crisis after the Great East Japan Earthquake.

At the beginning of the year, market themes were the U.S.-China trade issue and the U.S.–Iran tensions in the Middle East. Even when bad news appeared, stocks generally rebounded in the short term, and foreign exchange markets maintained relatively stable during those periods.

In hindsight, the U.S.-China trade issue was a relatively predictable risk. There was the risk that President Trump might tweet something unpredictable, but while it wasn’t easy to predict the economic impact depending on whether tariffs were imposed or not, it was possible to narrow the range of expectations.

On the other hand, the novel coronavirus makes it difficult to predict when the infection spread will stop. Even if the spread ends, economic activity will have contracted by then, making it hard to estimate the impact. This uncertainty clouds the economy’s outlook and causes markets to become rapidly risk-averse.

Even if an economic slowdown is anticipated, as long as it is reasonably predictable, stocks may fall but not crash. However, what the market despises most is uncertainty. Uncertainty leads to crashes.

In Japan, events are being canceled or postponed and people are limiting outings, which will certainly slow economic activity. Until signs of resolution and a return to normal economic activity appear, forecasts are difficult. Such anxiety accelerates stock-price declines and causes capital to shift into bonds, i.e., a risk-off flow.