Fears of a global pandemic sent equities and currencies tumbling lower. On an intraday basis, the Dow Jones Industrial Average fell more than 1,000 points erasing all of this year’s gains. Today’s move was the single biggest one day decline on a point basis for the Dow since February 2018. For currencies, USD/JPY was hit the hardest and its decline dragged all of the Yen crosses lower. Japanese markets were closed overnight but when they open this evening, USD/JPY, which dropped below 111 should move closer to 110. While US stocks fell 6 out of the last 7 trading days, today was the first meaningful move. In theory, such a big move should lead to more panic selling but gap opens are more frequently followed by consolidation rather than a continuation.

There’s no question that coronavirus fears are valid. The number of cases outside of China soared over the weekend leading to canceled events and quarantines in Europe and the Middle East. Tourism and business activity in China is being killed by the virus and now Europe is vulnerable to the same risk, especially with Italy being the third most visited country in continental Europe. In South Korea, the number of cases jumped to 833 over the weekend prompting the country’s version of CDC to advise South Koreans to limit outdoor activity and inter-city travel. Fourteen countries responded with tighter entry restrictions for travelers coming from South Korea. For the better part of this month, stocks were performing well but investors are finally waking up to reality and realizing that coronavirus will take a big bite out of first-quarter growth. As coronavirus cases surge, we would not be surprised if some countries end up experiencing a contraction in the first quarter.

Given these dynamics, more investors will be heading for the exit. However, the risk of deeper economic toil is the main reason why governments in heavily affected regions could amount a fiscal and monetary policy response. There’s talk of more spending and rate cuts for South Korea, Italy could step in with a fiscal response, the market is looking for the Fed to cut rates and later this week we could hear more caution from ECB President Lagarde. The coordinated fiscal or monetary stimulus would easily halt the slide in equities but individual rather than coordinated response is likely given the limited cases in the US. With that said, fiscal and monetary stimulus from China combined with action from South Korea could also do the trick. In the meantime, until these governments step up, the path of least resistance for stocks and FX will be lower.

Of all the major currencies, USD/JPY is the most vulnerable to further losses. Aside from the meltdown in stocks, 10-year bond yields hit a nearly 4 year low while 30-year bond yields hit a record low. Investors are pricing in 2 rate cuts this year even though the Federal Reserve gave very little indication that they are looking to ease. This quarter’s earnings should be weak with negative guidance expected from many companies across various industries. Apple’s warning last week and the unexpected drop in the Markit PMI manufacturing index for the US is a major red flag that no one should ignore. USD/JPY is a sell anywhere between 110.50 and 111.25 for a move to 109.

The best performing currency was the euro which rose above 1.0850 intraday on the back of a stronger German IFO report. Given the decline in investor confidence, we are surprised by the improvement which was driven primarily by an uptick in expectations. Its unlikely that this sentiment will be sustainable with coronavirus spreading in Europe. In fact, this week’s EZ confidence numbers could surprise to the downside. All other major currencies including sterling, the Australian, Canadian and New Zealand dollars fell victim to risk aversion. For CAD, the 3.5% drop in oil prices was a double blow.