Market Reactions to COVID-19
A review of Q1 2020 as seen in the CME Market Sentiment Meter
By Anish R. Verma, Andrew Milne
The COVID-19 pandemic had a notable effect on the eight futures and options products tracked by 1QBit’s CME Market Sentiment Meter. In some markets, such as U.S. equity index futures and U.S. interest rate futures, there were rapid increases in daily futures volumes as prices changed and traders managed their evolving risk. The peaks in daily volume were followed by diminishments that varied from market to market, as well as changes in the volumes and positions observed in the corresponding options markets. The CME Market Sentiment Meter reported transitions from the Balanced state to the Anxious state in all products except soybeans and natural gas. The Anxious state is associated with an expectation of larger price movements, which were observed in the markets. In addition, it was seen that forward-looking activity moved from futures to options at a different rate for each product, and that market sentiment took time to become established.
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The CME Market Sentiment Meter (MSM) provides a daily risk–return estimate for eight products traded on CME Group exchanges: corn (C), crude oil (CL), euro/USD FX (EC), S&P 500 index e-minis (ES), gold (GC), natural gas (NG), soybeans (S), and 10-year treasury notes (TYF). The Market Sentiment Meter is computed by 1QBit using end-of-day settlement data published by CME Group. It is available as a subscription product through CME DataMine.
Periods of Anxious market states for COMEX Gold futures (GC1) tended to be either short-lived or long-lived in the eight-year period ending in December 2019.
In 2018, the U.S. saw economic growth and the Federal Reserve hiked rates four times during the year. The year was dominated primarily by Balanced market states, and GC consistently fell once the rate hikes were announced.
The year 2019 saw slowed economic growth and increased tensions with China, Iran, and Russia. This led to a large rise in GC from July to November, and GC remained at a high relative to the beginning of the year. In 2019, the Federal Reserve made three rate cuts. During this time, the Market Sentiment Meter (MSM) indicated an extended period of Anxious market states from July to November.
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