WHAT HAPPENED YESTERDAY

As of 4 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.46%, 97.10
USDJPY, -1.14%, $107.07
EURUSD, +0.38%, $1.1177
GBPUSD, +0.54%, $1.2821
USDCAD, +0.40%, $1.3377
AUDUSD, +0.67%, $0.6583
NZDUSD, +0.13%, $0.6270

STOCK INDICES

S&P500, -2.81%, 3,003.37
Dow Jones, -2.97%, 25,914.15
Nasdaq, -2.99%, 8,684.09
Nikkei Futures, -1.28%, 20,900.0

COMMODITIES

Gold Futures, +3.26%, 1,646.75
Brent Oil Futures, -0.39%, 51.70

SUMMARY:

USD weakened across the board on expectations of global easing led by the Fed and the Fed delivered. JPY made strong gains against the USD as fears of a sharper slowdown return to plague the market. Now that the Fed has returned to its one playbook of cutting rates to counter all sorts of economic weakness, the question on the minds of investors is, “What next?”

Rate cuts easing monetary conditions, but they won’t solve the supply chain shock and also the demand shock that the world is facing. How will confidence be restored by cheaper money if you’re worried about the virus that is spreading like wildfire throughout the world? 

U.S. stocks began the session on a modestly lower note with the early weakness blamed on a joint statement from G7 finance ministers and central bankers, which did not call for immediate easing measures. Strikingly, a U.S. mid-morning announcement of an emergency fed funds rate cut invited a 2% spike in the S&P 500, which vanished in just over an hour. The S&P500 index eventually finished the session lower (2.81%), after testing more than 2% higher on the day to close below its 200-day moving average (3049), Nasdaq was down (-2.99%).

The Federal Reserve acquiesced to the bond market’s recent screams for a sharp rate cut, slashing the fed funds rate range by 50 basis points to 1.00-1.25%. U.S. 2yr Yields were down 22bps and U.S. 10yr Yields were down 17.9bps, in a curve steepening trade. 

Yesterday’s broad-based rally was followed by more gains in most Asian equity markets while central banks from the region lined up to offer support. The Bank of Japan announced readiness to purchase another JPY500 bln worth of JGBs while the Reserve Bank of Australia cut its cash rate by 25bp to a record low of 0.50% and signaled a willingness to get back into the easing mode once again.

FED CUTS RATES TO BLUNT COVID-19 IMPACT, MARKETS DROP

The U.S. Federal Reserve cut interest rates on Tuesday in a bid to shield the world’s largest economy from the impact of Covid-19, but the emergency move failed to comfort U.S. financial markets roiled by worries of a deeper, lasting slowdown.

“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Powell said in a news conference shortly after policymakers unanimously decided to cut rates by a half percentage point to a target range of 1.00% to 1.25%. Powell acknowledged the outlook is uncertain and the situation “fluid.” It was the first-rate cut outside of a regularly scheduled policymaker meeting since 2008 at the height of the financial crisis. 

IMPACT: Markets made a brief pop and sold off soon after, as the 50bps rate cut was already 100% priced in and speculators are demanding more easing from the Fed. Markets are already pricing in a 61.1% probability that the Fed will cut another 25bps point in its April meeting to 0.75% – 1.00%. With the Fed just falling in line with current expectations, it will not give speculators incentive to take on more risk.

RBA CUTS RATES TO 0.5% AS CHINA SLOWDOWN CONTINUES

Reserve Bank chief Philip Lowe reduced the cash rate by 0.25% to 0.5% – a new record low, as expected by traders and half of the economists surveyed. The governor said he’s prepared to ease further as the virus outbreak is having “a significant effect” on Australia’s economy.

“The Australian government has also indicated that it will assist areas of the economy most affected by the coronavirus,” Lowe said. Before the RBA meeting, Prime Minister Scott Morrison said the Treasury is working closely together with the other agencies “to address the boost that we believe will be necessary.” Morrison urged major banks to pass on any RBA cut. The four top lenders have all since confirmed that mortgage rates will be reduced by the full amount.

IMPACT: Australia kicked off an expected worldwide policy response to China’s slowdown and the fallout from the coronavirus with an interest-rate cut that’s set to operate in tandem with fiscal measures to cushion the economic blow. The RBA’s rate cut was largely priced in, hence the Aussie did not weaken on the move. However, the prospect of a hybrid package that includes fiscal measures was well received by the Aussie Dollar as these measures are traditionally inflationary and it will not limit the easing to just interest rate mechanisms. 

ASIA EASES (South Korea unveils $9.8 billion stimulus to fight Covid-19 / Hong Kong’s central bank cuts interest rate after Fed move)

• South Korea announced a stimulus package of 11.7 trillion won ($9.8 billion) on Wednesday to cushion the impact of the largest outbreak of Covid-19 outside China as efforts to contain the disease worsen supply disruptions and sap consumption. Finance Minister Hong Nam-ki said the supplementary budget, subject to parliamentary approval, will channel money to the health system, child care, and outdoor markets. Of the 11.7 trillion won proposed, 3.2 trillion won ($2.68 Billion) will make up for the revenue deficit while 8.5 trillion won ($7.11 Billion) will be extra fiscal injection. An additional 10.3 trillion won ($8.62 Billion) in Treasury Bonds will be issued this year to fund the extra budget. Loans will be made on relaxed terms to affected exporters while people who have lost their jobs will be re-trained.

• The Hong Kong Monetary Authority (HKMA) lowered its base rate charged through the overnight discount window by 50 basis points to 1.5% on Wednesday, hours after the U.S. Federal Reserve delivered a rate cut of the same margin.

IMPACT: Taking a cue from the Fed, policymakers this morning are opening up their coffers to stimulate their economies and this should be the beginning of a global liquidity push. The key to navigating this situation is to keep in view the Covid-19 narrative along with market demands versus central banks response in relation to the potential knock-on effects. Any mismatch in market expectation or overcompensation by central banks will drive risk appetite. 

DAY AHEAD

BoC rate cut expectations have been on the rise since the Covid-19 started spreading uncontrollably and markets have now priced cuts of almost 75-basis points in the overnight rate by year-end. That may look excessive considering that Canada’s economy isn’t doing too badly and inflation is running above the 2% target midpoint.

However, under the surface, there are several trouble spots: exports are struggling, consumer spending is soft and anti-pipeline protests on a busy railway route have been causing huge disruptions to freight traffic during February. When we also consider the additional impact from the virus on the current and upcoming quarters and the fact that growth already slowed markedly in the second half of 2019, Stephen Poloz & Co may decide waiting would be riskier than slashing rates immediately and announce a surprise reduction later today.

However, if Poloz still feels that the economy is “in a pretty good place” and the BoC stands pat, the odds are very high that it would cut in April. No action on later will also put greater weight to Friday’s employment report for February.

SENTIMENT

OVERALL SENTIMENT: 

How would you feel if the cavalry that you have been waiting for arrives and you rally a little but still concede ground on the day? That’s how the bulls felt on the day. Fear will spread through the ranks. Rallies will be sold unless more reinforcements (fiscal measures, tax cuts) arrive. 

FX

MARKETS

TRADING TIP

Buy the rumour, SELL the fact

The equity markets rallied since Friday on rumours that the G7 governments and central banks are ready to implement measures to support the economy and asset markets. The G7 had the teleconference and did nothing more than issuing a statement saying what we already know – that they’re ready to do something. 

The Fed then cut 50bp in an emergency meeting, the first intermeeting cut since 2008 GFC, and the market rallied briefly before waking up to the fact that that’s what’s been promised, but where do we go from here? Markets is never just about what is, but also about what’s ahead.

Fed cuts, no matter how aggressive, is not going to change the fact that the virus will continue to spread, and the economic impact will be significant. What else is there to do but get out while you can?

With no more positive news on the horizon and every piece of positive news baked into the price, no one wants to be the last one left standing when the music stops. The governments and central banks of the world may try to stop it, but this song of growth and boom has been playing a long time. 

Do you party on a little more or is it time to leave while the music is fading?

WHAT HAPPENED YESTERDAY

As of 3 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.63%, 97.51
USDJPY, +0.42%, $108.53
EURUSD, +1.07%, $1.1144
GBPUSD, -0.42%, $1.2767
USDCAD, -0.54%, $1.3325
AUDUSD, +0.60%, $0.6549
NZDUSD, +0.21%, $0.6266

STOCK INDICES

S&P500, +4.60%, 3,090.23
Dow Jones, +5.10%, 26,706.17
Nasdaq, +4.49%, 8,952.17
Nikkei Futures, +2.83%, 21,677.5

COMMODITIES

Gold Futures, +1.65%, 1,592.60
Brent Oil Futures, +5.09%, 53.09

SUMMARY:

FX markets started off risk-averse with a gap lower in AUD and USDJPY (about 0.5% lower than previous close at 0.6466 and 107.46 respectively) and steadily climbed higher throughout the day as rumours that coordinated action from the major central banks will be forthcoming. As the day progressed, risk-seeking sentiment started to dominate with FX recovering the opening losses and AUD testing above 0.6560s, more than 1.5% above the day’s low.

EUR stole the show as it relentlessly marched higher again. Stocks selling off? Oh, risk aversion, buy some EUR! Stocks rising fast? Oh, rate cuts from the Fed, buy some EUR! For now, this seems to be dynamic. How long can this last? Till all the shorts capitulate and everyone you know is long, and there’s no one left to buy the next EUR!

At the end of the Tokyo session, the BOJ announced that they bought a record total of 101 bn JPY worth of ETFs to support the stock market. Confirmations of a teleconference between G7 officials, including central bankers, on Tue, cheered the battered bulls and we were off to the races.

The major stock indices surged with the S&P 500 (+4.6%) recording its first gain since February 19, Nasdaq (+4.49%), while the Dow Jones Industrial Average (+5.1%) outperformed.

Equities started the new week on a firmly higher note even though the number of new Covid-19 cases in the United States continued increasing while China reported its worst Manufacturing (35.7) and Non-Manufacturing PMI (29.6) readings in history.

China’s PMI readings were much weaker than what was reported at the depth of the financial crisis, which promptly led to more calls for stimulus from the People’s Bank of China. The Bank of Japan, meanwhile, offered to purchase JPY500 bln worth of JGBs. The fed funds futures market continued pointing to expectations for a 50-basis point cut at the March 18 meeting or before.

Growing stimulus hopes contributed to another day of gains in the Treasury Yield market, pressuring the 10-yr yield to a record low of 1.043%, and 2-yr yield to a record low of 0.713% in early U.S. trading. However, as the stock markets stabilised and climbed higher, yields recovered and closed the day relatively unchanged with the 10y at 1.163% and 2-yr at 0.909%.

Small, medium and long term investors are all long US Treasuries. If things start to calm down, there could be a washout if aggressive Fed action is not forthcoming. If the Fed is aggressive in cutting, the curve could steepen with the 10year sector underperforming. A positioning washout much like what we saw in Gold previously could be on the cards if stocks rally further.

US MANUFACTURING

The ISM Manufacturing Index for February managed to eke out an expansion reading at 50.1 (consensus 50.5), but that was weaker than expected and down from 50.9 in January. The dividing line between growth and contraction is 50.0.

IMPACT: The key takeaway from the report is that there were noted concerns in respondents’ commentary about the negative impact of Covid-19, which is telling, because the virus has continued to spread globally since the report was compiled, implying there is an increased risk of the index falling below 50.0 in March. Reports from around the world on Monday also showed factories taking a beating from the Covid-19 outbreak, with activity in China shrinking at a record pace. Japan’s PMI showed its factory activity was hit by the sharpest contraction in nearly four years in February. In South Korea, factory activity also shrank faster in February.

A sharp contraction in manufacturing has raised calls for stimulus from central banks, this was one of the primary reasons for the risk rally yesterday. If central banks do not provide the stimulus the market calls for or provide adequate jawboning and manufacturing continues to contract, risk assets will be re-priced much lower.

CHILD DROWNS AT SEA OFF GREECE IN THE FIRST FATALITY AFTER TURKEY OPENS BORDER

A young Syrian boy died on Monday after being pulled from the sea when a boat capsized off the Greek island of Lesbos, Greek officials said, the first reported fatality since Turkey opened its border last week to let migrants reach Europe. The surge, which has led to Greek and Turkish police firing tear gas into crowds caught in the no-man’s land between the two borders, has revived memories of the 2015-16 refugee crisis when more than a million people arrived in Europe from Turkey.

IMPACT: The latest migrant surge follows Turkey’s decision to stop enforcing a 2016 accord with the European Union whereby it stopped migrants entering the bloc in return for cash. Turkey, already home to 3.7 million Syrian refugees, has another million arriving on its doorstep from a new surge of fighting in northern Syria and says it cannot handle anymore.

The migrant crisis coupled with Covid-19 may just be the straw that breaks the camel’s back in the EU, tipping them over to embrace a fiscal package to stimulate the economy. Migrants in Turkey are already putting a lot of stress on the Turkish economy and as the war in Idlib rages on, more waves of migrants will arrive on Turkish and Greek shores (turkey will probably open the borders for them to pass through to Europe) and this will create more political turmoil in the EU.

COVID-19 DEATHS RISE TO SIX IN SEATTLE AREA AS U.S. PUSHES FOR MORE TESTING

Six people in the Seattle area have died of the illness caused by the new Covid-19, health officials said on Monday, as authorities across the United States scrambled to prepare for more infections with the emphasis on increasing testing capacity.

The total number of cases detected by the public health system in Washington state now stands at 18, the most of any state. In addition to the 14 King County cases, four residents of nearby Snohomish County have tested positive for the virus, officials said. In addition to confirmed cases, King County has about 29 potential cases awaiting test results, so the number there could soon rise, officials said. Tests were being conducted on about 200 samples per day, and health officials said they expect to boost the number of tests to at least 1,000 a day in the near future.

IMPACT: Federal health officials have said the number of test kits for coronavirus would be radically expanded in the coming weeks. The United States appeared poised for a spike in cases, partly because there would be more testing to confirm infections. Trump said his administration has asked pharmaceutical companies to accelerate work on the development of a coronavirus vaccine, but provided no details. Top U.S. health officials have said any vaccine is up to 18 months away and there is no treatment for the respiratory disease, although patients can receive supportive care.

A spike higher in U.S. Covid-19 cases may cause a knee-jerk selloff in risk assets, but the extent of the spike will play a role in how the Covid-19 narrative in the western hemisphere will develop. (will it be mania or confidence that it might be under control?)

DAY AHEAD

‘Hard Brexit’ fears have unnerved investors after both the UK and the EU set out tough negotiating positions for future trade talks. UK PM Boris Johnson went a step further and warned he could walk away from the talks in June if by then the broad outline of a deal does not conform to that of a Canada-style agreement.

With negotiations due to formally start later today, Brexit headlines are likely to be the main driver for Sterling over the coming days as it will be extremely quiet on the data front apart from the final UK PMI readings.

SENTIMENT

OVERALL SENTIMENT: 

The news of the G7 teleconference reassured investors that help from the governments will be forthcoming. Fear ebbed and battered bulls are vindicated for holding on for now. Sentiment remains fragile and volatility will remain elevated.

FX

MARKETS

TRADING TIP

It doesn’t really fall like a rock… 

With governments showing again their propensity in implementing policies to support asset prices, the battered bulls are now heaving a sigh of relief and high-fiving themselves for not giving up. In a market conditioned to years of buying the dip, many would-be kicking themselves at this moment on why they lost their nerves and didn’t just close their eyes and stick a bid into the falling stock market.

It remains to be seen if this is the start of a bear market or just another retracement in a long multi-year bull market where it has always paid off to buy any dips that occur.

What is different this time though is that the Covid-19 crisis is causing not just a shock to confidence and demand, but also to supply. The question you have to ask yourself is, “Will more easy money from central banks and tax cuts from governments solve all that?”

If this is a bear market, it will be filled with relief rallies much like what we saw yesterday. Bear markets don’t just fall like a rock in a straight line. Be wary, and tread carefully. The key is to survive till the clear good risk vs reward trades appear. There is no rush to get into marginal positions. Do not give in to FOMO and find yourself out of the game.

Be sure to stick around. The markets are just beginning to get interesting!

WHAT HAPPENED YESTERDAY

As of 2 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.39%, 98.13
USDJPY, -1.38%, $108.08
EURUSD, +0.24%, $1.1026
GBPUSD, -0.50%, $1.2821
USDCAD, +0.05%, $1.3398
AUDUSD, -0.90%, $0.6510
NZDUSD, -0.87%, $0.6253

STOCK INDICES

S&P500, -0.82%, 2,954.22
Dow Jones, -1.39%, 25,409.36
Nasdaq, +0.01%, 8,567.37
Nikkei Futures, -3.52%, 21,080.0

COMMODITIES

Gold Futures, -4.61%, 1,566.70
Brent Oil Futures, -3.18%, 50.51

SUMMARY:

FX started to break out of range with AUD and NZD testing new lows. USD/JPY fell as JPY reiterated its status as the safe-haven currency. Powell comments (elaborated on below) led to a retracement in the risk aversion move. Gold fell out of bed despite the negative risk sentiment as it has been trading week for the past few sessions despite the continuous selling in equity indices. Speculators who were long Gold to hedge their underwater risk assets and leveraged longs finally had to capitulate as margin calls need to be answered. Traditional correlations (gold tends to go up when equities are down and yields are lower) break down when your broker calls up for cash. 

The stock market put up a bit of a fight on Friday, but when the dust settled, it was still the worst week for equities since late 2008, as the S&P 500 fell -0.82% on the day for a total loss of -11.5% since last Friday.

The benchmark index recorded its seventh consecutive day of losses, falling to its lowest level since early October as Covid-19-related fears kept participants on edge. Today’s action saw a sharply lower start, followed by an intraday churn as the market attempted a rebound after more than a week of losses.

Various U.S. officials offered reassurances throughout the day, but their comments did little to dispel the uncertainty associated with a disease that has a long incubation period and a seemingly high propensity to spread. The World Health Organization, for its part, raised its risk assessment of Covid-19 to “very high.”

Afternoon action saw the release of the following statement from Fed Chairman Jay Powell: “The fundamentals of the U.S. economy remain strong. However, the Covid-19 poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

Besides the mention of the Covid-19, the statement was essentially a carbon copy of comments that Fed Chairman Jay Powell has been making throughout his tenure. The softly worded statement was particularly underwhelming because it was drowned out by a screaming bond market. The 10-yr yield fell another 17 basis points to a fresh record low of 1.13% while the 30-yr yield slid 11 basis points to 1.67%. Upfront, the 2-yr yield fell 22 basis points to 0.88%. Thanks to these moves, the day ended with the fed funds futures market pointing to a 96.0% implied likelihood of a 50-basis point rate cut in March, followed by a 74.0% implied probability of another 25-basis point rate cut in April.

COVID-19 CASES IN GERMANY JUMP TO 117

The number of confirmed Covid-19 cases in Germany has jumped to 117 from 66, the Robert Koch Institute for disease control said on Sunday. A German government crisis committee has widened cross-border travel guidelines and cancelled major international events, and the health minister has advised people with cold symptoms to stay away from mass events.

More than half of the cases are in North Rhine-Westphalia, Germany’s most populous state where several schools and daycare centers will be closed on Monday to try to prevent the spread of the virus after staff members tested positive.

IMPACT: Finance Minister Olaf Scholz said in remarks published on Sunday that Germany would be in a position to introduce fiscal stimulus measures should the Covid-19 spark a global economic crisis. Fiscal Measures benefit main street in a more direct fashion because governments will be spending directly into the economy, rather than through capital market mechanisms. This, in turn, will make the private sector more affluent over time and potentially impact wages positively. This should generally be good for risk assets and the Euro. 

ERDOGAN ASKS PUTIN TO STEP ASIDE IN SYRIA

Turkish President Tayyip Erdogan said on Saturday that he had asked President Vladimir Putin for Russia to step aside in Syria and leave Turkey to deal with Syrian government forces alone after 34 Turkish soldiers were killed this week. Government forces, backed by Russian airpower, have waged a major assault to capture the northwest province of Idlib, the last remaining territory held by rebels backed by Turkey.

With diplomacy sponsored by Ankara and Moscow to ease tensions in tatters, Turkey has come closer than ever to a confrontation with Russia on the battlefield.

IMPACT: Russia’s Foreign Ministry said on Saturday that the two sides agreed in this week’s talks to reduce tensions on the ground in Idlib while continuing military action there. After the death of its soldiers in a Syrian government airstrike on Thursday, Turkey said it would allow migrants it hosts to freely pass to Europe.

Erdogan said in Istanbul on Saturday that 18,000 migrants have crossed the border, without providing evidence, adding that the number could rise to 25,000-30,000 on Saturday. Greek police fired teargas toward migrants who were gathered on its border with Turkey and demanding entry on Saturday. Turkey’s borders to Europe were closed to migrants under an accord between Turkey and the European Union that halted the 2015-16 migration crisis when more than a million people crossed into Europe on foot. Any escalation of the migrant crisis into Turkey will put downward pressure on the Turkish Lira as the economy is not in the right shape to support the humanitarian crisis. 

CHINA FACTORY INDEX HITS RECORD LOW ON COVID-19

Manufacturing activity in China plunged in February to 35.7 (Consensus 45.1, Prev 50.0), according to one of the first official economic indicators published since the Covid-19 outbreak, while the US Federal Reserve signalled that the central bank was considering cutting interest rates in response to “evolving risks” to the US economy. The collapse in China’s manufacturing activity, which exceeded its collapse during the global financial crisis of 2008, shows the severity of the problem faced by President Xi Jinping in restarting the world’s second-largest economy. Last weekend, Xi told local officials that low-risk areas should “resume full production and normal life”.

IMPACT: Local officials face two conflicting objectives. They must control the outbreak, which has killed 2,835 people in China and also get the country back to work after the extended lunar new year holidays when most of the migrant workers upon whom China’s factories depend return to their rural homes. Based on migration data, ANZ said the Chinese economy was operating at 20 percent capacity, with about 50 percent of workers back at their posts as of this weekend. As China continues to remain shut, companies that rely on supply chains continue to accrue the impact, the potential trifecta of China, South Korea and Japan going into shutdown concurrently is a looming risk for markets and the effect may cause risk appetite to be repriced much lower. 

DAY AHEAD

Central banks in Australia and Canada will hold policy meetings this week – the first since the outbreak of the Covid-19 escalated into a global crisis. But with policymakers having limited firepower, they will probably maintain a wait-and-see approach until a clearer picture starts emerging about the impact of the virus, whose spread has multiplied several-fold in the past week. Investors will also be waiting anxiously for the latest Non-Farm Payrolls report out of the United States as they push up their bets that the Federal Reserve will be compelled to slash interest rates soon. OPEC will come under the spotlight too as it meets to decide if there is a need for additional output cuts.

SENTIMENT

OVERALL SENTIMENT: 

Sentiment turned extremely weak and every trade is now watching Covid-19 updates with fear. Hopes of Fed rate cuts and possible coordinated easing by global central banks are what the markets are banking on to keep asset prices afloat. The virus is relentless, the spread is inevitable. US Presidential primaries to select the Democratic candidate are getting voters out and increasing the risk of exposure. That is not good. 

FX

MARKETS

TRADING TIP

What has always been, will not always be

That’s what gold traders rudely found out on Friday when Gold collapsed more than 4% in spite of the weakness in equities. The relationship has always been that when equities are extremely weak, the fear among investors is high, and hence Gold as a safe haven asset should be doing well as investors seek refuge.

However, what matters as well is market positioning. Gold has been going up, and speculators are leveraged long, and investors with equity positions that are losing money have been hedging their risk with purchases of Gold (hoping that profits from Gold will make up for the losses in the equity sell-off). That works till it doesn’t. 

When the rise in Gold started to stall as equities continued to sell off, everyone that was long Gold started to worry. As price action weakened, nervous longs started to sell. As Gold prices started to fall even as equities continued to fall, everyone started to unload their positions and the frenzy intensifies!

 Correlations are relationships that hold over the long run, but in the short run, anything can happen especially in an environment of high volatility and fear.

WHAT HAPPENED YESTERDAY

As of Fri 28 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.62%, 98.39
USDJPY, -0.72%, $109.63
EURUSD, +1.06%, $1.0997
GBPUSD, -0.14%, $1.2888
USDCAD, +0.43%, $1.3389
AUDUSD, +0.57%, $0.6581
NZDUSD, +0.25%, $0.6310

STOCK INDICES

S&P500, -4.42%, 2,978.76
Dow Jones, -4.42%, 25,766.64
Nasdaq, -4.61%, 8,566.48
Nikkei Futures, -4.21%, 21,390.0

COMMODITIES

Gold Futures, +0.45%, 1,647.30
Brent Oil Futures, -4.51%, 51.02

SUMMARY:

It seems like Groundhog Day all over with the equity markets gyrating wildly and the currency markets remaining range-bound. The only thing of note was the EUR continuing its march higher to test above 1.10s as being one of the major currencies with the lowest interest rates, it has taken the place of JPY as the safe-haven currency. However, Eurozone will bear the brunt of the global recession that is to come, and in such a scenario in the longer term, fears of member countries wanting to pull out of the union will rise. For the shorter term, logic is on hold as the market remains in the grips of fear. 

The stock market extended its recent sell-off by more than 4% on Thursday in a volatile session, as the widening spread of the Covid-19 heightened pessimism among investors. The day was filled with numerous relief rallies but each and everyone fizzled out quickly. The S&P 500 closed at session lows with a 4.42% decline. The Dow Jones Industrial Average (-4.42%), Nasdaq Composite (-4.61%), and Russell 2000 (-3.5%) experienced similar price action.

Regarding Covid-19, the U.S. Centers for Disease Control and Prevention (CDC) acknowledged the first Covid-19 case of “unknown origin” in the U.S., which raised concerns about a community spread of the virus. California’s governor fueled concerns by saying 28 people have tested positive and another 8,400 people are being monitored because of their travel.

The impact on global supply chains or consumer spending remains uncertain, but Goldman Sachs warned there could be no U.S. earnings growth in 2020 if the virus becomes widespread. Microsoft (MSFT 158.18, -11.99, -7.1%), meanwhile, was the latest high-profile company to issue a quarterly revenue warning, specifically for its More Personal Computing segment.

Current and past Fed officials offered their views on the matter. In an opinion piece for The Wall Street Journal, former Fed Governor Kevin Warsh argued that the Fed and other central banks should cut rates due to the Covid-19, while Chicago Fed President Evans reiterated the Fed’s stance that it is still premature to provide guidance without more data.

MIXED MESSAGES, TEST DELAYS HAMPER U.S. COVID-19 RESPONSE

Trump on Wednesday assured Americans that the risk of Covid-19 transmission in the United States was “very low.” Despite an explosion of cases in China over the past two months, it was only this week that the Trump administration put in a request for $2.5 billion to aid in the response, an amount both Republicans and Democrats have said is too small. The CDC this week for the first time advised American businesses, schools, hospitals, and families to prepare for a domestic acceleration of the virus, which has infected more than 80,000 people worldwide and killed nearly 3,000.

IMPACT: Trump’s administration is considering invoking special powers through a law called the Defense Production Act to quickly expand the domestic manufacturing of protective masks and clothing to combat the Covid-19 in the United States. With no Covid-19 vaccine or proven anti-viral medicine available, states are planning to isolate sick people in their homes, both to slow community spread and reduce pressure on hospitals, according to the CDC. The law grants the president the power to expand industrial production of key materials or products for national security and other reasons. The biggest producers of face masks in the United States include 3M Corp and Honeywell International Inc.

TURKEY, WITH MORE DEAD TROOPS, SAYS IT WON’T STOP SYRIAN REFUGEES REACHING EUROPE

Turkey, faced with a possible new wave of Syrian migrants and dozens of more dead Turkish soldiers in Idlib, will no longer stop Syrian refugees from reaching Europe, a senior Turkish official said as President Tayyip Erdogan chaired an emergency meeting. Nearly a million civilians have been displaced in Idlib near the Turkish border since December as Russia-backed Syrian government forces seized territory from Turkey-backed Syrian rebels, marking the worst humanitarian crisis of the country’s nine-year war. “We have decided, effectively immediately, not to stop Syrian refugees from reaching Europe by land or sea,” said the official, who requested anonymity. “All refugees, including Syrians, are now welcome to cross into the European Union.” The burden of hosting refugees “is too heavy for any single country to carry,” the official said.

IMPACT: The threat to open the way for refugees to Europe would, if executed, reverse a pledge Turkey made to the European Union in 2016 and could quickly draw Western powers into the standoff over Idlib and stalled negotiations between Ankara and Moscow. Turkey hosts some 3.7 million Syrian refugees and has repeated it cannot handle more. Under a deal agreed in 2016, the European Union has provided billions of euros in aid in return for Ankara agreeing to stem the influx of migrants into Europe.

DEVELOPER CONFERENCES CANCELLED AS TECH COMPANIES RESPOND TO THE VIRUS

The U.S. Centers for Disease Control and Prevention on Wednesday reported a Covid-19 case of unknown origin in northern California, where some of the world’s biggest tech companies are based. It is potentially the first incident of the virus spreading within U.S. communities. California Governor Gavin Newsom said on Thursday that the state is monitoring more than 8,400 people for Covid-19 symptoms after arrival on commercial flights, but California lacks test kits and is being held back by federal testing rules.

IMPACT: Facebook Inc said on Thursday it would cancel its annual developer conference due to fears over the Covid-19, as growing concerns about the economic impact of the global outbreak drove Wall Street to tumble for a sixth straight day. Earlier this month, The Mobile World Congress (MWC), the annual telecoms industry gathering in Barcelona, was called off after a mass exodus by exhibitors due to fears over the Covid-19. AT&T Inc, Verizon Communications Inc and IBM earlier withdrew from the RSA cybersecurity conference, taking place this week in San Francisco, citing Covid-19 concerns.

DAY AHEAD

New Zealand said today that it would release provisional data on its trade with China in the four weeks to Feb. 23, in a special release prompted by heightened interest in the impact on businesses from the Covid-19 epidemic. Statistics New Zealand will release the data which will provide an initial snapshot of trade with China in those weeks compared with the same period last year. This data will include total trade value with China as well as key exports of meat, fish, dairy and forestry products.

As we’ve said before, good data representing pre-Covid-19 information will largely be ignored. However, negative news will increase fear. 

SENTIMENT

OVERALL SENTIMENT: Fear reigns as market participants seem to have a SELL button that is substantially larger than the Buy button. With only good news on the virus situation likely to calm the markets as leverage continues to be unwound, expect sentiment to remain fragile.

FX

MARKETS

TRADING TIP

Don’t stand in front of a rampaging mob

The temptation to go against a move that you don’t understand is high. In a big sell-off, the retracements will be quick and sudden. Every time that it bounces fiercely, you will tell yourself, “Ah, I knew it! I should have bought the dip!”

All the other times that it continues to free-fall, you might breathe a sigh of relief that you didn’t give in to the temptation, but that relief will be fleeting and soon forgotten in the midst of the wild gyrations. 

As such, every dip is an “I told you so!” moment when it proves to be a temporary dip. You will say, “Ah, if I bought it, I could have sold it here now!” Be honest with yourself. The likelihood of you buying every dip and rally is very low. 

Choose the weaker side and trade against that. If you have no clue which is the weaker side, the place to be is on the side-lines!

WHAT HAPPENED YESTERDAY

As of Thu 27 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, +0.18%, 99.14
USDJPY, +0.16%, $110.38
EURUSD, +0.05%, $1.0886
GBPUSD, -0.77%, $1.2906
USDCAD, +0.49%, $1.3345
AUDUSD, -0.85%, $0.6547
NZDUSD, -0.51%, $0.6288

STOCK INDICES

S&P500, -0.38%, 3,116.39
Dow Jones, -0.46%, 26,957.59
Nasdaq, +0.17%, 8,980.77
Nikkei Futures, -0.74%, 22,090.00

COMMODITIES

Gold Futures, -0.12%, 1,645.00
Brent Oil Futures, -3.86%, 52.83

SUMMARY:

The wild swings in the equity markets did not really spill over to the FX markets. Most currencies remained within recent ranges. EUR crept higher throughout the day and triggered stops to reach a high of 1.0908 before quickly pulling back to 1.0850s. It has since regained the bid tone and is starting the Asian session at the highs. AUD, however, traded heavy all day despite the strength of EUR, broke to new lows since 2009 and lingers at the lows still. The heaviness of AUD is likely to continue given the market is waking up to the fact that the economic consequences of Covid-19 will be significant. 

S&P 500 advanced as much as 1.7% on Wednesday, as investors tried to buy an oversold market, but pestering worries about the coronavirus left the benchmark index down 0.38% for the session. The Nasdaq Composite (+0.17%) eked out a slim gain, while the Dow Jones Industrial Average (-0.46%) and Russell 2000 (-1.2%) joined the S&P 500 in negative territory.

Early on, it looked like sellers were taking an off-day after the S&P 500 dropped 7.6% over the prior four sessions, but the market continued to be inundated with negative updates on the Covid-19. For instance, Germany’s health minister said Germany is at the beginning of an epidemic, and it was reported that 83 people in New York were being monitored for exposure to the virus.

U.S. Treasuries were less in focus today, but the continued gains in the bond market weren’t conducive for risk sentiment. The 2-yr yield declined five basis points to 1.15%, and the 10-yr yield declined two basis points to 1.31%. The U.S. Dollar Index increased 0.18% to 99.14.

COVID-19 SPREADS FASTER OUTSIDE CHINA

The number of new Covid-19 infections inside China – the source of the outbreak – was for the first time overtaken by fresh cases elsewhere on Wednesday, with Italy and Iran emerging as epicenters of the rapidly spreading illness. Asia reported hundreds of new cases, Brazil confirmed Latin America’s first infection and the new infections were also detected for the first time in Pakistan, Sweden, Norway, Greece, Romania, and Algeria.

Trump, seeking to calm markets and an increasingly worried public said in a live broadcast that the United States was “very, very ready” to face the virus threat and that Vice President Mike Pence would be in charge of the national response. It was one of just a handful of times that the president has appeared in the White House briefing room.

IMPACT: Wall Street reversed earlier gains on Wednesday and oil prices dropped to their lowest level in over a year, spooked in part by health officials saying dozens of people who had been in China were being monitored in suburbs of populous New York city – although no confirmed cases have been found. Risk assets are sensitive to the velocity of the spread outside of China, and will be driven by the narrative as such. Trump’s presser did not ease market fears as stock indices continue to drift lower in Asian hours.

IMF, WORLD BANK CONSIDER ‘VIRTUAL’’ SPRING MEETINGS AS VIRUS SPREADS

The institutions’ April 17-19 Spring Meetings are scheduled to bring some 10,000 government officials, journalists, business people and civil society representatives from across the globe to a tightly packed, two-block area of downtown Washington, DC, that houses their headquarters.

Options include scaling back the number of meetings, canceling external events and limiting the size of the country delegations that would travel to Washington. Another alternative is to hold “virtual” meetings by teleconference, and the institutions could still proceed with full-fledged meetings. One person familiar with the IMF’s planning discussions said: “Plenty of people here see wider merit in testing whether holding key meetings virtually could be made to work.”

IMPACT: The virus will ultimately speed up adoption of technology such as web conferencing, and drive organizations to have off-site work contingency plans in the future as part of their SOP. Companies like Zoom Video Communications (ZM) will benefit as they are purely a tech company with almost no supply chain drag, it is interesting to note that Zoom prices have remained bid in the face of the market selloff. 

SOUTH KOREA HOLDS INTEREST RATE DESPITE VIRUS FEARS

South Korea’s central bank kept its key interest rate unchanged (1.25%) on Thursday, defying expectations for a cut amid growing pressure to ease policy as the Covid-19 hits demand in the export-reliant economy. 

IMPACT: South Korean Won strengthened on the back of surprise no policy move, but gave it all back on bad news of the virus. (1. The US urges reconsidering travel to South Korea 2. South Korea confirms 334 more Covid-19 cases, a total of 1595 cases 3. The U.S. decided to indefinitely postpone upcoming combined military exercises over Covid-19 concerns) 

DAY AHEAD

Canada will report GDP numbers for the fourth quarter on Friday when trade tensions and industrial strikes are expected to have ground growth to a near halt. With economic conditions not likely to have improved in the first quarter, the data will be watched carefully by policymakers at the Bank of Canada, who meet next week. In the meantime, the Canadian dollar has stumbled near 4-month lows versus its US counterpart, weighed by weaker oil prices.

SENTIMENT

OVERALL SENTIMENT: Sentiment was clearly still fragile when the rally of more than 2% off the lows in US equity indices lost steam as the day progressed. Trump’s press conference seems measured, advising caution and reiterating that the US is prepared for even the worst-case scenario while being nowhere close to sounding panicky and that should soothe the market a little. However, the central issue remains i.e. the spread of Covid-19 will continue.

FX

MARKETS

TRADING TIP

Bet on the horse you don’t believe in…

Imagine you’re at the horse-racing course, and a race is about to start.  Your friend who is an expert at punting on horses (if there is ever such a thing), tells you that the number 8 horse is the one least likely to win, is young and has never won a race before. Chances of it winning is maybe only once if it ran a hundred races. You look up at the board and you see the pay-out for it winning is 500 to 1. What would you do?

Seems like good odds? Much like the scenario above, there are instances when you should bet on low probability outcomes if the pay-out for such outcomes are skewed in your favour. Trading is not about buying the best stock in the market regardless of price. Price, how much higher it can go and how low it might go if you are wrong are key considerations. The reward is relative to the risk you are taking matters!

Sometimes, the best trades are betting on the favourites, but only if the pay-out makes sense. If you are risking too much just to make a little, no matter how certain you are of the outcome, it may not be worth making the bet. If that is the case, then it’s okay to just let it go. You don’t need to be trading all the time. Trade only when the price is right!

Sometimes, the best trades are on the outcomes that you think have very little chance of happening. Markets tend to underestimate the probability of such outcomes and as a result, the price of getting into such trades is typically low. 

Look out for trades like that as the key to being extremely profitable is having asymmetric reward vs risk profiles in your portfolio. When you lose, you suffer minimal losses, but when you win, you win big. Rinse and repeat!

WHAT HAPPENED YESTERDAY

As of Wed 26 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.37%, 99.00
USDJPY, -0.38%, $110.29
EURUSD, +0.23%, $1.0879
GBPUSD, +0.57%, $1.3003
USDCAD, -0.10%, $1.3281
AUDUSD, +0.01%, $0.6605
NZDUSD, -0.27%, $0.6322

STOCK INDICES

S&P500, -3.03%, 3,128.21
Dow Jones, -3.15%, 27,081.36
Nasdaq, -2.77%, 8,965.61
Nikkei Futures, -0.18%, 22,315.0

COMMODITIES

Gold Futures, -1.84%, 1,641.60
Brent Oil Futures, -3.55%, 54.30

SUMMARY:

FX market again became a side-show as global equity markets continued to slide. The breakdown in correlations is likely a sign of positions reducing and deleveraging by various market participants in the light of heightened uncertainty. Though equity indices sold off steadily throughout the day, Gold could not make any headway and in fact, was down almost 2% on the day. 

Stocks sold off again on Tuesday, as the global spread of Covid-19 continued to undermine growth expectations and exacerbate the flight for safety in Treasuries. The Nasdaq Composite (-2.77%) turned negative for the year while the S&P 500 (-3.03%), Dow Jones Industrial Average (-3.15%), and Russell 2000 (-3.5%) dropped at least 3.0%.

CDC officials warned that the spread of the COVID-19 in the U.S. appears inevitable, but the HHS said the immediate risk is low. NEC Director Kudlow tried to ease nerves by telling CNBC that the U.S. has contained the virus “pretty close to air-tight,” but the market didn’t care much for optimistic views.

Fed Vice Chair Clarida provided a pragmatic view, reiterating that it’s still too early to assess the growth impact from the COVID-19, or whether it will lead to a material change in its outlook, but the market didn’t care for pragmatism, either. Companies, after all, continued to provide warnings due to the virus, leading investors to believe the impact could be worse than expected.

Elsewhere, the rally in U.S. Treasuries persisted amid the underlying growth concerns. The 2-yr yield fell six basis points to 1.20%, and the 10-yr yield fell five basis points 1.33% after setting a record low at 1.31%. The U.S. Dollar Index fell 0.37% to 99.00. WTI crude fell back below $50 per barrel, closing the session down 2.7%, or $1.36, at $49.89/bbl.

U.S. BRACES FOR COVID-19 SPREAD 

The United States told Americans on Tuesday to begin preparing for COVID-19 to spread within the country as outbreaks in Iran, South Korea, and Italy escalated and fears that the epidemic would hurt global growth rattled markets. U.S. Health and Human Services Secretary Alex Azar on Tuesday asked a Senate sub-committee to approve $2.5 billion in funding to expand surveillance systems for the virus, help the development of vaccines and boost stockpiles of protective equipment.

IMPACT: While saying the immediate risk from COVID-19 in the United States remained low, a top CDC official, Dr. Anne Schuchat, said it was no longer a question of if the virus would become a global pandemic. “It’s a question of when and how many people will be infected.” The Dow and S&P 500 tumbled 3% on Tuesday in their fourth straight day of losses as investors struggled to gauge the virus’ economic impact. If cases in North America rise, we should see a deeper correction in risk assets. 

EU FORESEES HARD TALKS WITH UK ON FUTURE TIES

The European Union said on Tuesday talks on post-Brexit ties with Britain would kick off next Monday, but warned that the process would be “very hard” and could fail if London fails to secure the Irish border as previously agreed. With both sides talking tough ahead of the negotiations, Ireland warned that even a basic trade deal would be impossible by the end of this year if London does not honor border obligations under its exit deal.

IMPACT: British exports to the European Union could fall by as much as 14% if the two sides are unable to strike a free trade deal and could be 9% lower even if an agreement is reached, a United Nations study found. The imposition of tariffs under a no-deal scenario would crimp trade, with the effect amplified by so-called non-tariff measures (NTMs) such as quotas, licensing and regulatory measures protecting health, safety and the environment. Sterling volatility will remain elevated throughout this period and there is little edge in trying to speculate the eventual outcome.

U.S. AIRLINES, HOTELS EXTEND REBOOKING OPTIONS AS COVID-19 SPREADS

Delta Air Lines Inc said that reservations through March 2 on flights to Bologna, Milan, and Venice in northern Italy, where cases have climbed, are eligible for rescheduling. Air Canada has also added parts of Italy to its list of places eligible for rebookings. Hyatt Hotels said it would allow travellers from South Korea, Japan, and Italy to cancel or change their hotel bookings for free, updating a policy it has already rolled out for guests from mainland China, Hong Kong, Macau, and Taiwan.

Major airlines have also issued travel waivers, eliminating change fees, for flights to South Korea. So far U.S. airlines have only cancelled flights to China, a move that followed the U.S. State Department’s decision to elevate a travel advisory to the country to the same level as Afghanistan and Iraq.

IMPACT: American Airlines shares dropped 9.3% to $23.12 on Tuesday, below their price after the company emerged from Chapter 11 bankruptcy in 2013. The broader Dow Jones U.S. airline index lost 7%. Transport, Supply Chain dependent companies, and Consumerism will continue to bear the brunt of the damage as COVID-19 case counts increase.

DAY AHEAD

Australia’s capital expenditure print due tomorrow should provide some indication as to what to expect from Q4 GDP numbers due next week. It’s likely capital spending will have risen for the first time in a year in the December quarter, but given the new headwinds – the COVID-19 outbreak and the bushfires – facing the Australian economy in 2020, the data may not matter much for investors as panic grips the markets.

Any negative surprises in the numbers would likely raise fresh doubts about the robustness of the Australian economy, which is struggling to regain momentum as growth in China – Australia’s biggest trading partner – goes into low gear. They would also push up market expectations of interest rate cuts by the RBA. Investors are currently not pricing a full 25-basis point rate reduction before August, but weak data might change that, bringing the timing forward and dragging the Aussie lower.

The primary driver of markets will again be statistics on the spread of COVID-19. Data points that are considered information about the economy before the start of the COVID-19 outbreak will largely be ignored especially if they are on the stronger side (unless they are extreme outliers) as the fundamental outlook has changed substantially. 

SENTIMENT

OVERALL SENTIMENT: 

Sentiment continues to sour. The COVID-19 will continue to spread. Though the market may get desensitized to an increasing number of cases in time, infections occurring in new countries weaken confidence further. The economic consequences are yet to be fully appreciated. 

FX

MARKETS

TRADING TIP

Keep it Simple!

It is a mantra that should be remembered if one is to not only survive but thrive in volatile markets. In times of extreme volatility and heightened uncertainty, risk positions should be kept simple. These are not times, to try to be cute and structure complicated trades that depend on many variables to perform. 

Keep doing what works, and get out of those which don’t, and avoid trades you don’t understand. There will be many opportunities, and now is not the time to try to be involved in everything. 

Keep to your core competencies (eg. keep your trades to the markets you are familiar with), and keep it simple!

WHAT HAPPENED YESTERDAY

As of Tue 25 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.13%, 99.29
USDJPY, -0.63%, $110.86
EURUSD, +0.09%, $1.0848
GBPUSD, -0.21%, $1.2924
USDCAD, +0.25%, $1.3288
AUDUSD, +0.09%, $0.6611
NZDUSD, +0.35%, $0.6343

STOCK INDICES

S&P500, -3.35%, 3,225.89
Dow Jones, -3.56%, 27,960.80
Nasdaq, -3.71%, 9,221.28
Nikkei Futures, -1.96%, 22,355.0

COMMODITIES

Gold Futures, +0.69%, 1,656.10
Brent Oil Futures, -1.29%, 55.66

SUMMARY:

FX was relatively calm given the fierce sell-off in equity markets. USD started off strong due to safe-haven bids with a gap when the market opened in Australia. Gold went on a rampage to reach a high of 1689.4 before easing off to 1656.1 as profit-taking sales came in. USD/JPY started the session at 11.20s and steadily climbed higher throughout Asian hours (up to 111.60s) before finally trading like the safe-haven currency that JPY used to be, and falling back during NY hours. The FX moves continue to baffle traders as correlations that used to hold seems to be changing from day to day (Example: when stocks fall by 3-4% in a day, AUD would have fallen much more than 0.3% in the past). 

The stock market sold off more than 3% on Monday following a surge in Covid-19 cases outside China, including South Korea, Italy, and Iran. The Dow Jones Industrial Average (-3.56%), S&P 500 (-3.35%), and Russell 2000 (-3.0%) each turned negative for the year, while the Nasdaq Composite (-3.71%) gave up most of its monthly gains. 

Governments took swift action to help contain the outbreak, such as closing public spaces, but weakness in foreign equity markets reflected concerns about the possibility of a global pandemic. South Korea’s Kospi fell 3.9%, and Italy’s MIB fell 5.4%. China’s Shanghai Composite declined just 0.3% amid reports that the rate of new Covid-19 cases may have peaked in the region.

The World Health Organization (WHO) said that the drop in infections in China is “real” due to Beijing’s aggressive approach. It remained unclear, however, if the virus would continue to worsen in a way that further impedes economic activity that consequently hurts earnings prospects.

Technology and travel stocks, such as Advanced Micro Devices (AMD 49.12, -4.16, -7.8%) and American Airlines (AAL 25.45, -2.37, -8.5%), sold off on concerns that their businesses would be hurt by the Covid-19 situation. Many healthcare names like United Health (UNH 277.79, -23.64, -7.8%) were additionally pressured by Senator Bernie Sanders (I-VT) decisively winning the Nevada caucuses.

BATTLE AGAINST CORONAVIRUS TURNS TO ITALY

While health experts have expected limited outbreaks beyond China, the rapid acceleration of cases in Italy going from 3 on Friday to 220 on Monday is concerning, the World Health Organization (WHO) said in a statement. Just as China put cities on lockdown, Italian authorities sealed off the worst-affected towns, closed schools and halted the carnival in Venice, where there were two cases. Shops are shut, bars are closed and people speak to each other from a safe distance in Northern Italy. Italian health authorities were struggling to find out how the virus started. “If we cannot find ‘patient zero’ then it means the virus is even more ubiquitous than we thought,” said Luca Zaia, the regional governor of the wealthy Veneto region.

IMPACT: The surge of cases outside mainland China triggered sharp falls in global markets as investors fled to safe havens. European equities markets suffered their biggest slump since mid-2016, gold soared to a seven-year high and oil tumbled 4%.

GERMAN BUSINESS MORALE RISES, UNFAZED BY CORONAVIRUS FOR NOW

German business morale rose unexpectedly in February, a survey showed on Monday, easing recession fears in Europe’s largest economy and reflecting a slight improvement in its manufacturing sector, which has been struggling with falling exports. The Ifo institute said its business climate index rose to 96.1 from an upwardly revised 96.0 in January. The February reading was compared with a consensus forecast for a fall to 95.3. Ifo warned however that the survey did not fully reflect the possible economic fallout from the Covid-19, which could hurt growth if it becomes a pandemic. 

IMPACT: The full economic impact of the virus is not being accurately priced, especially for economies in the western hemisphere as the complacency is higher due to distance from the epicenter. However, this bubble is gradually being deflated with Italy taking center stage for a sudden surge in Covid-19 cases, given the extreme contagion effect of the virus, it should not be long before entire Europe will be battling this and business morale will have to be revised much lower. The knock-on effects from a freeze in global supply chains and transportation do not warrant business optimism in trade-sensitive Europe unless it’s based on blind optimism. 

COVID-19 UPDATE: HUBEI SEES RISE IN NEW COVID-19 CASES AS INFECTIONS SLOW IN OTHER PROVINCES

China reported a rise in new Covid-19 cases in Hubei province, the epicentre of the outbreak, on Tuesday while the rest of the country saw a fourth straight day of declines.

Hubei had 499 new confirmed cases on Feb. 24, the National Health Commission said, up from 398 a day earlier and driven mainly by new infections in the provincial capital of Wuhan. Mainland China in total had 508 new confirmed cases, up from 409 on Feb. 23, bringing the total number of confirmed cases in mainland China so far to 77,658.

Excluding the latest cases in Hubei, the rest of China had just nine new infections on Feb. 24, the lowest number of cases since Jan. 20 when the national health authority began publishing nationwide data on the Covid-19 infections.

IMPACT: More positive developments out of China will encourage other nations that the virus can be contained and boost morale, eventually affecting risk appetite. 

DAY AHEAD

The upcoming economic prints are unlikely to change this Dollar-friendly narrative. The last few weeks have seen market expectations for Fed rate cuts grow, with more than one and a half cuts now priced in by year-end, but the Dollar has only moved higher in the meantime. And the more concerns about the virus impact on foreign economies intensify, the more the Dollar is likely to shine since the US economy is better protected from a slowdown in China and US authorities have policy room to react to any shock, unlike Europe or Japan.

SENTIMENT

OVERALL SENTIMENT: Fear took hold of equity markets as the worsening of the Covid-19 situation in various countries over the weekend hit the newswires. Welcome to the new normal of trading Covid-19 headlines. Expect sentiment to remain fragile for some time. 

FX

MARKETS

TRADING TIP

Adapt or Die…

This is essentially what Charles Darwin was trying to say but with more words in his famous quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

For traders to succeed in the long-term, we must always be open to the possibility that what we used to know to be true may not be so anymore. Correlations between different asset classes are never constant and sometimes change when we least expect it. 

For example, if volatility increases dramatically, the sizes of trades will need to be reduced so that we can have wider stops to protect the trades from being taken out by random moves caused by unexpected headlines. 

Adapting to changes in market conditions is imperative if we want to survive and be around to take advantage of the opportunities that will inevitably appear once the dust settles. 

WHAT HAPPENED YESTERDAY

As of Fri 14 Feb, Singapore Time zone UTC+8

FX MOVES

U.S. Dollar Index, +0.05%, 99.10
USDJPY, -0.28%, $109.78
EURUSD, -0.29%, $1.0841
GBPUSD, +0.65%, $1.3046
USDCAD, +0.10%, $1.3263
AUDUSD, -0.27%, $0.6719
NZDUSD, -0.37%, $0.6441

MARKET MOVES

S&P500, -0.16%, 3,373.94
Dow Jones, -0.43%, 29,423.31
Nasdaq, -0.14%, 9,711.97
Nikkei Futures, -0.95%, 23,643.0

SUMMARY:

China reported a big jump in Coronavirus cases, the news was particularly disappointing because reports over the past few days had indicated that the rate of new cases was slowing down. The surge was due to a new diagnostic procedure, but White House officials reportedly remained skeptical of China’s information, thinking Beijing is still underreporting cases.

Risk currencies moved lower on the report, with Aussie and Kiwi weakening due to their close trading ties with China. The commodity currencies (AUD, NZD, CAD) will continue to be driven by the virus situation as any impact on global supply chains and trade will impact them the most. EUR continues to dribble lower as the break below 33-month low attracted more speculative sellers. GBP had a brief spate of volatility, jumping more than half a percent with the surprise announcement that the UK Chancellor, Savid Javid, will be replaced by Rishi Sunak. Sunak is seen as someone who will be more supportive of PM Johnson’s pro-business policies. 

The stock market slipped from record highs on Thursday following a spike in reported coronavirus cases in China, but it did close well off session lows. The S&P 500 lost 0.16% (down as much as -0.94%), the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 0.1%.

U.S. Treasuries finished mixed and little changed. The 2-yr yield increased one basis point to 1.45%, while the 10-yr yield declined one basis point to 1.62%. The U.S. Dollar Index increased 0.05% to 99.10. WTI crude rose 0.5%, or $0.23, to $51.40/bbl. 

In other news, the Federal Reserve Bank of New York will reduce the size of its overnight and term repurchase operations, according to Bloomberg. A judge reportedly placed a temporary block on Microsoft’s Pentagon cloud contract award following a lawsuit from Amazon.

US CONSUMER INFLATION

U.S. underlying consumer prices picked up in January, while the number of Americans filing claims for unemployment benefits rose slightly last week, suggesting the economy was stable enough for the Federal Reserve to keep interest rates on hold this year.

Consumer Price Index (CPI) increased just 0.1% m/m in January (consensus +0.2%) while core CPI, which excludes food and energy, increased 0.2%, as expected. The monthly increases left total CPI up 2.5% yr/yr, versus 2.3% in December. That is the largest yr/yr increase since October 2018. Core CPI was up 2.3% yr/yr for the fourth straight month. 

The key takeaway from this report is that it won’t spark any undue inflation/rate-hike concerns in the market given the stability of core CPI and the Fed’s seeming willingness to let inflation run a little hot to prevent inflation expectations from slipping too much.

IMPACT: Inflation prints coming largely within expectations will do little to aid a Dollar bid as the backdrop rhetoric from the Fed is that they are willing to allow inflation to run a little hot. By that measure, the impact of mildly rising inflation on the Dollar will not be received with much fanfare. 

FED TO WITHDRAW LIQUIDITY FROM REPO MARKET

The Federal Reserve is accelerating the pace of its withdrawal from short-term funding markets, even as investors’ demand for the central bank’s cash remains elevated. The new plan reduces the maximum amount the Fed will lend overnight each day from $120bn to $100bn — a change that will kick in on Friday. Moreover, the Fed will limit the amount it will lend in the form of two-week loans to $25bn as of Tuesday, from its current $30bn offering, and pare that amount even further in early March. At that point, the Fed will lend a maximum of $20bn on a two-week basis.

Analysts were primed for the shift, thanks to numerous reminders from chairman Jay Powell and other Fed officials in recent weeks that the central bank seeks to gradually transition away from active interventions in the repo market. The reductions were somewhat sharper than some had expected, however.

IMPACT: This is a key announcement and development to watch, as this is akin to the Fed gradually pulling the rug from under the markets. The melt-up in the market was largely due to the Fed’s response to the REPO crisis via a massive expansion of its balance sheet within a short period of time. With no signs of foreign buyers stepping back into the treasury market to buy up US Treasuries and finance US deficits, the withdrawal from the Fed may be followed by a sell-off in risk-assets.

LATEST VIRUS UPDATE: CHINA REPORTS BIG RISE IN CORONAVIRUS DEATHS

The big jump in China’s reported cases reflects a decision by authorities there to reclassify a backlog of suspected cases by using patients’ chest images, and is not necessarily the “tip of an iceberg” of a wider epidemic, a top World Health Organization official said on Thursday. Mike Ryan, head of WHO’s health emergencies program, said that more than 14,000 new cases reported in Hubei province overnight came after a change to include results from quicker computerized tomography (CT) scans that reveal lung infections, rather than relying just on laboratory tests to confirm cases.

IMPACT: The impact of the virus is still largely benign within the western hemisphere. Any significant revision in its impact and infected cases outside of China may cause a repricing of risk assets. 

DAY AHEAD

U.S. January retail sales figures will be announced later on today, these prints are seen as a reliable barometer of consumer spending. Retail sales are forecast to have increased by 0.3% month-on-month in January – the same pace as in the prior month. A miss in numbers will pose a downside risk for the Dollar given the recent strong gains as it would raise concerns about the health of the US consumer amid a weak global economic environment.

SENTIMENT

OVERALL SENTIMENT: Risk sentiment seems weaker than yesterday and we may see some reduction of risk positions ahead of the weekend. Volatility, especially in the currency markets, remains low for now but the dribble lower in EUR is attracting more sellers. Rallies in EUR/USD will likely be met by more selling if this continues.

i.e. CCY, Ticker (Short-Term: 1-3 MONTHS, Medium-Term: 3-6 MONTHS, Long-Term: 6-12 MONTHS)

FX

US DOLLAR, USD (-ve, Neutral, +ve)

JAPANESE YEN, JPY (+ve, +ve, neutral)

EURO, EUR (-ve, -ve, Neutral)

STERLING, GBP (Neutral, Neutral, Neutral)

CANADIAN DOLLAR, CAD (-ve, -ve, Neutral)

AUSTRALIAN DOLLAR, AUD (-ve, Neutral, Neutral)

NEW ZEALAND DOLLAR, NZD (-ve, Neutral, Neutral)

SWISS FRANC, CHF (+ve, +ve, neutral)

MARKETS

S&P 500, SPX (+ve, +ve, +ve)

NIKKEI 225, JP225 (Neutral, -ve, -ve)

SHANGHAI COMPOSITE, SSEC (-ve, -ve, Neutral)

TRADING TIP

The good old days are over…

This is a frequent lament of traders whenever they go through a period when markets are not going their way. There is only one constant in the markets, and that is that the market conditions will change. The ever-changing conditions are why there are opportunities for us to get into profitable trades. 

Though volatility in the currency markets is now very low by historical standards (the break of EUR/USD below the 33-month low this week is one of the lowest momentum breaks I can remember!), this does not mean this will always be the case. 

Even in low volatility environments, there will still be opportunities for trades with good risk vs reward characteristics to be put on. Don’t lose heart! If making money was easy, then everyone would be rich!

Are the good old days over? Far from it, the best days are yet to come. The first step to making it so is for you to believe it!

WHAT HAPPENED YESTERDAY

As of Thu 13 Feb, Singapore Time zone UTC+8

FX MOVES

U.S. Dollar Index, +0.30%, 99.01
USDJPY, +0.08%, $109.87
EURUSD, -0.37%, $1.0876
GBPUSD, +0.04%, $1.2958
USDCAD, -0.23%, $1.3257
AUDUSD, -0.01%, $0.6713
NZDUSD, +0.69%, $0.6447

MARKET MOVES

S&P500, +0.65%, 3,379.45
Dow Jones, +0.94%, 29,551.42
Nasdaq, +0.90%, 9,725.96
Nikkei Futures, +0.12%, 23,842.5

SUMMARY:

The snoozefest that is the FX markets is shown by the EUR/USD move yesterday. EUR broke below the 2018 low of 1.0879 but could only reach 1.0866. It’s been trading in a tight range of 1.0870-80 since and remains heavy. The only other move of note was the NZD strengthening on a statement that sounded more hawkish than the market expected.

The narratives driving stocks higher remained unchanged. Reports continued to indicate the slowing pace of the coronavirus, Fed Chair Powell’s congressional testimony assured investors that monetary policy will remain favourable, and the positive bias in stocks (including non-US markets) continued to fuel risk sentiment.

U.S. Treasuries remained out of favour amid the bullish bias in stocks. The 2-yr yield increased two basis points to 1.44%, and the 10-yr yield increased four basis points to 1.63%. The U.S. Dollar Index remained strong, closing 0.3% higher at 99.00.

NEW ZEALAND CENTRAL BANK HOLDS RATES, SURPRISES MARKETS WITH UPBEAT OUTLOOK

At its first meeting of the year, the Reserve Bank of New Zealand (RBNZ) flagged new risks to the economy from the coronavirus epidemic in China but expected any impact to be limited. While RBNZ held rates at 1% as expected, the statement omitted a line used in previous policy statements that it would add further monetary stimulus if needed. It also delivered noticeably more upbeat comments about employment and consumer prices. Orr said he expected the impact from the virus might only last about six weeks, based on guidance from other government departments, but that the RBNZ had room to adjust policy if the hit was greater. The central bank also raised the forecast path for rates this year to 1%, from 0.9% previously, removing the chance of a cut.

IMPACT: The New Zealand dollar rallied after the country’s central bank kept interest rates steady as expected but dropped a reference to the chance of further cuts, a hawkish move that suggested its easing cycle might be over. Markets quickly scaled back wagers on a further easing with a quarter-point move at the next meeting in March put at less than 10%. In this context of an increasingly hawkish central bank, any signs of economic green shoots emerging out of Australia or New Zealand will embolden the commonwealth currencies to gain ground against the Dollar.

FINAL DAY OF POWELL’S TESTIMONY

In testimony before the Senate Banking Committee, Powell said the Fed had two recession-fighting tools; buying government bonds, known as QE, and communicating clearly with markets about interest-rate policy, routinely considered as “forward guidance.”

“We will use those tools — I believe we will use them aggressively should the need arise to do so,” Powell said.

IMPACT: Powell assuring the Senate Banking Committee that the Fed stands ready to use accommodative monetary policy when the need arises was good news for risk assets, especially U.S equities which made all-time highs. It is key to note the nuances of his language, the fact that he used the term “aggressive” testifies to the Fed’s resolve to support risk assets, hence this makes shorting equities, in the long run, a futile and painful experience.

LATEST VIRUS UPDATE (AS OF 13TH FEB MORNING): CORONAVIRUS DEATH TOLL LEAPS IN HUBEI PROVINCE

Health officials in Hubei province said 242 people had died from the flu-like virus on Wednesday, the fastest rise in the daily count since the pathogen was identified in December, and bringing the total number of deaths in the province to 1,310. The previous record rise in the toll was 103 on Feb. 10.

The grim new tally came a day after China had reported its lowest number of new coronavirus cases in two weeks, bolstering a forecast by Beijing’s senior medical adviser for the outbreak there to end by April. But the 2,015 new confirmed cases reported in mainland China on Wednesday were dwarfed by the 14,840 new cases reported in Hubei alone on Thursday when provincial officials said they had adopted a new methodology for counting infections.

It was not immediately clear why the death toll rose so sharply, but the spike in newly infected was due to them reclassifying many of the “warded close contacts” of previously identified cases which dropped from 185K yesterday to 77K today.

IMPACT: Asian stock markets wobbled and the safe-havens of the Japanese yen, gold and bonds rose on Thursday morning as the number of new coronavirus cases at the outbreak’s epicenter jumped sharply. This drives home the point that the situation still remains volatile and the development of the viral outbreak will be the key driver of risk appetite, especially during the Asian session.

DAY AHEAD

U.S. will be reporting its inflation numbers later today. CPI inflation has been diverging from PCE inflation – the Fed’s preferred inflation metric – in recent months and the headline rate is forecast to have edged up further in January to 2.4% year-on-year. However, the core rate is expected to have moderated slightly to 2.2% y/y.

While a positive surprise wouldn’t necessarily mean policymakers would turn more wary about a build-up in inflationary pressures, it would nevertheless underline the relative robustness of the US economy compared to its peers and maintain upside pressure on the US Dollar.

SENTIMENT

OVERALL SENTIMENT: Risk sentiment remains strong with stocks continuing to trade well. Big jump in the number of cases in China only caused a temporary blip as the market becomes accustomed to the new normal. This is much like how you boil a frog. Watch the progression of the spread of the Covid-19 in Singapore as that will be instructive on how the infection will spread in a well-managed city that responds with reactive measures.

i.e. CCY, Ticker (Short-Term: 1-3 MONTHS, Medium-Term: 3-6 MONTHS, Long-Term: 6-12 MONTHS)

FX

US DOLLAR, USD (Neutral, Neutral, +ve)
JAPANESE YEN, JPY (+ve, +ve, neutral)
EURO, EUR (Neutral, Neutral, Neutral)
STERLING, GBP (Neutral, Neutral, Neutral)
CANADIAN DOLLAR, CAD (-ve, -ve, Neutral)
AUSTRALIAN DOLLAR, AUD (-ve, Neutral, Neutral)
NEW ZEALAND DOLLAR, NZD (-ve, Neutral, Neutral)
SWISS FRANC, CHF (+ve, +ve, neutral)

MARKETS

S&P 500, SPX (+ve, +ve, +ve)
NIKKEI 225, JP225 (Neutral, -ve, -ve)
SHANGHAI COMPOSITE, SSEC (-ve, -ve, Neutral)

TRADING TIP

Losers average Losers…

WHAT HAPPENED YESTERDAY

As of Wed 12 Feb, Singapore Time zone UTC+8

FX MOVES

U.S. Dollar Index, -0.11%, 98.72
USDJPY, +0.09%, $109.85
EURUSD, +0.08%, $1.0920
GBPUSD, +0.32%, $1.2957
USDCAD, -0.19%, $1.3291
AUDUSD, +0.49%, $0.6719
NZDUSD, +0.33%, $0.6406

MARKET MOVES

S&P500, +0.17%, 3,357.75
Dow Jones, -0.00%, 29,276.34
Nasdaq, +0.11%, 9,638.94
Nikkei Futures, +0.84%, 23,838.0

SUMMARY:

The FX market remained largely range-bound. AUD crept higher throughout the day and posted gains of nearly 0.5% vs the USD as risk sentiment continue to stabilise, encouraged by the strength in various global stock indices.

The US large-cap indices started Tuesday’s session hitting intraday highs, but stocks steadily pulled back throughout the day amid a lack of follow-through buying interest. The S&P 500 (+0.2%) and Nasdaq Composite (+0.1%) still eked out closing records, while the Dow Jones Industrial Average (unch) finished flat.

The initial boost in the market was attributed to reports indicating that the rate of new coronavirus cases was slowing down and a view that monetary policy will stay favourable given the risks that remain due to the virus. Fed Chair Powell told the House Financial Services Committee yesterday that the Fed is “closely monitoring” the situation.

U.S. Treasuries finished on a lower note and barely moved during Fed Chair Powell’s congressional testimony. The 2-yr yield increased four basis points to 1.42%, and the 10-yr yield increased four basis points to 1.42%. The U.S. Dollar Index declined by 0.1% to 98.75. WTI crude rose 0.9%, or $0.44, to $50.01/bbl.

BRITISH ECONOMY STAGNATES AS BREXIT UNCERTAINTY HITS GROWTH

Britain’s economy stagnated in the final quarter of 2019 (expected), as political uncertainty, Brexit worries, a slowing eurozone and trade tensions all hurt growth. There was no growth in the last quarter of 2019 as increases in the services and construction sectors were offset by another poor showing from manufacturing, particularly the motor industry. Manufacturing output fell in the October-December period by the most since the third quarter of 2013, down 2.5% from the same period a year earlier, reflecting car plant shutdowns in November, when Britain faced the prospect of a no-deal Brexit.

Britain’s finance minister, Sajid Javid, is expected to give the country’s economy a boost with a spending increase in the government’s first post-Brexit budget on March 11.

IMPACT: The currency, GBP, did not fall off the bed in reaction to the lacklustre print because consensus has already expected the UK economy to stagnate. The expectation of fiscal stimulus to boost the economy provided supporting bids for GBP.

MONETARY POLICY CAN’T BE ONLY GAME IN TOWN

European Central Bank (ECB) President Christine Lagarde said on Tuesday that monetary policy “cannot and should not be the only game in town,” arguing that fiscal and structural policies also have to play their part in upholding the effectiveness of ECB’s stimulus measures. “The longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced,” Lagarde emphasized that fiscal and structural policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of the ECB’s measures. “Indeed, when interest rates are low, fiscal policy can be highly effective,” she said.

She called for further efforts towards a “more complete” Economic and Monetary Union. The eurozone’s architecture has evolved substantially in recent years but “essential elements are still missing or incomplete,” Lagarde noted.

IMPACT: The call for fiscal stimulus in the EU continues and these calls by Lagarde usually foreshadow the actual measures that are to come out of the ECB. Fiscal stimulus in Europe will bode well for risk assets like Industrials and Manufacturing and might also put a bottom in for the Euro should the narrative start to gain traction amongst the EU members.

POWELL TESTIFIES

Federal Reserve Chair Jerome Powell told Congress on Tuesday that the U.S. economy is in a good place, even as he cited the potential threat from the coronavirus in China and concerns about the economy’s long-term health. “There is no reason why the expansion can’t continue,” he said, repeating the central bank’s view that its current target range for short-term borrowing costs, between 1.50% and 1.75%, is “appropriate” to keep the expansion on track.

Lawmakers also peppered Powell with questions ranging from the Fed’s injections of liquidity into short-term funding markets to climate change to the community reinvestment act (CRA) to the space economy. Powell’s answers stuck largely to the script. He defended the Fed’s plan to ease strains in the banking system with Treasury bill purchases and repo operations and said the central bank will likely reach an appropriate level of reserves around mid-year.

IMPACT: President Donald Trump reiterated his criticism that the Federal Reserve has kept interest rates too high and seemed to say the U.S. central bank’s chair, Jerome Powell, had hurt stock prices during his testimony to Congress on Tuesday. Powell stuck largely to script and any impact on the market was negligible.

DAY AHEAD

Considering the severity of the virus situation and the expected economic consequences from a disruption in global supply chains and trade, risk appetite remains healthy. Emerging Market currencies are getting some healthy bids and look to continue to strengthen against the Dollar.

Powell will appear before the Senate Banking Committee later today, as part of his two-day testimony.

SENTIMENT

OVERALL SENTIMENT: With more production facilities and ports reopening in China, market sentiment continues to improve. In the short term, the strength of the US market will continue to support the risk sentiment. The risk for the Asian economies remains. Singapore, in particular, is now facing travel restrictions from various countries as the spread of the virus shows no sign of slowing.

i.e. CCY, Ticker (Short-Term: 1-3 MONTHS, Medium-Term: 3-6 MONTHS, Long-Term: 6-12 MONTHS)

FX

US DOLLAR, USD (Neutral, Neutral, +ve)
JAPANESE YEN, JPY (+ve, +ve, neutral)
EURO, EUR (Neutral, Neutral, Neutral)
STERLING, GBP (Neutral, Neutral, Neutral)
CANADIAN DOLLAR, CAD (-ve, -ve, Neutral)
AUSTRALIAN DOLLAR, AUD (-ve, Neutral, Neutral)
NEW ZEALAND DOLLAR, NZD (-ve, Neutral, Neutral)
SWISS FRANC, CHF (+ve, +ve, neutral)

MARKETS

S&P 500, SPX (+ve, +ve, +ve)
NIKKEI 225, JP225 (Neutral, -ve, -ve)
SHANGHAI COMPOSITE, SSEC (-ve, -ve, Neutral)

TRADING TIP

If trading was easy…

Trading is not complex. In fact, it is relatively simple. These days, anyone with an internet connection and a bit of money can readily open a trading account and start clicking away.

However, simple as it may be, it isn’t easy. If it was easy, millions of retail traders, who have picked up trading from watching a few YouTube videos or reading a few books, would be raking it in. Much like the fact that most people know that to be healthy and fit, one needs to eat healthy and nutritious food and do some form of exercise regularly. How many people though have the stomach (pun intended) to do this on a regular basis?

The way to become successful at trading is also not complex. If you find the right mentors or have access to the correct training methods, you will find that becoming a successful trader is a relatively simple process of forming good trading habits.

To achieve financial freedom through trading, you will need to form trading habits that will lead you to maximise your profits and minimise your losses. These habits, as is the case with many good habits, are not easy to form in the beginning, but it does get progressively easier. Start today!