WHAT HAPPENED YESTERDAY

As of New York Close 23 Apr 2020,

FX

U.S. Dollar Index, +0.04%, 100.52
USDJPY, -0.08%, $107.65
EURUSD, -0.45%, $1.0775
GBPUSD, +0.15%, $1.2352
USDCAD, -0.68%, $1.4066
AUDUSD,  +0.83%, $0.6377
NZDUSD,  +0.92%, $0.6005

STOCK INDICES
S&P500, -0.05%, 2,797.80
Dow Jones, +0.17%, 23,515.26
Nasdaq, -0.01%, 8,494.75
Nikkei Futures, +1.54%, 19,313.0

COMMODITIES
Gold Spot, +0.81%, 1,728.78
Brent Oil Spot, +3.98%, 20.91

SUMMARY:

Gains in Euro unwound (high of +0.22%) when it became clear that eurozone leaders weren’t going to come up with any solid fresh stimulus and it fell further on talk that they won’t have anything ready until 2021. Commodity currencies enjoyed a good day, with the Canadian Dollar, CAD, strengthening amidst the rally in oil but note that only the front-month Crude climbed while the rest of the curve was more-or-less flat.

U.S. Initial claims for the week ending April 18 decreased by 810,000 to 4.427 million (consensus 4.0 million). Continuing claims for the week ending April 11 increased by 4,064,000 to 15.976 million (a record high). The key takeaway from this report, which covers the period in which the survey for the April Employment Situation Report was conducted, is that it presents some hope that the peak of the layoffs following the Covid-19 shutdowns has passed. Nonetheless, it is also a reminder of how bad things are on the labor front. This did not impact the market much as bad numbers are all within expectations now. 

The S&P 500 advanced as much as 1.6% on Thursday after the number of weekly initial claims declined to about 4.4 million, but stocks gave up gains following a negative report regarding potential Covid-19 treatment. The benchmark index finished just below its flat line with a 0.05% decline. The Dow Jones Industrial Average (+0.17%) and Nasdaq Composite (-0.01%) also closed little changed, while the Russell 2000 (+1.0%) outperformed. U.S. 2yr yield remained unchanged at 0.22% and U.S. 10yr yield fell 2bp to 0.61%.

The Financial Times reported that Gilead’s (GILD 77.78, -3.53, -4.3%) remdesivir drug flopped in its first randomized clinical trial in China, according to draft documents published accidentally by the World Health Organization (WHO). The news unnerved the market, and wiped out gains, as Stat News reported last Friday that the drug showed promising signs in one Chicago trial.

Gilead defended the results, saying WHO had an inappropriate characterization of the study, and the data still suggested the drug had a “potential benefit,” according to Stat News. Shares of Gilead still declined (-4.3%), and the broader market struggled the rest of the session, as the report reminded investors that the medical breakthroughs still needed to restore consumer confidence are not easily achieved.

U.S. HOUSE PASSES $500 BILLION COVID-19 BILL

U.S. House of Representatives overwhelmingly approved (vote of 388-5) a $484 billion Covid-19 relief bill on Thursday, funding small businesses and hospitals and pushing the total spending response to the crisis to an unprecedented near $3 trillion. The House action sent the latest of four relief bills to the White House, where Republican President Donald Trump has promised to sign it quickly into law.

The House also approved a select committee, with subpoena power, to probe the U.S. response to the Covid-19. It will have broad powers to investigate how federal dollars are being spent, U.S. preparedness, and Trump administration deliberations. 

IMPACT: The $484 billion aid bill is the fourth passed to address the Covid-19 crisis. It provides funds to small businesses and hospitals struggling with the economic toll of a pandemic that has killed more than 47,000 Americans and thrown a record 26 million out of work, wiping out all the jobs created during the longest employment boom in U.S. history. These stimulus packages are an overcompensation for actual economic destruction that will not disappear because more money has been thrown at it, the chickens will eventually come home to roost and the weakening bids in the S&P500 is a sign of things to come.

U.S. STATES TEST SAFETY OF REOPENING AS PANDEMIC PUSHES JOBLESS CLAIMS HIGHER

An array of U.S. merchants in Georgia and several other states prepared on Thursday to reopen for the first time in a month under newly relaxed Covid-19 restrictions, as another week of massive unemployment claims highlighted the grim economic toll of the pandemic. From Tennessee and Texas to Ohio and Montana, a handful of governors around the country have announced plans to swiftly allow the reopening of some workplaces that had been ordered closed as a way of curbing the spread of the Covid-19.

IMPACT: Those plans have drawn fire from public health experts and other governors who warn that a premature easing of stay-at-home orders and business closures imposed over the past five weeks could trigger a renewed surge in Covid-19 cases. If China’s and Singapore’s experience has shown us anything, it is that  there is evident risk of massive reinfections if measures are dropped prematurely. A second spike in Covid-19 cases in the U.S. will dampen risk sentiment once more and cause the stock market to crater like how it did when infections were rampant in New York city. This will lead to extreme risk aversion which will lead to USD strength.

U.S. WARSHIP SAILS THROUGH TAIWAN STRAIT, SECOND TIME IN A MONTH

A U.S. warship has again sailed through the sensitive Taiwan Straits, Taiwan’s Defence Ministry said on Friday, the second time in a month amid heightening tension between Taiwan and China. This coincides with a Chinese aircraft carrier passing near the island which China considers its own. China has been angered by the Trump administration’s stepped-up support, , such as more arms sales, U.S. patrols near it, and a visit to Washington by Vice President-elect William Lai in February, for Taiwan

IMPACT: China has carried out frequent drills near Taiwan in recent months, including flying fighter jets and nuclear-capable bombers close to the island, in moves denounced by Taipei’s government as attempts at intimidation. The tension between the U.S. and China is ramping up, this adds to the elevated volatility in markets. Extreme risk aversion will lead to a sell off in Asian currencies and USD strength. 

DAY AHEAD

Covid-19, reopening of states in the U.S. and Oil developments will continue to grab headlines and drive risk appetite across the board. US durable goods orders later today will give us a sense of how quickly business spending is falling.

SENTIMENT

OVERALL SENTIMENT:

Market sentiment turned strongly risk seeking as oil rallied aggressively off the lows. The rally got serious when the Bank of Japan was reported to be considering unlimited bond buying in their next policy meeting. The party stalled when news that Gilead’s drug trial was not going so well. How fast things turned on a dime as the US stock indices backed off from the highs and oil, gold and risk currencies followed suit. 

Volatility remains high as the short-term investor sentiment can change from headline to headline. However, focus on the inevitable. All policymakers around the world are determined to print as much as they can. Hard assets like Gold will eventually power higher and every dip will be met with buyers.

FX

STOCK INDICES

TRADING TIP

Begin at the Beginning

This seems like an obvious thing to do but somehow many people start at the end. What I mean is that quite often conclusions are arrived at even before facts are determined and analysis is done. A good example of this is that many believe that this will be a V-shaped recovery. 

This belief is strongly held to without any concrete evidence to back it. Why should there be a V-shaped recovery? Oh, because that’s always been so for the market corrections we have seen in recent memory. 

That might well be true, but the economic damage, demand destruction and supply disruption that the world is experiencing is unprecedented. To be successful in trading, it is critical to form conclusions after examining the facts. The facts so far do not suggest that the recovery will be V-shaped. False bravado from politicians counts for nothing. According to them, Covid-19 was just a flu, until it became patently obvious that it wasn’t.

WHAT HAPPENED YESTERDAY

As of New York Close 21 Apr 2020,

FX

U.S. Dollar Index, +0.26%, 100.20
USDJPY, +0.09%, $107.72
EURUSD, -0.06%, $1.0856
GBPUSD, -1.09%, $1.2301
USDCAD, +0.30%, $1.4191
AUDUSD,  -0.71%, $0.6291
NZDUSD,  -1.23%, $0.5963

STOCK INDICES

S&P500, -3.07%, 2,736.56
Dow Jones, -2.67%, 23,018.88
Nasdaq, -3.48%, 8,263.23
Nikkei Futures, -2.89%, 19,073.0

COMMODITIES

Gold Futures, -0.32%, 1,705.70
Brent Oil Spot, -24.88%, 18.69

SUMMARY:

The Dollar rose to a two-week high against a basket of currencies as investors fled riskier assets for the world’s most liquid currency while putting pressure on oil-linked currencies such as the Mexican Peso (USDMXN, +1.40%) and the Canadian Dollar (USDCAD, +0.30%). 

U.S. Existing home sales declined 8.5% m/m in March to a seasonally adjusted annual rate of 5.27 million (consensus 5.35 million). Total sales were up 0.8% year-over-year, marking the ninth straight month that they have increased on a year-over-year basis. The key takeaway from the report is that it showed existing home sales activity was relatively soft before the Covid-19 impact, with low inventory and high prices crimping sales. Existing home sales are counted when the deals are closed, so the sales activity for March is predicated mostly on contracts signed in January and February.

In New Zealand, the central bank (RBNZ) said it is open to direct monetization of government debt. A central bank buying debt directly from the government issue is not something that will inspire confidence in markets, this will be viewed as a Kiwi negative event (NZDUSD, -1.23%). Central banks get around this by buying sovereign debt from the market, not directly from the government press, with the stated reason being helping to stabilize markets or guide interest rates to a desired level. 

S&P 500 fell 3.07% on Tuesday, closing near session lows for its second straight decline, as risk sentiment remained suppressed by the ongoing turmoil in the oil futures market. The Dow Jones Industrial Average declined 2.67%, the Nasdaq Composite declined 3.48%, and the Russell 2000 declined 2.3%. U.S. 2yr yield remained unchanged at 0.20% and U.S. 10r yield fell 5bp to 0.58%.

The May WTI contract officially expired at $10.01/bbl after falling negative yesterday, but the fundamental problems that drove the contract into negative territory continued to plague the rest of the WTI futures curve. Specifically, WTI crude futures for May delivery collapsed 306% to -$37.63/bbl ahead of expiration, as no one presumably wanted to take physical delivery given the well-documented storage constraints and lack of demand. The June WTI contract plunged 43.0%, or $8.70, to $11.57/bbl, after trading to an intraday low of touch $6.50/bbl at its low (a whopping 69% fall). Intraday price swings of 10-20% were occurring within minutes as extreme volatility was the order of the day.

Separately, news that Congressional leaders and the Trump administration reached a stimulus bill agreement, which reportedly includes $310 billion in small business funding, was encouraging but not market moving. The Senate and House will still need to vote on the bill.

SINGAPORE EXTENDS LOCKDOWN

In Singapore, the circuit breaker measure to choke off the spread of the Covid-19 will be extended by another month to June 1, and existing measures will be tightened until May 4, said Prime Minister Lee Hsien Loong. While he noted that the circuit breaker measures have been working, he stressed that Singapore cannot be complacent. He said the number of unlinked cases has not come down, which suggests a “hidden reservoir” of cases in the community. 

IMPACT: The Singapore Dollar (USDSGD, +0.76%) weakened on the back of the measures as businesses will suffer for an extended period. This is an important and bearish development as it shows that even a well organised city state like Singapore needs extended social distancing measures to keep the virus spread at bay. Anything else will likely lead to disastrous outcomes.

U.S. SENATE PASSES $500 BILLION COVID-19 AID PACKAGE 

The U.S. Senate on Tuesday unanimously approved $484 billion in fresh relief for the U.S. economy and hospitals hammered by the Covid-19 pandemic, sending the measure to the House of Representatives for final passage later this week.

Previously, Washington provided nearly $350 billion in loans to small businesses impacted by the economic fallout from the Covid-19 that can turn into grants if certain requirements are met. That funding was quickly exhausted. Critics of the program said too much of the money had gone to larger, better-connected businesses. Indeed, burger chain Shake Shack Inc (SHAK.N) said on Monday it would return a $10 million loan it received after coming under public criticism.

To reduce the risk of large companies getting the bulk of the loans, Senate Democratic leader Chuck Schumer said, $125 billion of small business funds in the latest package would go to “mom and pop” and minority-owned stores.

IMPACT: The House is expected to vote on Thursday on what would be the fourth Covid-19-related measures. Taken together, the four measures amount to about $3 trillion in aid since last month to confront a crisis that has killed more than 43,000 Americans.

GEORGIA TESTS BOUNDARIES OF LIFE POST-PANDEMIC WITH REOPENING

A handful of mostly southern U.S. states will begin loosening economic restrictions this week in the midst of a still virulent pandemic, providing a live-fire test of whether America’s communities can start to reopen without triggering a surge that may force them to close again.

The Republican governors of Georgia, South Carolina, Tennessee and Ohio all announced on Monday they would begin peeling back the curbs on commerce and social activity aimed at stopping the Covid-19 outbreak over the next two weeks. Colorado’s Democratic governor said on Tuesday he would open retail stores on May 1.

Georgia has been hardest-hit of these states, with 19,000 cases and nearly 800 deaths, including a dense cluster in the state’s southwest. Amid a national debate over how to fight the virus while mitigating the deep economic toll, these moves are the first to test the borders of resuming “normal” life.

IMPACT: None of the states have met basic White House guidelines unveiled last week of two weeks of declining cases before a state should reopen. Most are weeks away from the timing suggested in modeling by the influential Institute for Health Metrics and Evaluation (IHME), based on the virus’s spread and social distancing. As the case with Singapore and Japan show, premature complacency will lead to even more pain in the longer run.

U.S. ENERGY SECRETARY TO URGE HOUSE LAWMAKERS TO BUY OIL FOR STRATEGIC RESERVE

The U.S. energy secretary said on Tuesday he would talk with leaders in the U.S. House of Representatives and urge them to fund the purchase of crude to fill the emergency oil reserve.

In March, Trump ordered Energy Secretary Dan Brouillette to fill the Strategic Petroleum Reserve, or SPR, to the top as the price of oil plunged while the Covid-19 crushed global demand. So far, Congress has declined to fund the purchase, with some Democrats opposed to bailing out the oil industry.

As the Energy Department works with Congress on a purchase, it also is moving forward with a plan to lease an initial 23 million barrels of storage space in the reserve to oil companies.

IMPACT: Oil prices are falling for many reasons, with the primary one being an unprecedented level of demand destruction as social distancing measures and travel restrictions are imposed in various countries worldwide. Trying to stem the tide of overwhelming amounts of supply is futile. 

DAY AHEAD

The Eurozone’s preliminary PMIs for April will be released tomorrow, and the numbers could be abysmal. The preliminary PMIs for April will reveal just how much economic damage the pandemic has inflicted, with forecasts pointing to another drop deeper into contraction territory for both the manufacturing and services indexes.

Admittedly though, economic data don’t mean much right now. While investors could pay some attention to the PMIs since they also contain a forward-looking component, most of the price action in the euro might be driven by the meeting of EU leaders.

They will be discussing more stimulus measures, including the prospect of some risk-sharing mechanism like Eurobonds. If agreed, this could be a game-changer for the euro. It would imply a quicker recovery in the most virus-ravaged economies such as Italy and Spain, and remove some of the political risk premia.

However, despite some recent signs of flexibility, such an agreement remains very unlikely given the scale of opposition from Germany and the Netherlands. Therefore, the risks surrounding the euro’s reaction seem asymmetric. With nobody really expecting a deal, a surprise Eurobond agreement would likely push the euro much higher, whereas another disappointment might only generate minor losses.

SENTIMENT

OVERALL SENTIMENT:

The wild swings and the continued sell off in WTI crude oil futures dominated the news headlines and caused risk aversion in various asset classes including Gold which was down almost 3% at one point. This will continue to weigh on sentiment as victims of the crisis in various shapes and forms will relentlessly pop out of the woodwork as time passes.

FX

STOCK INDICES

TRADING TIP

Beware the Assumed Boundaries

Many people trade with the assumption that prices are somehow bound by some limits without fully understanding why they hold these assumptions. 

Interest rates can never be less than zero else there would be queues at the banks to borrow money and get paid for doing so. That was assumed true until it wasn’t. Oil prices cannot be at zero because then it would be free. That was true until the price of oil futures went deeply negative.

Always review what are the assumptions that are inherent in your thinking if you want to succeed at trading. Many have lost the shirts in the process of buying blue chip investment bank stocks such as Lehman Brothers all the way down to zero!

WHAT HAPPENED YESTERDAY

As of New York Close 20 Apr 2020,

FX

U.S. Dollar Index, +0.23%, 99.95
USDJPY, +0.14%, $107.68
EURUSD, -0.14%, $1.0863
GBPUSD, -0.48%, $1.2438
USDCAD, +0.94%, $1.4131
AUDUSD,  -0.36%, $0.6342
NZDUSD,  +0.28%, $0.6043

STOCK INDICES

S&P500, -1.79%, 2,823.16
Dow Jones, -2.44%, 23,650.44
Nasdaq, -1.03%, 8,560.73
Nikkei Futures, -1.37%, 19,430.0

COMMODITIES

Gold Futures, +0.44%, 1,706.35
Brent Oil Spot, -6.54%, 24.88

SUMMARY:

Dollar Index edged 0.23% higher, 99.95, on Monday. Oil-linked currencies were weaker with the U.S. dollar 0.94% higher against its Canadian counterpart.

S&P 500 declined 1.79% on Monday, although that was relatively modest given the implosion in the oil market where the expiring May contract for WTI crude closed negative for the first time ever. The Dow Jones Industrial Average declined 2.44%, the Nasdaq Composite declined 1.03%, and the Russell 2000 declined 1.3%. U.S. 2yr yield remained unchanged at 0.20% and U.S. 10yr yield fell 2bp to 0.63%.

Specifically, WTI crude futures for May delivery collapsed 306% to -$37.63/bbl ahead of expiration, as no one presumably wanted to take physical delivery given the well-documented storage constraints and lack of demand. The negative price also indicated that producers are paying someone to take their oil. According to Bloomberg, USO owned 25% of the outstanding volume of May WTI oil futures contracts as of last week. With that contract set to expire today, the buyers of that “paper oil” have to sell or take physical delivery at the end of May. ETFs like USO are not created to take physical delivery of the oil contracts and were forced to unwind at any price.

The historic, and mind-boggling, occurrence appeared to spoil an intraday rebound in stocks, which started to accelerate losses heading into the futures settlement time at 2:30 p.m. ET. Around that same time, it was also reported that a vote to replenish the small business loan program was delayed in the Senate due to ongoing negotiations.

It should be noted, though, that the WTI futures curve did show rising prices amid expectations that prices should rebound with production cuts and hopefully increased demand. For instance, the June WTI crude futures contract settled at $20.43/bbl, although that was still an 18.9% decline.

In equities, Walt Disney (DIS 102.26, -4.37, -4.1%) and Boeing (BA 143.61, -10.39, -6.8%) underperformed the broader market following a pair of analyst downgrades and negative-sounding reports. Disney is reportedly suspending pay for 100,000 employees, while a GE leasing subsidiary canceled 69 orders of Boeing’s 737 MAX.

OIL CRASHES INTO NEGATIVE FOR THE FIRST TIME IN HISTORY

U.S. crude oil futures collapsed below $0 on Monday for the first time in history, amid a Covid-19-induced supply glut, ending the day at a stunning minus $37.63 a barrel as desperate traders paid to avoid having to take delivery of physical oil.  Brent crude, the international benchmark, also slumped, but that contract was nowhere near as weak because more storage is available worldwide.

IMPACT: Traders fled from the expiring May U.S. oil futures contract in a frenzy on Monday with no place to put the crude, but the June WTI contract settled at a much higher level of $20.43 a barrel. The May U.S. WTI contract fell 306%, to settle at a discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down 6.54%, to settle at $24.88 a barrel.

Refiners are processing much less crude than normal, so hundreds of millions of barrels have gushed into storage facilities worldwide. Traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels are sitting in tankers around the world.

TRUMP TO CONSIDER HALTING SAUDI OIL IMPORTS

Trump said on Monday that his administration was looking at the possibility of stopping incoming Saudi Arabian crude oil shipments as a measure to support the battered domestic drilling industry.

“The problem is no one is driving a car anywhere in the world, essentially…Factories are closed, businesses are closed,” Trump said. “We had really a lot of energy to start off with, oil in particular, and then all of a sudden they lost 40%, 50% of their market.”

IMPACT: Trump reiterated that his administration plans to top up the nation’s emergency crude oil stockpile as prices plunge. The Department of Energy is in the process of leasing some of the roughly 77 million barrels of available space in the Strategic Petroleum Reserve to U.S. oil companies to help them deal with the dearth of commercial storage as the Covid-19 outbreak crushes domestic energy demand. The administration initially wanted to purchase the crude oil directly, but Congress has yet to approve the funding.

AUSTRALIA EDGES TOWARDS REOPENING SCHOOLS AS COVID-19 INFECTIONS SLOW

Students in Australia’s most populous state, New South Wales, will start returning to school next month in much larger numbers amid a rapid decline in new infections, Premier Gladys Berejiklian said on Tuesday. Australian states and territories have largely shuttered schools for more than a month as part of efforts to slow the spread of Covid-19, despite sometimes conflicting advice from the federal government, which had wanted schools to remain open. Children of emergency workers are among the few who have continued to go to school.

IMPACT: Berejiklian said students will begin to return to school on May 11 on a staggered basis in preparation for full-time schooling to re-start in July. Australia is one of the few nations around the world to detail plans to reopen schools after infection rates plummeted from more than 25% in mid-March to its current level of less than 1% a day.

The reopening of schools has been a key demand of Prime Minister Scott Morrison, who hopes it will stimulate Australia’s economy and allow parents to better juggle work commitments.

DAY AHEAD

Caution returned to world markets as a drubbing for U.S. WTI crude oil kicked off a busy week of data and earnings that will drive home the damage being inflicted by global Covid-19 lockdowns. Investors will be watching for signs of progress as heads of European Union governments are scheduled to hold a video summit over how to tackle the economic fallout from the crisis on Thursday, where differing views on coronabonds, mostly demanded by the southern EU member states, are expected to be voiced.

SENTIMENT

OVERALL SENTIMENT:

The world woke up to the rude fact that the price for oil is not actually bound by zero. Though many will dismiss the panic selling in the May futures of WTI crude oil and say it is primarily due to the maturity contract today, the demand destruction is what has led to persistently weak prices despite the OPEC+ deal with US support. Market disruptions like these will inevitably lead to stories of massive losses in various firms having exposure to the product thinking that 0 is the lowest it can go. Credit losses at banks due to loans made to various firms that have oil trading activities will soon be revealed. Expect unexpected ripple effects…

FX

STOCK INDICES

TRADING TIP

Free energy? No, we pay you!!

How did you end up with negative oil prices today?  This happens when a physical futures contract finds no buyers close to or at expiry, here is a brief explanation in point form.

1. A physical contract such as the WTI Crude has a delivery point at Cushing, in this occurrence May 2020. So people who hold the contract at the end of the trading window have to take physical delivery of the oil they bought on the futures market. – this is very rare.
2. It means that in the last few days of the futures trading cycle, (which is today for this one) speculative or paper futures positions start rolling over to the next contract. – this is normally a pretty undramatic affair.
3. What happened yesterday is trades or speculators who had bought the contract are finding themselves unable to resell it, and have no storage booked to get delivered the crude in Cushing, where the delivery is specified in the contract.
4. This means that all the storage in Cushing is booked, and there is no price they can pay to store it, or they are totally inexperienced in this game and are caught holding a contract they did not understand the full physical aspect of as the time clock expires.
5. The June contract is not out of the woods either: yesterday’s action indicates that physical oil markets at Cushing are not in good shape and that storage is getting very full.

Oil costs money to store and due to the Covid-19 induced economic halt, oil isn’t being used much. All the land storage facilities are filled up and nobody who can store it will buy it from you. Hence if you want to get rid of the oil, you have to pay someone.

WHAT HAPPENED YESTERDAY

As of New York Close 17 Apr 2020,

FX

U.S. Dollar Index, -0.25%, 99.72
USDJPY, -0.40%, $107.53
EURUSD, +0.38%, $1.0878
GBPUSD, +0.35%, $1.2501
USDCAD, -0.58%, $1.4000
AUDUSD,  +0.57%, $0.6365
NZDUSD,  +0.92%, $0.6026

STOCK INDICES

S&P500, +2.68%, 2,874.56
Dow Jones, +2.99%, 24,242.49
Nasdaq, +1.38%, 8,650.14
Nikkei Futures, +2.39%, 19,700.0

COMMODITIES

Gold Futures, -1.90%, 1,698.80
Brent Oil Spot, +0.23%, 26.62

SUMMARY:

Dollar ticked lower on Friday as investors, cautiously optimistic about the results of a drug trial and Trump’s plan to reopen the economy, regained some appetite for risk. Dollar, which has closely tracked risk sentiment through the Covid-19 crisis, fell -0.19%, 99.72. 

S&P 500 advanced 2.68% on Friday amid hopes for a Covid-19 treatment and optimism about reopening the economy. The Dow Jones Industrial Average (+2.99%) and Russell 2000 (+4.3%) outpaced the benchmark index, while the Nasdaq Composite (+1.38%) had a more modest performance. U.S. 2yr Yield was unchanged at 0.20%. U.S. 10yr Yield rose 4bp to 0.65%.

A report published by Stat News indicated that most Covid-19 patients treated with Gilead Sciences’ (GILD 83.99, +7.45, +9.7%) remdesivir showed a rapid recovery in a trial at the University of Chicago Medicine. Note, Gilead did not issue an official statement regarding the trial, which lacked a placebo group for comparison. The University of Chicago itself warned that drawing any conclusions was “premature and scientifically unsound”.

The possibility that there might be an effective Covid-19 treatment, though, added to the positive sentiment in the market as it could restore some confidence for consumers when the economy starts to reopen. Trump said on Thursday that some states already satisfied the administration’s new guidelines to reopen before May.

The information technology sector (+1.4%) underperformed today amid relative weakness in Apple (AAPL 282.80, -3.89, -1.4%), which was downgraded to Sell from Neutral at Goldman Sachs on a view that iPhone sales will take more time to recover than expected. Boeing (BA 154.00, +19.76, +14.7%) shares rose nearly 15% after the company said it plans to restart production at its Puget Sound facility next week. Procter & Gamble (PG 124.69, +3.19, +2.6%) advanced with the broader market after it beat earnings estimates. 

U.S. COVID-19 CRISIS TAKES A POLITICAL TURN

Trump lashed out at four Democratic governors over their handling of the pandemic after having conceded that states bear ultimate control of restrictions to contain the outbreak. The Republican president targeted three swing states critical to his re-election bid – Michigan, Minnesota and Virginia – where his conservative loyalists have mounted pressure campaigns challenging those governors’ stay-at-home orders.

Amplifying a theme that his supporters have trumpeted this week in street protests at the state capitals of Lansing, St. Paul, and Richmond, Trump issued a series of matching Twitter posts touting the slogans: “LIBERATE MICHIGAN!” “LIBERATE MINNESOTA!” and “LIBERATE VIRGINIA!”

IMPACT: Michigan has become a particular focus of agitation to relax social-distancing rules that rank among the strictest in the nation after Governor Gretchen Whitmer, widely seen as a potential running mate for presumed Democratic presidential candidate Joe Biden, extended them through the end of April. Trump, who played down the Covid-19 threat in its early stages, had been pressing to restart idled businesses as soon as May 1, at first declaring “total” authority to do so and branding governors who resisted his approach, many of them Democrats, as “mutineers.”

TRUMP: SOME STATES TO BEGIN LIFTING RESTRICTIONS IN COMING DAYS

Trump said on Saturday that Texas and Vermont will allow certain businesses to reopen later today while still observing Covid-19-related precautions and Montana will begin lifting restrictions on Friday. He said both Republican and Democratic governors “have announced concrete steps to begin a safe and gradual phased opening.” Texas and Vermont “will allow certain businesses to open on Monday while still requiring appropriate social distancing precautions,” he said.

IMPACT: On Saturday morning, Governor Andrew Cuomo of New York, the epicenter of the U.S. epidemic, said his Covid-19-battered state may finally be past the worst of the health crisis there. Again, Trump is determined to ignore the lessons that have been learnt by other countries (Singapore, Japan, China) regarding the measures required to stop a 2nd wave of infections.

CHINA’S ECONOMY SHRANK FOR FIRST TIME IN DECADES

China, the world’s second-largest economy shrank 6.8% (expected -6.2%) in the first quarter of 2020 compared to a year earlier. While a contraction was expected, it’s still a historic moment for China. The plunge is the worst for a single quarter that China has recorded since it started publishing those figures. 

China’s three major engines for growth — consumer spending, exports and fixed asset investment — all sputtered as large swaths of the country were placed on lockdown in late January and early February to contain the spread of the virus. Retail spending dropped 19% last quarter, while exports plunged more than 13%. Fixed asset investment declined 16%.

IMPACT: China cut its benchmark lending rate as expected on Monday to reduce borrowing costs for companies and prop up the Covid-19-hit economy, after it contracted for the first time in decades. The one-year loan prime rate (LPR) was lowered by 20 bps to 3.85% from 4.05% previously, while the five-year LPR  was cut by 10 bps to 4.65% from 4.75%.

DAY AHEAD

While the stimulus is significant to be sure – as it will help prevent this crisis from evolving into a depression – investors might be underappreciating how deep this downturn will be and how long it will take for economies to recover. The speed of job losses in the US is simply terrifying. The unemployment rate will easily surpass 10% next month – the peak of the previous recession – and who knows how much higher it will climb as the pandemic cascades through the economy. Those losses could take years to recover, especially when considering the scars this crisis might leave on consumer behavior. Would you go to a restaurant or cinema on the same day the end of the lockdown, or play it safe and wait? Not to mention the risk of second waves of infections once the lockdowns are lifted, and the possibility of future shutdowns.

All this argues for a slow and protracted recovery as consumption remains soft, something that stock prices don’t seem to fully reflect. Indeed, the latest gains in gold and the yen suggest traders don’t have much faith in the recent stock rally either. The fact that oil prices can’t get off the floor either, despite huge supply cuts, argues the same point. It implies a real pickup in demand isn’t expected anytime soon.

SENTIMENT

OVERALL SENTIMENT:

Rumour of a promising drug trial got the bulls going but the denial from the company did not tamper the enthusiasm and the bears could not regain lost territory. The waves of money from policymakers continue to rule the sentiment for now. Reality will bite eventually, but it takes time.

FX

STOCK INDICES

TRADING TIP

The Dollar Smile

The theory states that the Dollar tends to outperform when the US economy is very strong (on the left side of the smile) or very weak (right side). And it does poorly when the US economy is just muddling through (middle of the smile). 

Why is this? Well, the logic is straightforward. The US trades at a “safety premium” relative to other countries. 

Most international funding is done in USD dollars. So, when the US economy is extremely weak, volatility increases, and markets are perceived as riskier. The risk aversion will lead to these Dollar loans being called back and Brazilian Reals or whichever currency will get converted into USD to cover the dollar debt thus putting upward pressure on the Dollar.

When the US economy is extremely strong and outperforming the rest of the world, investments will flow into USD and the US economy, thus leading to USD strength.

WHAT HAPPENED YESTERDAY

As of New York Close 16 Apr 2020,

FX

U.S. Dollar Index, +0.26%, 99.90
USDJPY, +0.42%, $107.93
EURUSD, -0.46%, $1.0859
GBPUSD, -0.22%, $1.2488
USDCAD, -0.53%, $1.4039
AUDUSD,  +0.65%, $0.6360
NZDUSD,  +0.14%, $0.6000

STOCK INDICES

S&P500, +0.58%, 2,799.55
Dow Jones, +0.14%, 23,537.68
Nasdaq, +1.66%, 8,532.36
Nikkei Futures, +0.38%, 19,655.0

COMMODITIES

Gold Futures, -0.53%, 1,731.00
Brent Oil Spot, +2.11%, 26.56

SUMMARY:

The Dollar Index hit a one-week high on Thursday as investors fled to safe-haven assets following the release of weekly U.S. jobless data which showed a record 22 million Americans have sought unemployment benefits in the last month, erasing nearly all job gains since the Great Recession. Weekly jobless claims totaled 5.245 million (consensus 5.000 million), down 1.37 million from the prior week. Housing starts for March declined 22.3% m/m while building permits fell 6.8% m/m. The Philadelphia Fed Index for April plunged 43.9 points to -56.6 (consensus -25.0) for its lowest reading since July 1980.

Stock market closed mixed on Thursday, as investors responded to another round of weak economic data by continuing to buy shares of technology companies while avoiding distressed sectors like financials and energy. The Nasdaq Composite rose 1.66%, while the S&P 500 (+0.58%) and Dow Jones Industrial Average (+0.14%) posted smaller gains. The Russell 2000 declined 0.5%. U.S 2yr yield remained unchanged at 0.20%. U.S. 10yr yield fell 2bp to 0.61%.

TRUMP UNVEILS THREE-STAGE PROCESS FOR STATES TO END COVID-19 SHUTDOWN

Trump proposed guidelines on Thursday under which U.S. state governors could act to revive the U.S. economy from its Covid-19 shutdown in a staggered, three-stage process.

“We are not opening all at once, but one careful step at a time,” Trump told reporters, without himself providing details on his guidelines. The new federal guidelines recommend that states record a 14-day “downward trajectory” in Covid-19 cases before beginning a three-phase process of re-opening. Before states re-open, hospitals should have a “robust testing program” that includes antibody testing in place for healthcare workers, the guidelines say.

The document lays out Trump’s plan for opening businesses in states across the country that have been ravaged by the pandemic and its economic impact even though the responsibility for such decisions lies with the state, not federal authorities.

IMPACT: A White House official described the guidelines as conservative and noted that they had been agreed to by the top doctors on the president’s coronavirus task force.

Trump is pushing to get the U.S. economy going again after the Covid-19 shutdown left millions of Americans jobless. More than 20 million people have filed for unemployment in the U.S. in the past month and over 90% of the country has been under stay-at-home orders.

GILEAD COVID-19 DRUG SUGGESTS PATIENTS ARE RESPONDING TO TREATMENT

A Chicago hospital treating severe Covid-19 patients with Gilead Sciences’ antiviral medicine remdesivir in a closely watched clinical trial is seeing rapid recoveries in fever and respiratory symptoms, with nearly all patients discharged in less than a week.

Remdesivir was one of the first medicines identified as having the potential to impact SARS-CoV-2, the novel coronavirus that causes Covid-19, in lab tests. The entire world has been waiting for results from Gilead’s clinical trials, and positive results would likely lead to fast approvals by the Food and Drug Administration and other regulatory agencies. If safe and effective, it could become the first approved treatment against the disease.

IMPACT: Gilead Sciences shares popped by more than 16% in after-hours trading Thursday after details leaked of a closely watched clinical trial of the company’s antiviral drug Remdesivir, showing what appears to be promising results in treating Covid-19. As a result, S&P500 Futures are up approx. 2.73% in early Asian Trading.  

The University of Chicago Medicine recruited 125 people with Covid-19 into Gilead’s two Phase 3 clinical trials. Of those people, 113 had severe disease. All the patients have been treated with daily infusions of remdesivir.

U.S. RAMPS UP RHETORIC AGAINST CHINA, INCREASING TENSIONS

• US EXPLORES POSSIBILITY THAT VIRUS STARTED IN CHINESE LAB, NOT A MARKET

US intelligence is reviewing sensitive intelligence collection aimed at the Chinese government, according to the intelligence source, as they pursue the theory. But some intelligence officials say it is possible the actual cause may never be known.

• US CLAIMS CHINA MAY HAVE CONDUCTED LOW-LEVEL NUCLEAR TEST

According to a US State Dept report China may be secretly conducting nuclear tests with very low explosive power; there is no proof, but there is a series of activities that “raise concerns”.

• US SHOULD HALT TRADE WITH CHINA UNLESS THEIR VIRUS POLICY CHANGES

Sen. Graham suggested that China needs to be held accountable for spreading the virus and advocated for the closing of some markets in China where food is sold. He also said the United States needs to take aggressive action against China or risk another pandemic.

IMPACT: U.S. seems to be orchestrating a narrative warfare on China, leveraging the virus situation to soften the ground for the U.S. administration to sow seeds of discord in time to come. Keep a keen eye on this development as it will shape foreign policies in the near future. Increasing tension in a world where cooperation is needed more than ever should be bad for risk assets when things come to the fore.

DAY AHEAD

With the worst of the pandemic now behind Europe and the US also approaching a peak, markets have turned their sights to when economies will reopen. Stocks have recovered on hopes for a ‘return to normal’, but importantly, safe havens like the yen and gold are also gaining. The combination suggests that traders are still playing defense and that the recent stock rally may be built on shaky foundations. Indeed, investors might be downplaying the scale of this crisis, and how long it will take for economies to recover. As such, the upcoming PMIs could provide a reality check.

SENTIMENT

OVERALL SENTIMENT:

It’s hot and it’s cold, it’s up and it’s down. As the tug of war continues between unlimited money from policy makers and deteriorating economic fundamentals, the market is behaving like a yoyo. It is easy to forget that the world is about to experience the worst depression of our time. However, it is critical to focus on the facts and the relentless flow of money will push prices of hard assets higher over time. Focus on that and ignore the noise. 

FX

STOCK INDICES

TRADING TIP

Do what works, Avoid what doesn’t

Fighting the market trends can be exhausting. It is both devastating to your financial and mental capital. When market movements do not behave as you expect them to according to your world view, and your trades are not working well, it is best to reduce the size of your risk positions or even just exit everything and take a step back.

Without risk positions to colour your view, you will be in a better frame of mind to objectively take stock of the situation at hand. Even in the midst of a very noisy market, there will be some trades that are working out. Focus on what is working out well and do more of that. If you can’t find anything that works, then you have the answer. Don’t do any trades, take a breather and enjoy the bliss of having no financial capital at risk. 

The weekend is upon us, enjoy it!

WHAT HAPPENED YESTERDAY

As of New York Close 15 Apr 2020,

FX

U.S. Dollar Index, +0.81%, 99.65
USDJPY, +0.38%, $107.63
EURUSD, -0.69%, $1.0905
GBPUSD, -0.84%, $1.2519
USDCAD, +1.68%, $1.4116
AUDUSD,  -2.07%, $0.6309
NZDUSD,  -1.81%, $0.5996

STOCK INDICES

S&P500, -2.20%, 2,783.36
Dow Jones, -1.86%, 23,504.35
Nasdaq, -1.44%, 8,393.18
Nikkei Futures, -1.86%, 19,245.0

COMMODITIES

Gold Futures, -1.49%, 1,742.50
Brent Oil Spot, -6.47%, 26.01

SUMMARY:

On a day of equity weakness, investors fled from riskier assets for safe-havens such as the Dollar and US Treasury bonds. The U.S. dollar index, which had fallen in the four previous trading days, rose as high as 99.98, but returned some of those gains, last trading up 0.81%. IMF’s overnight report, which downgraded global growth more than expected, along with the record downturn in U.S. retail sales, and the huge drop in U.S. industrial production, all combined to see a rush into safe havens.

S&P 500 declined 2.20% on Wednesday, as the release of historically weak economic data undercut risk sentiment. The Dow Jones Industrial Average lost 1.86%, the Nasdaq Composite lost 1.44% to snap a four-session winning streak, and the Russell 2000 underperformed with a 4.3% decline. U.S. 2yr yield fell 3bp to 0.20% and U.S. 10yr yield fell 13bp to 0.63%.

U.S. Retail sales declined 8.7% m/m in March (consensus -8.0%). The key takeaway from the report is that it captured the impact of the Covid-19 shutdown situation, as spending in discretionary categories cratered while spending for essential items accelerated. Industrial production declined 5.4% m/m in March (consensus -4.1%).

In addition, more banks bolstered their loan-loss reserves to prepare for tougher times ahead, the Fed’s Beige Book for April noted a sharp contraction in economic activity with business contacts expecting conditions to worsen, and The Wall Street Journal reported that the Paycheck Protection Program for small businesses was on pace to run out of money today.

The energy sector (-4.7%) declined the most, though, as the group remained pressured by lower oil prices after the EIA projected a 9.2 mb/d decline in oil demand in 2020. Brent Oil settled 6.47% lower, to $26.01/bbl.

Separately, airline stocks finished mixed after the companies reached individual agreements with the government for payroll relief. Shares of American Airlines (AAL 12.29, +0.35, +2.9%) closed higher, while Delta Air Lines (DAL 24.35, -0.19, -0.8%) closed lower.

BANK OF CANADA

Canada’s central bank held interest rates steady at 0.25% as expected, added provincial and corporate bonds to its quantitative easing program, and suspended its economic forecasts given the highly uncertain outlook. “The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households,” the Bank of Canada said in a new policy statement April 15. “The situation calls for special actions by the central bank.”

In its quarterly monetary policy report, the bank outlined two scenarios under which real gross domestic product (GDP) would shrink. It estimated real GDP would fall by 1% to 3% in the first quarter and would contract by 15% to 30% in the second quarter, both compared with the fourth quarter of 2019.

IMPACT: Policy-makers already have set up a half-dozen emergency programs aimed at pushing cash into financial markets, including the weekly purchase of at least $5 billion of federal government bonds. In the “coming weeks,” the central bank announced it also will start buying up to $50 billion in provincial debt, and up to $10 billion of investment-grade corporate bonds. Both will be firsts for the Bank of Canada.

U.S. RETAIL SALES & FACTORY OUTPUT SINKS

U.S. retail sales suffered a record drop in March and output at factories declined by the most since 1946, buttressing analysts’ views that the economy contracted in the first quarter at its sharpest pace in decades as extraordinary measures to control the spread of Covid-19 shut down the country.

The drag on sales from social restrictions far outweighed a 3.1% surge in receipts at online retailers like Amazon (AMZN), and grocery stores and pharmacies as consumers stocked up on household essentials such as food, toilet paper, cleaning supplies and medication. Grocery store sales soared 26.9% and receipts at healthcare outlets jumped 4.3%. Sales at building material stores rose 1.3%.

IMPACT: Economists see no respite for consumer spending in the second quarter, with estimates as deep as a 41% rate of decline, despite a historic $2.3 trillion fiscal package, which made provisions for cash payments to some families and boosted unemployment benefit checks. As a reminder, about 16.8 million people have filed claims for unemployment benefits since March 21.

PANDEMIC TO BRING ASIA’S 2020 GROWTH TO HALT: IMF

Asia’s economic growth this year will grind to a halt for the first time in 60 years, as the Covid-19 crisis takes an “unprecedented” toll on the region’s service sector and major export destinations, the International Monetary Fund said on Thursday.

Asian policymakers must offer targeted support to households and firms hit hardest by the pandemic, the IMF said, calling also for efforts to provide ample liquidity to markets and ease financial stress faced by small and midsize firms. Emerging economies in the region should tap bilateral and multilateral swap lines, seek financial support from multilateral institutions, and use capital controls as needed to battle any disruptive capital outflows caused by the pandemic, the IMF said.

IMPACT: While Asia is set to fare better than other regions suffering economic contractions, the projection is worse than the 4.7% average growth rates throughout the global financial crisis, and the 1.3% increase during the Asian financial crisis in the late 1990s. The IMF expects a 7.6% expansion in Asian economic growth next year on the assumption that containment policies succeed, but added the outlook was highly uncertain.

DAY AHEAD

China’s economy contracted in Q1, but by how much?

All this is expected to be revealed tomorrow when China publishes its Q1 GDP growth estimate as well as industrial output and retail sales numbers for March. A dire set of figures could spark some panic selling on fears that the economic slump in Europe and America will be even greater. Forecasts are for GDP to have declined by 10% over the quarter and 6% annually. If the contraction proves to be milder than anticipated, however, this may not necessarily be met with a positive response in the markets as many traders would question the validity of the official data.

SENTIMENT

OVERALL SENTIMENT:

US bonds had a strong rally and US stocks fell, with the S&P500 index dropping around 3% from the strong close of the day before. All on a day with nothing surprising on the news front. It seems likely that the 2840-50 level will be strong resistance on the S&P500 index for now. 

No matter how positively Trump wants to spin the situation and want to send people back to work to get the economy started again, doing so preemptively will be a mistake. The price for making mistakes when it comes to dealing with the virus, as we have seen repeatedly, is eventually going to be costly.

FX

STOCK INDICES

TRADING TIP

The Glass is Half Full

That’s the mode that investors are in right now in seeing the positive spin to every piece of news. Aided by the wave of cheap money from the Fed and fiscal subsidies from the government, sentiment has improved considerably, and fears have subsided. 

No matter how positive of a spin you make to give it, the glass is still, in fact, half empty and as time passes, as the deteriorating fundamentals take whole, we are going to have to wake up to the fact that there’s going to be a lot of thirsty people around. 

Earnings season has just started and eventually, all the repeated wake-up calls from disappointing earnings will take a toll.

WHAT HAPPENED YESTERDAY

As of New York Close 14 Apr 2020,

FX

U.S. Dollar Index, -0.54%, 98.84
USDJPY, -0.61%, $107.11
EURUSD, +0.63%, $1.0984
GBPUSD, +0.91%, $1.2625
USDCAD, -0.19%, $1.3878
AUDUSD,  +0.82%, $0.6435
NZDUSD,  -0.16%, $0.6100

STOCK INDICES

S&P500, +3.06%, 2,846.06
Dow Jones, +2.39%, 23,949.76
Nasdaq, +3.95%, 8,515.74
Nikkei Futures, +2.40%, 19,528.0

COMMODITIES

Gold Futures, -0.58%, 1,751.20
Brent Oil Spot, -5.21%, 27.81

SUMMARY:

Dollar fell to two-week lows against a basket of currencies on Tuesday as risk sentiment returned to the market following better-than-expected economic data from China, which painted a less gloomy picture than feared. China’s March exports fell 6.6% from a year earlier, compared with a forecast for a 14% drop, while imports fell by less than 1%, compared with a 9.5% drop predicted by economists. China’s Trade Balance came in at a surplus of +139B vs an expectation of +175B, although it missed expectations, it was far better than the previous recorded -43B. 

It was a good day for the stock market on Tuesday, as investors expressed optimism in an economic recovery despite the uncertainty signaled by some of the nation’s most influential banks. The Nasdaq Composite rose 3.95%, pulling ahead of the S&P 500 (+3.06%), Dow Jones Industrial Average (+2.39%), and Russell 2000 (+2.1%), for its fourth straight advance. U.S. 2yr yield fell 2bp to 0.23% and U.S. 10yr yield unchanged at 0.76%.

JPMorgan Chase (JPM 95.50, -2.69, -2.7%) and Wells Fargo (WFC 30.18, -1.25, -4.0%) kicked off the Q1 earnings reporting season with underwhelming quarterly results, but more importantly, they stirred some concern by substantially increasing their provisions for credit losses. The provisions represented the challenges the companies are preparing for, given the unprecedented circumstances.

The stock market wasn’t concerned with uncertainty today, though, as it remained comforted in the notion that the economy will strategically reopen through a coordinated plan from federal and state officials. In addition, better-than-feared trade data for March out of China may have also aided investor sentiment.

NEW YORK CITY RECORDS SHARP JUMP IN COVID-19 DEATHS AS PRESUMED CASES ADDED

New York City revised its official Covid-19 death toll sharply upward to more than 10,000 on Tuesday, to include victims presumed to have perished from the lung disease but never tested. The new cumulative figure for “confirmed and probable COVID-19 deaths” released by the New York City Health Department, marks a staggering increase of over 3,700 deaths officially attributed to the highly contagious illness since March 11.

The city’s revised count, 10,367 in all, also raises the total number of lives lost to Covid-19 nationwide to more than 28,300, with New York state, and its largest city, in particular, accounting for the biggest share of deaths by far.

IMPACT: The recalibration of the pandemic’s lethality in New York came as Trump’s May 1 target for restarting the economy was pronounced “overly optimistic” by his top infectious disease adviser, Dr. Anthony Fauci on Tuesday. Trump and a number of state governors, including Cuomo, have clashed sharply this week over who has the power to lift restrictions aimed at curbing the pandemic.

FED LAUNCHES COMMERCIAL PAPER LIQUIDITY BACKSTOP

The Commercial Paper Funding Facility’s (CPFF) special purpose vehicle purchases higher rated, three-month unsecured and asset-backed paper from eligible bank, corporate, special-purpose entity and municipal issuers using financing from the New York Federal Reserve. The vehicle, which was announced on March 17, began making purchases on Tuesday according to the New York Fed.

Short-term credit markets had come under strain as investors worried that companies hit by efforts to slow the spread of the virus would not be able to repay their IOUs. That spurred the Fed to take steps aimed at thawing out markets frozen by spiking lending rates. The facility is funded with $10 billion of loss guarantee from the U.S. Treasury, which the Fed is expected to leverage as much as 10 times should demand warrants.

IMPACT: The program is similar to an operation used during the 2008 financial crisis, in which the central bank acts as a lender of last resort for companies otherwise unable to borrow in the short-term market.

MAJOR U.S. AIRLINES ACCEPT GOVERNMENT AID FOR PAYROLLS

The U.S. Treasury Department said on Tuesday that major passenger airlines have agreed in principle to a $25 billion rescue package, ensuring airline workers jobs until October while the industry works to overcome its biggest-ever crisis.

Major carriers will receive 70% of the funds for payroll in cash assistance that will not need to be paid back, while smaller carriers receiving $100 million or less will not need to repay any funds.

The six largest U.S. airlines – American Airlines Group Inc (AAL.O), United Airlines Holdings Inc (UAL.O), Delta Air Lines Inc (DAL.N), Southwest Airlines Co (LUV.N), JetBlue Airways Corp (JBLU.O) and Alaska Airlines (ALK.N) – as well as four other airlines accepted the support, Treasury said.

IMPACT: Under the terms laid out by Treasury officials last week, the government would receive repayment on 30% of the funds awarded to large carriers and warrants equal to 10% of the loan amount. Two officials said the warrants are priced at last week’s closing share price.

DAY AHEAD

The Covid-19 pandemic has already had a devastating impact on the US labour market and the next data points to get the virus treatment are retail sales and industrial production. Both are due later today. The virus outbreak may have been dominating the headlines since January but the hard data for countries other than China have only now started coming in. Thus, can the latest bout of market optimism prevail, or will the dire numbers reignite fears of economic catastrophe?

SENTIMENT

OVERALL SENTIMENT: US investment bank thinks that the downturn will be 4 times worse than the one experienced in the 2008 crisis but then an “unprecedented recovery” would ensue. The world seems to have to come to terms that things will be very bad, and yet, they are projecting a V-shaped recovery. That is possible if the virus miraculously ceases to be a problem in a few months or a cure or vaccine is found. That, unfortunately, is extremely unlikely to happen in the next few months.

For now, the optimism will last until the market wakes up to the immutable fact that the virus is here to stay, and life will be different until a cure or a vaccine is found. 

FX

STOCK INDICES

TRADING TIP

Do you want to be Right or Do you want to be Rich?

Bears are all wailing and whining as the bulls have recently left them trampled in the wake of the recent stock market rally off the lows. The S&P500 index has recouped almost 50% of the loss from the highs to the lows. The situation with the virus outbreak has only become worse. However, the markets do not just reflect the present but also discount the future. 

For now, the focus is on the flattening of the infection curve in various hotspots such as Italy and New York. There will be times when the market prices relentlessly go against what you believe to be right. However, the purpose of trading is not to be right, but to be rich. 

To be successful, you need to be able to remain solvent during the periods when you are wrong. A way to do this is to keep your risk position to a minimum when the markets are going against you. The time to scale up will become apparent when things start going your way.

WHAT HAPPENED YESTERDAY

As of New York Close 13 Apr 2020,

FX

U.S. Dollar Index, -0.23%, 99.38
USDJPY, -0.77%, $107.63
EURUSD, -0.08%, $1.0920
GBPUSD, +0.51%, $1.2521
USDCAD, -0.72%, $1.3874
AUDUSD,  +0.95%, $0.6399
NZDUSD,  +0.23%, $0.6101

STOCK INDICES
S&P500, -1.01%, 2,761.63
Dow Jones, -1.39%, 23,390.77
Nasdaq, +0.48%, 8,192.42
Nikkei Futures, -1.91%, 19,118.0

COMMODITIES
Gold Futures, +0.87%, 1,768.00
Brent Oil Spot, +1.84%, 29.34

SUMMARY:

There were no notable economic prints on Monday as several markets were closed for Easter Monday. Dollar sold off when the U.S. opened, in an otherwise flat Asian and European Session. Financial markets remain on edge over the spread of the Covid-19 as severe restrictions on personal movement drag the global economy into a deep recession. However, a slower flow of news in the past few days has boosted risk assets modestly, and the Dollar, which serves as a safe-haven asset, has drifted modestly lower.

The greenback has also been pressured in the last few weeks by Federal Reserve measures that have flooded the financial system with dollars to address a liquidity crunch caused in part by demand for the greenback.

S&P 500 declined 1.01% on Monday in a slight reversal from last week’s rally, while relative strength in the technology stocks helped lift the Nasdaq Composite (+0.48%). The Dow Jones Industrial Average fell 1.39%, and the Russell 2000 fell 2.8%. U.S. 2yr yields rose 2bp to 0.25% and U.S. 10yr yields rose 3bp to 0.76%.

NEW YORK, CALIFORNIA, AND OTHER STATES PLAN  FOR REOPENING AS COVID-19 CRISIS EASES

Seven Northeastern U.S. states and three on the West Coast formed regional pacts on Monday aimed at coordinating a gradual reopening of their economies without a resurgence of Covid-19 infections just as the outbreak appeared to be starting to wane.

“Nobody has been here before, nobody has all the answers,” Cuomo said during an open conference call with five counterparts. “Addressing public health and the economy: Which one is first? They’re both first.”

IMPACT: New York, by far the hardest-hit state, will work closely with nearby New Jersey, Connecticut, Delaware, Pennsylvania, and Rhode Island to devise strategies for jointly easing stay-at-home orders imposed last month to curb coronavirus transmissions, New York Governor Andrew Cuomo said.

Political leaders said reopening of the economy may hinge on more widespread testing and cautioned that lifting of stay-at-home orders prematurely could reignite the outbreak. The Trump administration has signaled May 1 as a potential date for easing the restrictions.

SPAIN PARTIALLY LOOSENS LOCKDOWN AS COVID-19 DEATH RATE SLOWS

Spain let some businesses get back to work on Monday, but one of the strictest lockdowns in Europe remained in place despite a slowing in the country’s Covid-19 death rate.

Spain recorded its smallest proportional daily rise in the number of deaths and new infections since early March, with the cumulative toll rising by 517 to 17,489. The Health Ministry said on Monday confirmed Covid-19 cases totalled 169,496, up from 166,019 the previous day.

IMPACT: Although some activities, including construction and manufacturing, were allowed to restart, Health Minister Salvador Illa said that Spain remained in lockdown. Shops, bars, and public spaces are set to stay closed until at least April 26.

Business association CEOE warned that many companies, particularly the small firms that make up the bulk of the Spanish economy, do not have access to protective equipment like gloves and masks needed to guarantee the safety of staff. Some regional leaders also criticized the moves, fearing a resurgence of the coronavirus outbreak, which is weighing heavily on the Spanish economy, with some 900,000 jobs lost since mid-March.

TRUMP SAYS HE IS ON THE SAME PAGE WITH FAUCI, IS NOT FIRING HIM

Trump said on Monday he liked leading health expert Anthony Fauci and did not intend to fire him after Fauci said in an interview that earlier mitigation efforts against the Covid-19 outbreak could have saved more lives. On Sunday, Trump had retweeted a call to fire Fauci after the top U.S. expert on infectious diseases said lives could have been saved if the country had shut down sooner during the Covid-19 outbreak.

Trump in the past has repeated critical tweets of officials or enemies rather than make the criticism himself. The retweet fueled speculation Trump was running out of patience with the popular scientist and could fire him, prompting a White House denial before Trump’s briefing.

White House spokesman Hogan Gidley said Trump’s retweet addressed what he considered a false report on his travel restriction involving China, where the Covid-19 originated.

IMPACT: Fauci has assumed national prominence – and a degree of affection – as a leader in the fight against the Covid-19. He has contradicted or corrected Trump on scientific matters during the public health crisis, including whether the anti-malaria drug hydroxychloroquine is effective against the virus. Last week during the daily White House Covid-19 briefing, Trump stepped in and prevented Fauci from answering a question about hydroxychloroquine. Sacking Fauci would likely cause an erosion in the trust of the government’s ability to make decisions based on scientific evidence instead of focusing on the economy and the stock market.

DAY AHEAD

U.S. Retail Sales and Industrial Output prints coming out tomorrow are expected to be dismal. American shoppers had turned cautious in February, even before the disease had taken hold in the United States. U.S. Retail sales were down 0.5% over the month and the decline is expected to have accelerated to 8% in March. That may not seem incredibly dramatic given that most consumers were advised to stay at home, as panic-buying frenzy in supermarkets will likely hide the even gloomier reality in other sectors of the retail industry. Similarly, industrial output is also seen slipping sharply, with forecasts of a 4.2% month-on-month drop.

SENTIMENT

OVERALL SENTIMENT: Stocks tried higher, but failed, and yet it couldn’t break lower. Bonds remained in a tight range. Gold, however, continues to power higher without much of any news. Sometimes, you just have to listen to what the markets are telling you. 

FX

STOCK INDICES

TRADING TIP

Of Bazookas and the Kitchen Sinks

When the credit market started to crack in late 2007, it took the US Federal Reserve more than a full year from the first rate cut to the implementation of the “whatever it takes” Quantitative Easing programmes before they finally succeeded in stabilising the markets.

Compared to the slow and reactionary response by the Fed in the 08 crisis, the Covid-19 crisis has seen the Fed aggressively cut rates to zero and introduced unprecedented QE and fiscal measures all within less than a month. This is much like pumping the patient full of steroids, painkillers, and antibiotics as soon as he turns up in the Emergency Room. Yes, of course, in 2007-08, rates were much higher than and the crisis is not comparable to the scale of the current Covid-19 crisis. However, doing whatever it takes in such a short time and in such a resolute manner did stem the panic and helped the patient numb the pain and prevented a sudden death.  

This massive boost of free and easy money soothed the markets and led to the fierce rally in the stock market that we are currently witnessing. Some are even calling for a V-shaped recovery and new highs. That’s the “good news”. 

The bad news, though, is the patient is not cured. The damage will continue to be done as more jobs are lost, earnings get crushed and businesses start to fail. The reckoning has only been postponed, but eventually, it comes.