WHAT HAPPENED YESTERDAY

As of New York Close 9 Apr 2020,

FX

U.S. Dollar Index, -0.51%, 99.61
USDJPY, -0.32%, $108.47
EURUSD, +0.65%, $1.0929
GBPUSD, +0.57%, $1.2457
USDCAD, -0.28%, $1.3975
AUDUSD,  +1.78%, $0.6339
NZDUSD,  +1.35%, $0.6087

STOCK INDICES

S&P500, +1.45%, 2,789.82
Dow Jones, +1.22%, 23,719.37
Nasdaq, +0.77%, 8,153.58
Nikkei Futures, +3.01%, 19,490.0

COMMODITIES

Gold Futures, +4.07%, 1,752.80
Brent Oil Spot, -4.82%, 28.81

SUMMARY:

The Dollar has been pressured by Federal Reserve measures which have flooded the financial system with dollars to address a liquidity crunch caused in part by demand for the greenback. In the U.S., it was another dismal initial claims report, with 6.606 million jobless claims filed for the week ending April 4 (consensus 5.000 million), bringing the three-week total to 16,780,000 after revisions. Continuing claims for the week ending March 28 hit a record high 7.455 million. The key takeaway from the jobless claims data is that the number of filings is simply astounding and a true sign of the vast impact of the sudden economic stop. Unfortunately, it likely still doesn’t capture the full impact as it’s reasonable to assume that the system for filing claims is overwhelmed and not facilitating every effort to file for jobless benefits.

The stock market climbed to end the holiday-shortened week, the S&P 500 gained 1.45%, extending this week’s advance to 12.1% while the Nasdaq (+0.77%) underperformed but still gained 10.6% for the week. U.S. 2yr Yield fell 4bp to 0.23% and U.S. 10yr Yield fell 4bp to 0.73%.

The market climbed out of the gate after the release of another horrific weekly initial claims report was masked by news of more unprecedented action from the Fed, the central bank added another $2.30 trln in emergency lending capacity for businesses and municipalities. Fed Chairman, Jay Powell, said that the central bank will continue using its powers forcefully, proactively, and aggressively.

In Europe, the Bank of England announced that it will begin directly financing the U.K.’s fiscal needs by buying bonds from the government instead of through the secondary market while German Chancellor, Angela Merkel, rejected Italy’s demand for the issuance of joint euro debt. Also of note, the Japanese government will reportedly spend up to 237 bln Yen ($2.20 bln) to help Japanese manufacturers move their production facilities out of China.

UNITED STATES LOGS WORLD’S HIGHEST COVID-19 DEATH TOLL

The United States surpassed Italy on Saturday as the country with the highest reported Covid-19 death toll, recording more than 20,000 deaths since the outbreak began. The U.S. has seen its highest death tolls to date in the epidemic with roughly 2,000 deaths a day reported for the last four days in a row, the largest number in and around New York City. Even that is viewed as understated, as New York is still figuring out how best to include a surge in deaths at home in its official statistics.

The current federal guidelines advocating widespread social-distancing measures run until April 30. Trump, who is seeking re-election in November, will then have to decide whether to extend them or start encouraging people to go back to work and a more normal way of life. Trump has said he will unveil a new advisory council, possibly on Tuesday, that will include some state governors and will focus on the process of reopening the economy.

IMPACT: Public health experts have warned the U.S. death toll could reach 200,000 over the summer if unprecedented stay-at-home orders that have closed businesses and kept most Americans indoors are lifted when they expire at the end of the month. Most of the curbs, however, including school closures and emergency orders keeping non-essential workers largely confined to home, flow from powers vested in state governors, not the president.

Nonetheless, Trump has said he wants life to return to normal as soon as possible and that the measures aimed at curbing the spread of the Covid-19 disease carry their own economic and public-health cost.

Speaking by telephone with Fox News on Saturday evening, Trump said he would make a decision “reasonably soon,” based on the advice of “a lot of very smart people, a lot of professionals, doctors and business leaders.” He said “instinct” would also play a role.

TRUMP ORDERS U.S. GOVERNMENT TO HELP ITALY IN COVID-19 FIGHT

Trump on Friday ordered top U.S. administration officials to help Italy in fighting the Covid-19  by providing medical supplies, humanitarian relief, and other assistance. In a memo to several Cabinet ministers, Trump ordered a variety of measures to help Italy, including making U.S. military personnel in the country available for telemedicine services, helping set up field hospitals, and transporting supplies.

“The Italian Republic, one of our closest and oldest Allies, is being ravaged by the Covid-19 pandemic, which has already claimed more than 18,000 lives, brought much of the Italian healthcare system to the brink of collapse, and threatens to push Italy’s economy into a deep recession,” Trump said in the memo. 

IMPACT: Italy requested aid from the U.S., according to the White House. The aid granted by the U.S. comes in the form of technical assistance for Italy’s health sector through the Department of Health and Human Services and support for Italian businesses as well as international organizations and nongovernmental organizations. The U.S. is taking this opportunity to demonstrate its leadership in the face of the Chinese public relations campaign.

OPEC+ APPROVE OIL CUT TO SUPPORT PRICES

OPEC+ agreed on Sunday to a record cut in output to prop up oil prices amid the coronavirus pandemic and said they had an unprecedented deal with fellow oil nations, including the United States, to curb global oil supply by 20%. The group said it had agreed to reduce output by 9.7 million barrels per day (bpd) for May and June, after four days of talks and following pressure from Trump to arrest the price decline.

IMPACT:  Commodity Currencies slipped against the Dollar on Monday as a record output cut agreed by OPEC+ failed to offset broader concerns about global demand for resources, there is an estimated 30 million bpd drop in worldwide fuel consumption caused by the Covid-19 pandemic.

DAY AHEAD

As much of the world is stuck in a lockdown, one country where life has started to return to normal will shed some light on the toll of the virus outbreak on its economy as China reports GDP growth estimates. The data could either spread misery or provide a glimmer of hope to those countries still heavily stricken by the virus. US indicators will also be scrutinized as March numbers for retail sales and industrial production are released. But aside from these highlights, market sentiment will continue to be driven by virus headlines, with investors hoping to see signs that the spread is at least slowing in big economies such as the United States.

SENTIMENT

OVERALL SENTIMENT: 

The situation in Singapore and Japan has become increasingly worrying as the community spread resulting from imported cases continue to worsen. China is now implementing social distancing measures in their north-eastern cities and strengthening border controls to prevent importing infected cases from Russia which is currently seeing a surge in cases. OPEC+ finally agreed on cuts that may eventually prove to not be enough to compensate for the demand destruction that the world is currently undergoing. Currently, the market is still in the glass is half full mood, but with more corporate earnings and projections to be unveiled in the week ahead, that could be in for a change soon.

FX

STOCK INDICES

TRADING TIP

Hear the Printing Press

Forget the noise and focus on the inevitable. With the relentless wall of money, asset markets will be caught in the tussle between wave after wave of cheap/free money and the unimaginable economic damage that will be wrought by the virus. 

However, what is clear is with the tireless printing press churning out fiat money at all hours of the day, the value of fiat money will depreciate against hard assets. The path of gold to much higher levels is clear, and the journey has only just begun.

Of course, it’s easy to say this today after the nearly 4% move after the Fed announcement last night. Here, you can listen to us talk about why a higher Gold is inevitable hours BEFORE it happened yesterday:

It sure pays to listen, doesn’t it? Have a peaceful Easter and a Happy Holidays!

WHAT HAPPENED YESTERDAY

As of New York Close 8 Apr 2020,

FX

U.S. Dollar Index, +0.17%, 100.12
USDJPY, +0.21%, $108.94
EURUSD, -0.28%, $1.0860
GBPUSD, +0.42%, $1.2391
USDCAD, +0.06%, $1.4004
AUDUSD,  +1.05%, $0.6234
NZDUSD,  +0.65%, $0.6015

STOCK INDICES

S&P500, +3.41%, 2,749.98
Dow Jones, +3.44%, 23,433.57
Nasdaq, +2.58%, 8,090.90
Nikkei Futures, +0.93%, 19,328.0

COMMODITIES

Gold Futures, -0.19%, 1,680.45
Brent Oil Spot, +4.38%, 30.27

SUMMARY:

Dollar gained slightly on Wednesday in choppy trading as some optimism faded that the Covid-19 crisis may be nearing a peak faded and as investor concerns remained over the economic fallout of the pandemic. The Dollar’s firmer tone came even as stocks rallied, but held below intraday highs reached on Tuesday. 

Euro was weighed down by the failure of European Union finance ministers to agree on further support for their Covid-19-hit economies. The talks, intended to get an agreement on a package of measures for governments, companies, and individuals, were suspended until Thursday. A feud between Italy and the Netherlands over what conditions should be attached to eurozone credit for governments was blocking progress, sources said.

AUD gained 1.10% to a three-week high of $0.6234, erasing earlier losses after ratings agency S&P cut the outlook for its sovereign AAA rating from stable to negative, clawed back losses and turned positive on the day.

The stock market rallied on Wednesday, though the advance found resistance near Tuesday’s opening high. The S&P 500 gained 3.41% while the Russell 2000 (+4.6%) outperformed. U.S. 2yr Yield fell 1bp to 0.27% and U.S. 10yr Yield rose 2bp to 0.77%.

The rally took place as participants remained optimistic about the recent slowdown in new Covid-19 cases, which led to speculation about parts of the U.S. economy being able to reopen soon. NIAID Director Fauci said death models are improving and that a turnaround in Covid-19 would be likely after this week.

The optimism about the future overshadowed a couple of reminders about how dire the recent past has been. The World Trade Organization expects that global GDP will be down between 2.5% and 8.8% this year while the Organization for Economic Cooperation and Development noted today that its leading indicators are pointing to a sharp slowdown in all major economies except for India, where a less drastic slowdown has been observed.

U.S. PLANNING WAYS TO ‘EASE’ BACK TO NORMAL IF VIRUS EFFORTS WORK: FAUCI

U.S. health officials are planning ways for the country to return to normal activities if distancing and other steps to mitigate Covid-19 this month prove successful in curbing the outbreak, Fauci, the top U.S. infectious disease official said on Wednesday.

The Trump administration has called for 30 days of measures, including staying at least six feet away from other people, that have upended American life as most people stay isolated at home, shuttering schools and closing businesses through at least the end of April, with some states continuing certain closures through May and June.

IMPACT: Countries need to be cognisant of another spike in cases from re-infection. Researchers analysed blood sampled from 175 patients who had been released and the results showed nearly a third had low levels of antibodies and in some patients, they could not be detected at all.

COMING NEXT FROM THE FED: HOW MUCH FOR MAIN STREET?

Treasury Secretary Steven Mnuchin said Wednesday his department and the Federal Reserve hope to provide more details this week on an emergency lending facility directed toward medium-sized businesses, which have not yet benefited from the $2 trillion economic rescue package signed into law last month.

“We are actively working with the Fed on a Main Street lending facility,” Mnuchin said on CNBC Wednesday morning. “We hope to have an announcement this week with the details on that and get it up and running as soon as we can.”

IMPACT: The facility would be aimed at businesses with more than 500 employees that don’t have access to the Fed’s corporate credit facilities, which will buy debt issued by large companies. The Fed and Treasury have been working for weeks to set up that emergency program, which is supposed to be funded by some of the $500 billion set aside by Congress for loans to businesses and municipalities. Fed Chair Jerome Powell is set to speak later today at a virtual event hosted by the Brookings Institution, where he could provide more information on the Main Street facility.

SANDERS QUITS U.S. PRESIDENTIAL RACE, SETTING UP BIDEN BATTLE WITH TRUMP

Sanders, a one-time front-runner who promised to lead a grassroots political revolution into the White House, acknowledged he no longer had a path to victory after a string of decisive nominating contest losses to Biden but promised to work with his more moderate former rival to oust Trump.

The independent U.S. senator from Vermont said the Covid-19 outbreak, which has taken him off the campaign trail and limited his ability to get his message out, required a broad response and urgent attention in Congress.

Sanders called it a “difficult and painful decision” but said he would stay on the ballot in future primaries and continue to gather delegates in order to push the Democratic platform toward his populist anti-corporate agenda, including a government-run healthcare system and tax hikes for the rich.

IMPACT: The departure of Sanders, Biden’s last remaining rival in a field that once included more than two dozen candidates, sets up a long battle for the White House between the 77-year-old Biden and Trump, 73, who is seeking a second four-year term in office.

That matchup for the foreseeable future will revolve around Trump’s handling of the public health crisis that has upended all aspects of American life and rocked the country’s economy. Biden on Wednesday signaled he was ready for a bruising general election fight and the challenge he now faces in trying to unite the Democratic Party’s liberal and moderate wings.

DAY AHEAD

It’s OPEC+ meeting today, even though we saw a sizable rebound after Trump said that Saudi Arabia and Russia will cut 10-15 million barrels from their production, those gains look fragile. The Kingdom said it’s willing to cut its own production only if many countries – beyond Russia and OPEC members – also cut theirs.

Moreover, the size of the proposed cuts is extremely large. Even if everything goes smoothly with this production deal and everyone chips in, which is a big assumption, it’s still difficult to imagine any cut bigger than 5 million barrels per day, and that would do next to nothing to balance an oil market that is about to see more than 30 million barrels per day in-demand wiped out. In other words, even if this deal happens, there’s a good chance markets will be disappointed by its size, which makes the latest recovery look quite vulnerable.

SENTIMENT

OVERALL SENTIMENT: 

It’s hot and it’s cold, all on the same day. Tussle continues and for now, the wall of easy money seems to be prevailing. The US stock and bond markets will be closed for Good Friday and the bond market will have an early close (2pm NY) on Thursday, so expect some risk reduction ahead of the long weekend. With decreasing liquidity, expect more whipsawing price and tread carefully!

FX

STOCK INDICES

TRADING TIP

Expect to be Confused

In a career of trading, there will be times when what’s happening in the market just “makes no sense” to you. This is to be expected, and this is especially true when prices are moving against all that you believe to be fundamentally true. The key to success is not to expect the market to always make sense, but to insulate yourself against losses when it doesn’t. 

There will be occasions when prices are moving against you and you can’t make sense of it, and your gut reaction is to respond with anger and fight the moves with your capital. That may work sometimes, but more often than not, it will lead to financial ruin. It is imperative to keep your emotions in check and respond with humility and accept that sometimes, you can’t win all the time. It is imperative to then reduce your risk and wait for things to start to make sense to you again. 

On that note, Happy Easter to those who celebrate and Happy Holidays to the rest!

WHAT HAPPENED YESTERDAY

As of New York Close 7 Apr 2020,

FX

U.S. Dollar Index, -0.79%, 99.95
USDJPY, -0.50%, $108.68
EURUSD, +0.94%, $1.0894
GBPUSD, +0.87%, $1.2336
USDCAD, -0.67%, $1.4016
AUDUSD,  +1.08%, $0.6152
NZDUSD,  +0.51%, $0.5962

STOCK INDICES

S&P500, -0.16%, 2,659.41
Dow Jones, -0.12%, 22,653.86
Nasdaq, -0.33%, 7,887.26
Nikkei Futures, +2.29%, 18,995.0

COMMODITIES

Gold Futures, -0.87%, 1,679.15
Brent Oil Spot, -2.23%, 29.00

SUMMARY:

Dollar dropped and risk currencies, including the Aussie, outperformed on Tuesday as risk appetite improved on hopes that lockdowns may be slowing the spread of the Covid-19 in some countries. Action by central banks to ease a scramble for Dollars has helped bring some calm to markets.

The major averages ended Tuesday with modest losses after surrendering their opening gains. The S&P 500 (-0.16%) slipped four points after starting the day with a 3.51% gain while the Nasdaq (-0.33%) underperformed slightly and Dow Jones, -0.12%. U.S. 2yr yield rose 1bp to 0.28% and U.S. 10yr yield rose 8bp to 0.75%.

Equities jumped out of the gate after markets across Asia and Europe had another good outing during their time zones. The sharply higher start was attributed to optimism about a potential plateau in Covid-19 cases, but the key indices hit their best levels within the first five minutes of action, followed by a daylong slide that sent the Nasdaq and S&P 500 into negative territory.

Regarding additional stimulus, House Speaker Nancy Pelosi told Democratic lawmakers that she wants the next spending package to be at least $1 trillion. Meanwhile, Senate Majority Leader, Mitch McConnell, said that he expects the increase to the small business loan program to be approved on Thursday.

RESERVE BANKS INTEREST RATES HELD AT 0.25 PERCENT

The Reserve Bank has kept Australia’s official cash rate at the historic low of 0.25 percent (expected). In a statement, Governor Philip Lowe said the Board had reaffirmed the targets for the cash rate and the yield on three-year Australian government bonds of 25 basis points, as well as the other elements of the package announced on March 19.

IMPACT: Aussie was the leader of the board surging more than 1.5% after a decidedly hawkish statement from the RBA, which while acknowledging the challenges of the Covid-19 pandemic also hinted that its QE operations could be tapered.

The RBA stated, “Since this target was introduced, the Bank has bought around $36 billion of government bonds in secondary markets, including bonds issued by the states and territories. The Bank will continue to promote the smooth functioning of these important markets. If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required.”

AUSTRALIA’S PARLIAMENT SET TO PASS HUGE STIMULUS PLAN

Australia’s parliament will return today to pass an emergency A$130 billion ($80 billion) stimulus package as the Covid-19 pandemic wreaks havoc on the country’s economy. Federal Treasurer Josh Frydenberg said today would become “one of the most important days in the history of the Australian parliament, as we come together across the political divide to save millions of Australian jobs”.

IMPACT: The support measures come as economists predict the worst recession in Australia’s history, with the unemployment rate almost doubling to near 10%. The Reserve Bank of Australia on Tuesday predicted a “very large” economic contraction in the current quarter.

WORLD WATCHES ITALY AS BUSINESSES PLEAD TO RETURN TO WORK

Many Italian companies and academics are pressing the government to reopen factories to prevent an economic catastrophe, as the world watches how the first Western country to impose a lockdown can extricate itself from the unprecedented measures. About 150 Italian academics have published a letter in Italian financial daily (Il Sole-24 Ore), owned by the Italian business lobby Confindustria, urging the government to unblock the economy.

IMPACT: Italy faces among the most pressing dilemmas, not only because it’s lockdown has been in place longer than most nations and it has the world’s highest death toll, but because the Covid-19 has hit hardest in the northern industrial heartlands that generate a third of its economic output.

What worries many in Italy, and elsewhere, is the apparent lack of authoritative plans on how to safely lift measures, as governments wrestle with an unforeseen, invisible and unfamiliar foe and scientific guidance evolves on a weekly basis.

So far, officials have said that work restrictions would probably be lifted on a sector-by-sector rather than a geographical basis. Social distancing, wider use of personal protection devices such as face masks and strengthened local health systems have also been spoken about. Testing and “contact tracing” would be extended, including the use of smartphone apps and other forms of digital technology, following the South Korean playbook.

DAY AHEAD

One of the more important releases this week will be the U.S. Initial Jobless Claims tomorrow. This is the most up-to-date economic indicator right now, and another disappointing print could see the Dollar climb as stocks sell-off. The second most crucial release will be the U.S. University of Michigan consumer sentiment index for April, due tomorrow too, which will reveal how badly the US consumer has been hit. 

SENTIMENT

OVERALL SENTIMENT: 

Expect the bipolar market sentiment to continue as conflicting forces of free money and economic damage jostle for supremacy. Volatility will remain high as many liquidity providers such as banks are also reducing their risk-taking activities as work-from-home policies are in effect. In light of the much increased volatility and the wild whipsawing price action, it is imperative to size risk positions appropriately to withstand the sudden shifts in sentiment.

FX

STOCK INDICES

TRADING TIP
Size Does Matter

Do you feel like when you’re making money, you do not have big enough of a position and yet, when you are losing money, your position is too big? This is a common lament of many traders as they do not have a structured framework of sizing their trades. This may eventually lead to reckless risk-taking and having excessive risk positions when markets are at its most manic point. 

To stop that from happening, it is imperative to have a framework to guide you through wins and losses and prevent emotions from becoming part of your trading process. The first principle which must always be first and foremost in the minds of every trader is never to risk more than you are comfortable to lose. If you should ever find yourself bargaining with a higher power when the markets are moving against you, your risk is too big!

Getting the sizing of trades right is an essential ingredient of trading success. This is one of the skills that every successful trader I’ve had the privilege of meeting has and is one of the bedrock principles of our TrackRecord trading programmes. 

WHAT HAPPENED YESTERDAY

As of New York Close 6 Apr 2020,

FX

U.S. Dollar Index, +0.16%, 100.74
USDJPY, +0.62%, $109.13
EURUSD, -0.09%, $1.0799
GBPUSD, -0.25%, $1.2231
USDCAD, -0.64%, $1.4112
AUDUSD,  +2.02%, $0.6117
NZDUSD,  +1.21%, $0.5948

STOCK INDICES

S&P500, +7.03%, 2,663,68
Dow Jones, +7.73%, 22,679.99
Nasdaq, +7.33%, 7,913.24
Nikkei Futures, +7.81%, 19,005.0

COMMODITIES

Gold Futures, +4.99%, 1,727.75
Brent Oil Spot, -2.91%, 29.66

SUMMARY:

Sterling dropped against the Dollar and the Euro on Monday after it was reported that British Prime Minister Boris Johnson has been moved into intensive care after his Covid-19 symptoms worsened. His Downing Street office said he was still conscious. Johnson was admitted to hospital on Sunday night and had been undergoing tests after suffering persistent Covid-19 symptoms, including a high temperature, for more than 10 days. Britain has no formal succession plan should the prime minister become incapacitated, but Johnson, 55, asked Foreign Secretary Dominic Raab to deputise for him.

Japanese Prime Minister Shinzo Abe moved to declare a state of emergency in seven prefectures including Tokyo and Osaka, and announced a record economic stimulus package as the country braces for a surge in Covid-19  infections. The emergency declaration, which will also cover Kanagawa, Saitama, Chiba, Hyogo and Fukuoka prefectures, hands powers to local governments to try to contain the spread of the virus that causes Covid-19, including by urging residents to stay at home.

The stock market rallied more than 7% to start the shortened trading week, as sentiment was buoyed by encouraging signs that the COVID-19 outbreak may be improving. The Dow Jones Industrial Average (+7.73%) and Russell 2000 (+8.2%) set the pace, followed by the Nasdaq Composite (+7.33%) and S&P 500 (+7.03%). U.S 2yr Yield rose 4bp to 0.27% and U.S 10yr Yield rose 5bp to 0.67%.

The positive bias was formed overnight in the futures trade when data out of Europe showed countries reporting fewer Covid-related deaths, offering hope that the U.S. could follow a similar path. As the death toll in the U.S. approaches 10,000, New York Governor Cuomo said he’s seeing signs that possible flattening of New York’s caseload curve is starting to emerge.

Social distancing efforts have also provided an improved statistical outlook regarding total U.S. deaths, although the trajectory of the Covid-19 is subject to change. Nevertheless, these encouraging signs provided the market some relief that contributed to a broad-based, and steady, advance.

JAPAN PM ABE SAYS FISCAL SPENDING UNDER STIMULUS PLAN TO TOTAL 39 TRILLION YEN

Japanese Prime Minister Shinzo Abe said direct fiscal spending under the government’s stimulus package to combat the Covid-19 pandemic will total 39 trillion yen ($357 billion). Abe said on Tuesday morning the package would have 39 trillion yen in fiscal spending and wouldn’t be limited by what has been done in the past. “This will be among the biggest economic packages in the world,” with a total value of 108 trillion yen (equal to 20% of economic output), he told a meeting of ruling party lawmakers at his official residence.

IMPACT: Details of the package are expected to be announced Tuesday. Abe also said he plans to boost virus testing capacity to 20,000 a day as well as increase the number of hospital beds and ventilators. He pledged cash handouts of 200 million yen to small and mid-sized businesses.

UK PM JOHNSON MOVED TO INTENSIVE CARE AS COVID-19 SYMPTOMS WORSEN

British Prime Minister Boris Johnson was moved to an intensive care unit on Monday after his Covid-19 symptoms worsened though his Downing Street office said he was still conscious. Downing Street had said he was in good spirits and still in charge, though his condition deteriorated in the early evening and he was transferred at about 1800 GMT to an intensive care unit – where the most serious cases are treated – at St Thomas’ hospital in central London. Downing Street said he had been moved to the intensive care unit as “a precaution should he require ventilation to aid his recovery”.

IMPACT: Downing Street has said that Foreign Secretary Dominic Raab, who also holds the title First Secretary of State, would deputise for Johnson if necessary. Raab chaired the government’s emergency daily COVID-19 meeting on Monday and will continue to do so while Johnson is in hospital. But Britain’s constitution — an unwieldy collection of sometimes ancient and contradictory precedents — offers no clear, formal “Plan B” or succession scenario, experts said.

There is no guidance in the Cabinet Manual, which sets out the rules and conventions for the running of government, on precisely what to do should the prime minister and other senior figures become incapacitated.

U.S. ENTERS ‘PEAK DEATH WEEK’ FOR COVID-19

Globally, the Covid-19 figures remain stark and show no sign of plateauing yet. A tally at 1400 GMT put the number of confirmed cases at 1.27 million – just three days after it crossed the 1 million mark – and deaths up by 17,000 over the same period to 70,395.

But a ray of hope came from European nations, including hardest-hit Italy and Spain, which have started looking ahead to easing lockdowns after steady falls in their Covid-related fatality rates. “It’s going to be the peak hospitalization, peak ICU week and unfortunately, peak death week,” Admiral Brett Giroir, a physician and a member of the White House Coronavirus Task Force, told ABC’s “Good Morning America” TV program on Monday. Roughly twice as many people a day are now dying in the United States as in Spain or Italy, and hospitals report chaotic shortages of beds, ventilators, and protective gear.

IMPACT: In Spain and Italy, which account for over 40% of the world’s fatalities, the death rate has been declining for several days and public discussion has turned to how and when to ease weeks of drastic curbs on personal and economic activity.

DAY AHEAD

The Reserve Bank of Australia meets later today. With “no appetite” for negative interest rates and a clear indication that the lower bound of interest rates is 0.25% – where they were cut to in March – further measures by the RBA will likely comprise changes to its QE programme and additional support for the banking system to maintain cheap lending.

The RBA’s QE scheme is different from that adopted by most other central banks and resembles more closely the Bank of Japan’s quantitative and qualitative easing (QQE) programme whereby it targets the yield on government bonds rather than set a specific amount of purchases. The RBA’s target is to keep the yield on 3-year Australian government bonds (AGB) at 0.25%.

SENTIMENT

OVERALL SENTIMENT: 

Good news cheered the market and bad news was shrugged off as the shorts were sent running for cover. For now, the bear market rally is hurting the bears and that is a key feature of bear markets. The relentless printing presses of all the central banks of the world are driving asset prices higher and Gold is starting to exert its strength. The dominant trade will change as the crisis progresses. To be bearish stocks is to fight against the printing presses although the economic reality is on your side. Gold, however, has the printing presses and the economic reality which requires low interest rates and quantitative easing for a long time to come on its side. 

FX

STOCK INDICES

TRADING TIP

The Baton Changes Hands…

The dominant trade at the beginning of the crisis will not stay as the dominant trade throughout the crisis. Prices change, oversubscribed positions get unwound, and market psychology changes. With many now having the mindset of selling instead of all overwhelmingly wanting to buy the dip, the stock markets will now be caught in a tussle between conflicting forces. While selling stocks used to be the dominant trade when many investors were complacently long with leverage while remaining oblivious about the Covid-19 virus risk, the situation has now changed. 

To be successful in trading, you must constantly revisit your views and the trades that you have on and ask yourself if this is still the best use of your risk capital. The goal is always to find the best risk reward trade. 

With all the money printing going on around the world, it is a matter of time before hard assets start to be repriced against fiat currencies. 

If the breakout in Gold holds, the time for it to be the dominant trade may be at hand.

WHAT HAPPENED YESTERDAY

As of New York Close 3 Apr 2020,

FX

U.S. Dollar Index, +0.39%, 100.58
USDJPY, +0.51%, $108.46
EURUSD, -0.45%, $1.0809
GBPUSD, -1.07%, $1.2262
USDCAD, +0.49%, $1.4203
AUDUSD,  -1.06%, $0.5996
NZDUSD,  -0.79%, $0.5871

STOCK INDICES

S&P500, -1.51%, 2,488.65
Dow Jones, -1.69%, 21,052.53
Nasdaq, -1.53%, 7,373.08
Nikkei Futures, -1.01%, 17,628.0

COMMODITIES

Gold Futures, +0.49%, 1,645.70
Brent Oil Spot, +17.68%, 30.55

SUMMARY:

The Dollar firmed against major currencies for a third straight day on Friday, as investors took shelter in the U.S. currency amid worsening economic fallout from the Covid-19 outbreak.  The Dollar largely shrugged off the U.S. non-farm payrolls report that showed massive job losses of 701,000 last month, compared with expectations of 100,000 lost jobs. March’s contraction abruptly ended a historic 113 straight months of employment growth. The Labor Department also revised February’s number upward to 275,000 job gains. The unemployment rate rose to 4.4% from 3.5% the previous month.

The non-farm payrolls report followed Thursday’s data showing initial claims for U.S. unemployment benefits rose to 6.65 million in the latest week from an unrevised 3.3 million the previous week.

The key takeaway from the report is that it still isn’t adequately capturing the full extent of the weakness in the labor market. Things are even worse than the headlines suggest, as the Initial Jobless Claims report released last Thursday made abundantly clear. Those filings are not embedded in Friday’s report, which was formulated mostly on the basis of an employment survey conducted the week of March 12. In actuality, the unemployment rate is likely closer to 10.0% at this juncture.

The stock market ended the down week on a lower note, though the S&P 500 (-1.51%) was able to remain above its low from Wednesday. The benchmark index surrendered 2.1% for the week. Small caps had a more difficult go, as the Russell 2000 (-3.1%) lost 7.1% for the week, stopping the decline just a bit above its March low. Dow Jones, -1.69% and Nasdaq, -1.53%.

OPEC+ MEETING DELAYED

OPEC and Russia have postponed a Monday meeting to discuss oil output cuts until April 9, OPEC sources said on Saturday, as a dispute between Moscow and Saudi Arabia over who is to blame for plunging crude prices intensified. OPEC+ is working on a deal to cut the production of oil equivalent by about 10% of world supply, or 10 million barrels per day, in what member states expect to be an unprecedented global effort including the United States.

Washington, however, has yet to make a commitment to join the effort and Russian President Vladimir Putin on Friday put the blame for the collapse in prices on Saudi Arabia – prompting a firm response from Riyadh on Saturday. OPEC sources later downplayed the Saudi-Russia row, saying the atmosphere was still positive, although there was no draft deal yet nor agreement on details such as a reference level from which to make the production cuts.

IMPACT:  US oil prices soared 25% — their biggest one-day gain on record — on Thursday after Trump tweeted that he hopes and expects Saudi Arabia and Russia will slash output by between 10 million and 15 million barrels per day.

The United States is not part of OPEC+ and the idea of Washington curbing production has long been seen as impossible, not least because of U.S. antitrust laws. Still, the oil price crash has spurred regulators in Texas, the heart of U.S. oil production, to consider regulating output for the first time in nearly 50 years.

Russian Energy Minister Alexander Novak told Russian state media he understood that the United States had legal restrictions on output cuts but it should still be flexible. Other oil producers that do not belong to OPEC+ have indicated a willingness to help. Canada’s Alberta province, home to the world’s third-largest oil reserves, is open to joining any potential global pact. Norway, Western Europe’s largest oil and gas producer, said on Saturday it would consider cuts to its oil output if a wide global deal is agreed.

TRUMP: ‘GOING TO BE A LOT OF DEATH” IN U.S. NEXT WEEK FROM COVID-19

Trump told Americans to brace for a big spike in Covid-19 fatalities in the coming days, as the country faces what he called the toughest two weeks of the pandemic. “There’s going to be a lot of death,” Trump said at a briefing with reporters.

White House medical experts have forecast that between 100,000 to 240,000 Americans could be killed in the pandemic, even if sweeping orders to stay home are followed. “We are coming up to a time that is going to be very horrendous,” Trump said at the White House. “We probably have never seen anything like these kinds of numbers. Maybe during the war, during World War One or Two or something.”

IMPACT: New York, the hardest-hit state, reported on Sunday that for the first time in a week, deaths had fallen slightly from the day before, but there were still nearly 600 new fatalities and more than 7,300 new cases. Places such as Pennsylvania, Colorado and Washington, D.C., are starting to see rising deaths. Once the peak of the epidemic passes, Cuomo said a mass rollout of rapid testing would be critical to help the nation “return to normalcy.”

BRAZIL LAWMAKERS PASS ‘WAR BUDGET’ AS COVID-19 CASES TOP 10,000

Brazil’s lower house of Congress approved a constitutional amendment for a “war budget” to separate Covid-related spending from the government’s main budget and shield the economy as the country surpassed 10,000 confirmed cases.

The war budget still needs the Senate’s approval by three-fifths of the votes in two rounds expected to take place this week. Late on Friday, the lower house approved the main text of the bill with 423 votes in favor and one opposed in the second round of voting after the first score of 505 in favor and two against.

Besides easing fiscal and budgetary constraints to speed up measures tackling the outbreak, the war budget also grants the Brazilian central bank emergency bond-buying powers to stabilize financial markets. “We must ensure money reaches key sectors, so as of this week we’ll start discussing what we want to buy and what kind of intervention we want to make,” Brazil’s central bank president, Roberto Campos, said in a live presentation to XP brokerage on Saturday evening.

IMPACT: Bolsonaro’s approval rating has fallen to its lowest level since he took office last year amid mounting criticism of his handling of the public health crisis. Brazil is among a number of countries struggling to get medical supplies from China. Earlier on Saturday, President Jair Bolsonaro asked Indian Prime Minister Narendra Modi for support in supplying pharmaceutical inputs for the production of hydroxychloroquine.

DAY AHEAD

The pandemonium in financial markets has calmed down somewhat, but that serenity seems fragile and investors will keep a close eye on how fast the virus is spreading in America, which is now entering the most painful phase. On the bright side, Europe looks close to a ‘peak’ in new cases. That said, markets will probably remain nervous until the US shows signs of stabilization too, and since that point might be weeks away, risk aversion will linger. 

As Trump said today in his press briefing that he expects the peak to be seen in 2 weeks, the market is starting off the week on a positive note. The peak he’s talking about is only referring to the early epicenters of outbreaks such as New York, and the other states are still seeing an increase. History has shown that optimism from Trump on the Covid-19 front should always be taken with a generous handful of salt. 

With regards to events and data, the weekly US jobless claims and the OPEC+ meeting would be the most market moving.

SENTIMENT

OVERALL SENTIMENT: 

The market is now focused on the improving situation in Italy, Spain, France and New York. With the aggressive social distancing measures that they have implemented, the peak is bound to arrive someday and that someday has finally arrived. That is the good news. 

The bad news is, though, you may declare victory on the virus, but that is just a battle and the war is not over. As evidenced by the increase in social distancing measures in Singapore and the impending declaration of state of emergency in Japan, the 2nd wave is just starting to hit the places which let their guard down. 

The only defence against the virus is social distancing and the economic costs that need to be paid will be paid. The only difference is if the governments are proactive, the economic costs do not come with the costs of lives and infected cases which could have been prevented and if they are reactive, it will come with huge costs to the lives of the citizens and residents.

FX

STOCK INDICES

TRADING TIP

Run to where the Ball is going to be

When you watch little children play football, they spend most of their time and energy chasing the ball. When they learn how to play the game properly, they do less of that, but more of running into spaces where they expect the ball will be. 

That is how successful traders find good trading opportunities as well. Many were confused as to why the dramatic loss of more than 700K jobs as shown by the US Non-farm Payrolls number (vs expected -100K) did not elicit much a market reaction, but with the latest weekly Initial Jobless claims coming in at more than 6.6 million and Continuing Claims at 3.0 million, is anyone really surprised to see 700K jobs being lost?

The world is now being conditioned to seeing outsized unemployment numbers. The economic damage that will be caused by the ripples will soon be felt. We will see consumption booms in certain sectors (grocery shopping, health supplement, online entertainment platforms etc) and a collapse in sectors which require group participation (bazaars, cinemas, clubs, bars, restaurants etc). Some sectors will face a cash crunch as their revenue streams dry up. There will be defaults, and the governments will try their utmost to save all these industries.

In times of upheavals, there will be many opportunities if and only if you are looking ahead and not behind. Figure out where the ball will go next because that will give you goalscoring opportunities.

WHAT HAPPENED YESTERDAY

As of New York Close 2 Apr 2020,

FX

U.S. Dollar Index, +0.69%, 100.19
USDJPY, +0.81%, $108.04
EURUSD, -1.08%, $1.0846
GBPUSD, +0.12%, $1.2392
USDCAD, -0.42%, $1.4131
AUDUSD,  -0.10%, $0.6065
NZDUSD,  +0.13%, $0.5915

STOCK INDICES

S&P500, +2.28%, 2,526.90
Dow Jones, +2.24%, 21,413.44
Nasdaq, +1.72%, 7,487.31
Nikkei Futures, +0.59%, 17,925.0

COMMODITIES

Gold Futures, +2.83%, 1,636.40
Brent Oil Spot, +16.57%, 25.96

SUMMARY:

The Dollar rose against a basket of currencies for a second straight day on Thursday as investors, worried about the prospect of a global recession, continued to take shelter in the greenback. With the increase in the Covid-19 impact around the world, investors are looking at the Dollar as a safe haven.

The stock market ended a two-day skid on Thursday, and oil prices spiked more than 30% before closing the day up 24% on Trump’s tweet that Saudi and Russia may agree to a 10-15 million barrels per day cut in production. Stocks rose even as weekly initial claims doubled to a record 6.6 million, depicting the dire economic situation caused by Covid-19. The S&P 500 (+2.28%) and Dow Jones Industrial Average (+2.24%) set the pace with gains over 2.0%, followed by the Nasdaq Composite (+1.72%) and Russell 2000 (+1.3%).

Although more discussions are reportedly needed between Saudi Arabia, Russia, and possibly even the U.S. to reach an agreement, news that Saudi Arabia is asking for an emergency OPEC+ meeting supported the market’s price-truce hopes. Conversely, some investors were wary that the lack of oil demand would still weigh on the industry despite attempts to control supply.

US initial jobless claims spiked by 3.341 million to a seasonally adjusted 6.648 million (consensus 2,800,000) for the week ending March 28. Continuing claims for the week ending March 21 reached 3.029 million, which is the highest level since July 6, 2013. The positive price action in the market suggested that the shocking numbers may already have been priced in.

TRUMP TOUTS ‘GREAT’ SAUDI-RUSSIA OIL DEAL TO HALT PRICE ROUT, BUT DETAILS UNCLEAR

Trump said on Thursday he had brokered a deal with top crude producers Russia and Saudi Arabia to cut output and arrest an oil price rout amid the global Covid-19 pandemic, though details of how cuts would work were unclear. Trump said the two nations could cut output by 10 to 15 million barrels per day (bpd) – an unprecedented amount representing 10% to 15% of global supply, and one that would require the participation of nations outside of OPEC and its allies.

Trump said he spoke with both Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman on Thursday. “I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump wrote on Twitter.

IMPACT: A senior U.S. administration official familiar with the matter said Trump would not formally ask U.S. oil companies to contribute to the production cuts, a move forbidden by U.S. antitrust legislation. Saudi Arabia, the de facto head of OPEC, called on Thursday for an emergency meeting of OPEC and non-OPEC oil producers, an informal grouping known as OPEC+, state media reported, saying it aimed to reach a fair agreement to stabilize oil markets. Trump is separately set to meet with U.S. oil industry executives on Friday.

But the question remains: even if the world’s top three producers reach an unprecedented pact to curb oil output, can any deal remove enough oil when the Covid-19 has destroyed a third of global demand for crude? Oil demand has dropped by as much as 30 million barrels per day (bpd) – according to Trafigura, roughly equivalent to the combined output of Saudi Arabia (12M), Russia (10M) and the United States (12M).

Saudi immediately responded by confirming that they are open to cuts but must be accompanied by other producers outside of OPEC. Back in the late 80s and 90s when oil prices went all the way below $10, the whole way had OPEC agreeing to production cuts but many were cheating on their quota as they needed the cash flow. That is likely to be the case again even if production cuts get the buy-in from all the producers.

FRANCE’S COVID-19 DEATH TOLL JUMPS AS NURSING HOMES INCLUDED

The Covid-19 death count in France surged to nearly 5,400 people on Thursday after the health ministry began including nursing home fatalities in its data. More than two-thirds of all the known nursing home deaths have been registered in France’s Grand Est region, which abuts the border with Germany.

It was the first region in France to be overwhelmed by a wave of infections that has rapidly moved west to engulf greater Paris, where hospitals are desperately trying to add intensive care beds to cope with the influx of critically ill patients.

IMPACT: The country’s broad lockdown is likely to be extended beyond April 15, Prime Minister Edouard Philippe said on Thursday, extending a confinement order to try and deal with the crisis that began on March 17.

GLOBAL COVID-19 CASES SURPASS ONE-MILLION

Global Covid-19 cases surpassed 1 million on Thursday with more than 52,000 deaths as the pandemic further exploded in the United States and the death toll climbed in Spain and Italy, according to a tally of official data.

Morgues and hospitals in New York City, the epicenter of the U.S. outbreak, bent under the strain on Thursday, struggling to treat or bury casualties, as New York state’s Governor Andrew Cuomo offered a grim prediction the rest of the country would soon face the same misery.

In Italy, which hit a daily peak of 6,557 new cases on March 21 and accounts for around 28% of all global fatalities, the death toll climbed to 13,915 on Thursday. But it was the fourth consecutive day in which the number of new cases stayed within a range of 4,050-4,782, seeming to confirm government hopes that the epidemic had hit a plateau.

In Tokyo, at least 97 new Covid-19 infections were confirmed on Thursday, the biggest daily increase yet. The figure follows 66 reported on Wednesday and 78 on Tuesday, and brought the total number of confirmed cases in Tokyo to 684, raising pressure for Prime Minister Shinzo Abe to declare a state of emergency to curb the rapid spread of the virus. A resurgence of cases in Tokyo is a clear and present danger that must be watched closely.

IMPACT: There has been particular concern about the spread of the virus in countries that are already struggling with weakened health systems. In Iraq, three doctors involved in the testing, a health ministry official and a senior political official said there were thousands of cases of Covid-19, many times more than it has publicly reported. The health ministry denied it.

DAY AHEAD

For the first time in a decade, US Nonfarm Payrolls (NFP) will most certainly turn negative in March, indicating that Americans are losing jobs at a rapid pace. Forecasts suggest that NFP will clock in at -124k, from +273k in February, pushing the unemployment rate up to 3.8% from 3.5% previously. Average hourly earnings are projected to hold steady at 3.0% in yearly terms but admittedly, with so much attention on job losses, wage growth might be of secondary importance.

Yet, investors might view these figures as somewhat outdated. The data was collected during the first half of March, which means that they won’t reflect most of the damage from the virus-fighting lockdowns, as those came into effect during the second half of the month. Hence, although this week’s employment report will show some weakness, that might only be a small taste of the real damage in the labour market, and the true fallout will be revealed when the numbers for April are released next month.

SENTIMENT

OVERALL SENTIMENT: Situation continues to worsen in the UK and US while Trump is focused on boosting the stock markets with various initiatives. The debate on whether using masks work is an example of how idiotic it has become. You would think that it would just be common sense to ask the governments which have managed to keep the outbreak under control (China, South Korea, Taiwan, Singapore etc). The US Initial and Continuing Claims are telling signs of all the jobs that are being lost all around the world. Who’s rushing out to spend money on frivolities at this moment?

FX

STOCK INDICES

TRADING TIP

Let Go of the Past

Historical data points should be used as reference points to compare what’s currently happening to the world against previous crises that have happened before. However, we should avoid being anchored to the worst-case scenarios of the past. 

What is currently happening is unprecedented. That is why the monetary and fiscal policies that have been announced and will continue to be announced are multiple times in orders of magnitude vs what has been implemented before. 

That is because the economic damage that is being wrought and that will continue to be wreaked is in orders of magnitude of what we have seen before. Start seeing the world through this lens and you will begin to understand what is about to come in the months ahead.

WHAT HAPPENED YESTERDAY

As of New York Close 1 Apr 2020,

FX

U.S. Dollar Index, +0.50%, 99.50
USDJPY, -0.24%, $107.29
EURUSD, -0.73%, $1.0951
GBPUSD, -0.31%, $1.2380
USDCAD, +0.65%, $1.4153
AUDUSD,  -0.74%, $0.6090
NZDUSD,  -0.36%, $0.5935

STOCK INDICES

S&P500, -4.41%, 2,470.50
Dow Jones, -4.44%, 20,943.51
Nasdaq, -4.41%, 7,360.58
Nikkei Futures, -5.58%, 17,865.0

COMMODITIES

Gold Futures, +0.52%, 1,604.95
Brent Oil Spot, -0.76%, 22.27

SUMMARY:

The Dollar advanced on Wednesday, with markets bracing for what is shaping up to be one of the worst economic contractions in decades as the world confronts the Covid-19 pandemic. The Dollar rose against the Euro, Sterling and most other major currencies as selling in global shares highlighted growing risks from the pandemic that has shown little sign of easing. Markets were spooked after Trump’s dire press briefing late Tuesday, where he warned Americans of a “painful” two weeks ahead in fighting the Covid-19 even with strict social distancing measures.

The stock market retreated more than 4% to start the second quarter on Wednesday, as Trump warned that the next two weeks will be “very painful” in terms of Covid-19 fatalities. The S&P 500 (-4.41%), Dow Jones Industrial Average (-4.44%), and Nasdaq Composite (-4.41%) each fell 4.4%. The Russell 2000 underperformed with a 7.1% decline.

The Coronavirus Task Force on Tuesday estimated that deaths attributed to Covid-19 could total 100,000-240,000 in the U.S. with daily deaths projected to peak in two weeks. To help contain the outbreak, and hopefully bring these figures down, Florida, Nevada, and Pennsylvania joined the growing list of states to issue ‘stay at home’ orders for 30 days.

Original assumptions made by the medical community were based on the data coming out of China, which the U.S. intelligence community said underrepresented the real number of cases and deaths in the country, according to Bloomberg. The White House’s projections, based on new data being released every day, had the market worried about the social and psychological effects on the economy.

ITALY COVID-19 DEATH RATE SLOWS

Italy’s daily death toll from Covid-19 on Wednesday was the lowest for six days, authorities said, but the overall number of new infections grew and the government extended a national lockdown until at least the middle of April. The Civil Protection Agency said 727 people had died over the last 24 hours, down from 837 the day before, bringing total fatalities from the world’s deadliest outbreak of the viral pandemic to 13,155.

In the wealthy northern region of Lombardy, the epicentre of the outbreak, the daily tally of new infections jumped 50% compared with the day before, reversing a recent downtrend. The daily death toll in the region also grew, and a study suggested the number of fatalities is far higher than officially registered.

IMPACT: A national lockdown in place since March 9 was due to expire on Friday, but Prime Minister Giuseppe Conte announced the restrictions would remain in place until at least April 13. With Italy’s economy on its knees due to the lockdown, a survey of purchasing managers showed manufacturing activity fell in March at its sharpest rate for 11 years (to 40.3 from 48.7), and Economy Minister Roberto Gualtieri said this year would see a steep recession.

RUSSIAN PLANE WITH COVID-19 MEDICAL GEAR LANDS IN U.S. AFTER TRUMP-PUTIN CALL

Trump, struggling to fill shortages of ventilators and personal protective equipment, accepted Putin’s offer in a phone call on Monday. A Russian military transport plane left an airfield outside Moscow and arrived at New York’s John F. Kennedy airport in the late afternoon on Wednesday.

The State Department said that following the call between the two leaders, the United States “has agreed to purchase” needed medical supplies, including ventilators and personal protection equipment, from Russia and that they were handed over to the Federal Emergency Management Agency on Wednesday in New York City.

IMPACT: A U.S. official in Washington said the shipment carried 60 tons of ventilators, masks, respirators and other items. Russia has also used its military to send planeloads of aid to Italy to combat the spread of the Covid-19, exposing the European Union’s failure to provide swift help to a member in crisis and handing Putin a publicity coup at home and abroad.

TRUMP SAYS HE EXPECTS SAUDI-RUSSIA OIL PRODUCTION DEAL IN COMING DAYS

Trump said on Wednesday he expected Saudi Arabia and Russia to reach a deal in the next few days on oil production to end a price war that has “ravaged” the oil industry worldwide. “I think that they will work it out over the next few days. … Both know what they have to do,” Trump told a White House news conference, without elaborating on the reasons for his confidence.

“I think that Russia and Saudi Arabia at some point are going to make a deal, in the not-too-distant future, because it’s very bad for Russia, it’s very bad for Saudi Arabia,” he said, adding he had separate “great” conversations with Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin in recent days.

IMPACT: Trump’s intervention comes as April shapes up to be a calamitous month for the oil market. Saudi Arabia plans to boost its supply to a record 12.3 million barrels a day, up from about 9.7 million in February. At the same time, fuel consumption is poised to plummet by 15 million to 22 million barrels as Covid-19-related lockdowns halt transit in much of the world. Oil demand has been so battered by government lockdowns to stop the spread of the Covid-19 that any conceivable oil production cut agreement between the U.S., Canada, Russia and OPEC members would still fall well short of what’s needed to shore up the market.

DAY AHEAD

Estimates for this week’s US Initial Jobless Claims from economists at major firms range from more than 3 million to as high as 5.5 million.  Today’s report is expected to signal even further economic pain ahead. 

Tomorrow, the March jobs report – which includes the unemployment rate – will be released. But, it includes data only through March 14, and so will not show the impact of the last two weeks of the month where millions filed for unemployment benefits. Forecasts are for Nonfarm Payrolls to plummet by 123k in March versus a healthy gain of 273k in February. The unemployment rate is expected to jump to 3.9%. 

With the markets already having gotten a glimpse of what is to come from last week’s dire jobless claims figures, a poor jobs report may not have much of an impact unless it’s shockingly bad.

SENTIMENT

OVERALL SENTIMENT:

With all the announced fiscal policies baked into the price, the continuing spread of the virus in the US and UK remains as a weight on the market. News of funds caught with investments in corporate bonds which are getting downgraded as the economic conditions deteriorate will continue to plague the headlines. Investment losses, job losses, revenue loss for corporates… where are the wins going to come from?

FX

STOCK INDICES

TRADING TIP

Expect Randomness and Irrationality

When markets are uncertain and under stress, the risk appetite of market-makers drop dramatically. This will lead to a decrease in the ability of participants to get a “reasonable” price when they have sizeable trades to execute.

Such illiquid conditions will lead to price spikes and falls that seemingly happen without rhyme or reason. In the chart below, you can see that there was a price spike at 3.45pm London time (2245 in Singapore) that took AUD/USD from .6055 to .6185 within seconds before settling down at 0.6105 for a while before drifting back below 0.6100. Some attribute the price spike to the WMR fix (https://www.investopedia.com/terms/w/wmreuters-benchmark-rates.asp) but that happens at 4.00pm London.

 We may never know what the real reason is, and it could just be as simple what we technically call a fat finger error where someone just accidentally typed in and hit the wrong rate. Also, note that there was a sell-off the day before that was just as inexplicable.

 Suffice to know that market conditions are illiquid, hence we can only protect ourselves by sizing our risk appropriately. Where you intend to stop out may not be the rate that you get to exit at. 

WHAT HAPPENED YESTERDAY

As of New York Close 31 Mar 2020,

FX

U.S. Dollar Index, -0.18%, 99.00
USDJPY, -0.29%, $107.51
EURUSD, -0.20%, $1.1026
GBPUSD, -0.09%, $1.2407
USDCAD, -0.65%, $1.4079
AUDUSD,  -0.57%, $0.6138
NZDUSD,  -1.09%, $0.5950

STOCK INDICES

S&P500, -1.60%, 2,584.59
Dow Jones, -1.84%, 21,917.16
Nasdaq, -0.95%, 7,700.10
Nikkei Futures, -1.29%, 18,557.5

COMMODITIES

Gold Futures, -3.12%, 1,592.00
Brent Oil Futures, -1.96%, 25.94

SUMMARY:

Dollar fell against a basket of major currencies on Tuesday modestly pressured by the weight of Federal Reserve measures meant to ensure there was enough liquidity in the global financial system. The Dollar earlier in the session benefited from quarterly and fiscal year-end demand from portfolio managers and Japanese firms, but trading was choppy, with the Dollar alternating between gains and losses.

Markets ended the tumultuous first quarter in negative territory on Tuesday, while investors continued to assess the latest news on Covid-19 and the policies proposed to address its impact. The S&P 500 closed near session lows with a 1.6% decline after a brief stay in positive territory early in the session. The Dow Jones Industrial Average lost 1.84%, the Nasdaq Composite lost 0.95%, and the Russell 2000 lost 0.5%.  

Notably, Trump said a $2 trillion infrastructure bill should be included in the fourth part of a stimulus bill with U.S. interest rates near zero. Prior to the statement, Bloomberg reported that White House officials were looking into a $600 billion relief bill for mortgage markets, the travel industry, and state governments.

On the Covid-19 front, NIAID Director Dr. Fauci said there have been “glimmers of hope” that social distancing is helping to curtail the spread of COVID-19, but the situation remained dire with the number of infections continuing to rise in the U.S. On a related note, Texas Governor Abbott issued a “stay at home” order until May 4.

FED’S NEW REPO FACILITY

The Federal Reserve announced Tuesday the opening of a new repurchase agreement or repo facility aimed at supplying foreign central banks with US dollars. The pool will allow monetary authorities abroad to swap US government bonds for Dollars. Global demand for the US currency has soared as the Covid-19 crisis drives investors to stable assets and forces firms to shore up their cash reserves. The Fed’s facility “should help support the smooth functioning of the US Treasury market,” the bank said in a statement. The facility will open on April 6 and operate for at least six months, the Fed added.

IMPACT: Dollar pared gains in the aftermath of the latest Fed move on Tuesday to expand the ability of dozens of foreign central banks to access Dollars during the Covid-19 crisis. Essentially, the Fed is allowing foreign central banks to exchange their holdings of U.S. Treasury securities for overnight Dollar loans. It is one of a slew of measures that the Fed unleashed to address liquidity problems caused by the economic fallout from the Covid-19 pandemic. That has dented the Dollar’s luster a bit as the supply of the U.S. currency expands.

CHINA MANUFACTURING PMI REBOUNDS

China’s manufacturing PMI was 52 and its non-manufacturing PMI was 52.3 in March, after an abrupt fall in February to 35.7 and 29.6, respectively. For manufacturing, the good news is that production and new orders rose above 50 but export orders and imports were still below 50. This reflects that domestic demand has recovered faster than external demand (spread of pandemic overseas), which has been affected by the Covid-19 for most of March. Although the survey showed business confidence improved as output resumed gradually, Caixin and IHS Markit noted demand challenges ahead. The positive readings are not as good as they seem because they are survey numbers and even China’s National Bureau of Statistics, which releases the PMI data, expressed caution, “The number above 50 doesn’t mean that economic activity is fully resumed. We need to fully understand the unprecedented austerity and complexity, and should pay great attention to the virus shocks on production and demand,”

It is noteworthy that for the non-manufacturing PMI,  only the sub-indices of business activity and business expectations were above 50. All the other sub-indices, e.g. new orders, prices, and employment were in contraction, indicating that companies do not want to hire before they can confirm a solid return of business activity. 

IMPACT: China’s manufacturing PMI and non-manufacturing PMI returned to above-50 in March. That improvement could be brief as these are month-on-month comparisons for survey respondents. The >50 readings do not represent a swift recovery, but more representative that those surveyed are seeing a light at the end of the tunnel when the month before they thought they were staring into the abyss. 

PUTIN SENDING MEDICAL SUPPLIES TO HELP U.S.

Russia is sending the United States medical equipment to help fight the Covid-19 outbreak, the Interfax news agency reported on Tuesday, citing the Kremlin spokesman Dmitry Peskov. Putin made the proposal in a phone conversation with Trump on Monday, when they discussed the Covid-19 pandemic and oil markets, directing their energy ministers to speak.

“Trump gratefully accepted this humanitarian aid,” Interfax quoted Peskov as saying. A Russian plane with medical and protective equipment may leave for the United States on Tuesday, he added.

IMPACT: According to a senior administration official at the White House, Russia is expected to deliver a planeload of supplies and personal protection equipment on Wednesday.

DAY AHEAD

The lockdown measures taken to slow the spread of the virus will hit companies across the U.S., with industries such as tourism, bars, and restaurants, likely to be decimated first as consumers are told to stay at home. Very little economic data has been released so far that captures the scope of the damage but that changes later today when the ISM business surveys for March is released.

Forecasts suggest that the manufacturing index will drop to 45.0 from 50.1 in February, while the non-manufacturing print is expected to fall to 44.0 from 57.3 previously, both entering contraction territory. If these numbers are met, that would signal the U.S. economy is already in recession, which will probably deepen in the coming months as more states go into quarantine and social distancing measures are tightened further.

As for the risks surrounding these forecasts, it’s possible that we see a positive surprise in the manufacturing print relative to expectations, but a negative surprise in the non-manufacturing index. This has been the case so far in the Eurozone, UK, and US Markit PMIs for March.

SENTIMENT

OVERALL SENTIMENT: With month-end rebalancing flows out of the way, the market now gets back to the tug of war between the bad news from the Covid-19 front and the good news from the fiscal and monetary policies front. With much of the bazookas from the policymakers fired, the market is likely to trade in range, caught between the effects of the deteriorating economic fundamentals and the soothing effects of unlimited money printing.

FX

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Respect the Flow of Money

There are huge amounts of money invested in passively managed funds and these funds have certain benchmarks which they must adhere to. The way that these benchmarks need to be met will lead to flows which can be predicted given significant market moments. 

For example, in March, when stocks were down substantially (S&P500 index was down >25% at one stage) and bonds were up significantly, these passively managed funds will need to rebalance their portfolio by reducing the portion of their portfolio which have increased in value and re-allocate the excess cash to the portion that have depreciated in value. 

For simplicity, let’s just say the mandate of a $100 million fund is to be invested 50% in stocks and 50% in bonds. At the start of the month, they would have invested $50M in stocks and $50M in bonds. If stocks should fall in value by 20% and bonds rise in value by 10%, what they own would be now $40M in stocks and $55M in bonds. For them to adhere to the mandate of having 50/50 allocation, they would need half the new total value of the portfolio (40+55=$95M/2= $47.5M) be invested in each of the two asset classes. 

That would mean selling (55-47.5= $7.5M) worth of bonds and buying (47.5-40= $7.5M) of stocks at the end of the month (or whenever the rebalancing period is). So, this is what we meant when we were talking about rebalancing month-end flows which led to huge amounts of buying in the stock market. 

Was it coincidence that yesterday (31 March) marked the highs of the rebound of the S&P500 index from the low? It could be, but the month-end and quarter-end rebalancing purchases definitely did play a part in the up move. These money flows drive asset prices especially in the short term and understanding them is critical to trading success.