WHAT HAPPENED YESTERDAY

As of New York Close 23 Mar 2020,

FX

U.S. Dollar Index, -0.69%, 102.11
USDJPY, 0.00%, $110.82
EURUSD, +0.65%, $1.0764
GBPUSD, -0.41%, $1.1595
USDCAD, +0.80%, $1.4480
AUDUSD, +1.31%, $0.5875
NZDUSD,  +0.51%, $0.5739

STOCK INDICES

S&P500, -2.93%, 2,237.40
Dow Jones, -3.12%, 18,576.04
Nasdaq, -0.27%, 6,860.67
Nikkei Futures, +3.16%, 17,455.0

COMMODITIES

Gold Futures, +6.13%, 1,575.55
Brent Oil Futures, +2.19%, 27.57

SUMMARY: 

Dollar weakened on Tuesday as the US Federal Reserve’s announcement that it would buy US Treasuries and Mortgage-backed securities in unlimited amounts to stabilise the market topped the USD bulls in their tracks . The heavily battered commodity currency group (AUD, NZD & CAD) enjoyed a relief rally on the day. Gold rallied more than 6% as in a world full of easy money, hard assets are the safe refuge. 

S&P 500 fell 2.93% on Monday in another volatile session, as disappointment over the Senate’s inability to advance its stimulus bill outweighed the unprecedented stimulus measures announced by the Fed. The Dow Jones Industrial Average declined 3.12%, the Russell 2000 declined 1.1%, and the Nasdaq Composite declined just 0.27%. U.S. 2yr Yield down 9bp and U.S. 10yr Yield down 16bp. 

Yesterday’s action started when the S&P 500 index futures hit limit down within a minute of Asian open after the Senate failed to gather enough procedural votes for its stimulus bill. Losses were later trimmed on some cautious optimism that another vote for a revised plan would fare better, but the real move came after the Fed’s stimulus announcement sent futures into the green.

Briefly, the Fed lifted the $700 billion cap on its purchases of Treasury and agency mortgage-backed securities and said it will buy “in the amounts needed.” In addition, the central bank established new credit facilities and said it will be buying investment-grade corporate bonds, municipal debt, and U.S.-listed exchange ETFs for investment-grade corporate bonds.

Despite the Fed’s efforts to support the system and prevent confidence from eroding further, investors continued to sell into strength. The index rallied more than 8% on the news but lost all those gains within minutes and traded in a volatile fashion for the rest of the day. The disappointing price action suggested that the market was signaling Washington to get its act together and approve a long-awaited stimulus plan for Americans and businesses.

The S&P 500 did battle back to just below its flat line heading into the second procedural vote in the afternoon, but the rebound effort was squandered after it failed again. Senate Majority Leader McConnell (R-KY) said that procedural delays could push another vote out to Friday, which is a long time for a fearful market.

$2 TRILLION COVID-19 AID PACKAGE STALLS IN U.S. SENATE

A far-reaching Covid-19 economic stimulus package remained stalled in the U.S. Senate on Monday as Democrats said it contained too little money for states and hospitals and not enough restrictions on a fund to help big businesses. A 49-46 vote left the $2 trillion measure short of the 60 votes needed to advance, as the chamber remained deadlocked for a second day. Only one Democrat, Senator Doug Jones, voted with Republicans to advance the bill.

IMPACT: Stocks fell about 3% on Monday due to the roadblock as Democrats say it too heavily favors corporations at the expense of public health and workers. Even an extraordinary flood of support from the Federal Reserve wasn’t enough to lift stocks, as frustration with Washington grew and the number of Covid-19 cases rose. Markets are likely to remain incredibly volatile as long as the number of new infections accelerates. Until then, investors are looking for both central banks and governments to do their parts to support the economy.

FED, SAYING AGGRESSIVE ACTIONS IS NEEDED, STARTS UNLIMITED QE

Saying “aggressive action” was needed to soften the blow to the economy from the Covid-19 pandemic, the Federal Reserve on Monday announced it would purchase an unlimited amount of Treasuries and securities tied to residential and commercial real estate to ward off a credit crunch.

The Fed said it would buy assets “in the amounts needed” to support smooth market functioning and effective transmission of monetary policy. The Fed had previously set a $700 billion limit for asset purchases but used up more than half of the ammunition last week alone. In addition, the Fed announced several new lending programs worth $300 billion to support all corners of the financial markets.

IMPACT: Though still cast in the usual Fed language of ensuring “liquidity” and keeping financial markets moving, the implications are more profound – of central bank loans scaled to such a point that they undergird payrolls, rents, and firm survival as the Covid-10 economic shock rolls through. The effort shows the Fed casting aside constraints on several fronts to ensure that companies can issue bonds and get loans and limit the risk that the halt in business required to combat the health crisis may lead to widespread failures and bankruptcies.

U.S. STATES, CITIES DESPERATE FOR COVID-19 HELP, MILITARY PREPARES

U.S. governors and mayors on Monday became more desperate in their pleas for help from the federal government to fight Covid-19 as the military prepared to set up field hospitals in New York and Seattle to ease the strain on creaking health services.

As health authorities struggled to cope with the rising number of sick people and the U.S. Senate failed to advance an economic stimulus package, Defense Secretary Mark Esper said the U.S. military is preparing to deploy field hospitals to New York and Seattle.

The planned hospitals, essentially tent facilities that can be rapidly set up, can only handle a limited number of patients and are less suited to treating highly infectious people who need to be isolated. But they can relieve pressure on hospitals by treating patients with illnesses other than COVID-19.

IMPACT: A lack of coordinated federal action was causing chaos for states and municipalities, and even putting them in competition with each other for resources. Trump on Sunday defended his decision to hold off using the federal defence production act (which allows the government to tap onto private companies to help alleviate the strain on resources), on the grounds that nationalizing businesses “is not a good concept.” With the addition of Maryland, Indiana, Michigan, and Massachusetts on Monday, 15 out of 50 U.S. states have now imposed restrictions on people’s movements to curtail the virus, putting the country on a track similar to those of the most devastating European countries such as Italy and Spain.

DAY AHEAD

The flash PMI reports will be the first big numbers for March in the Euro area. Given that many parts of Europe started imposing lockdowns during March, analysts’ forecasts for the flash releases are pretty grim. The manufacturing PMI is expected to drop from 49.2 to 39.0 and the services PMI is forecast to plunge from 52.6 to 36.5. The composite PMI is projected to fall from 51.6 to 37.8.

After coming under fire for not doing enough and for communication errors, the European Central Bank appears to have scaled up its response and announced last week that it will buy an additional 750 billion euros of public and private sector securities on top of its existing purchases. The move seems to have gone some way in calming equity and bond markets and this likely means ECB policymakers will not be in a hurry to announce other bold measures anytime soon. Unless of course, the incoming data over the next few weeks, including the March PMIs, start to indicate that the Eurozone economy will require a lot more help than what’s already in the pipeline.

SENTIMENT

OVERALL SENTIMENT: The Fed found yet another kitchen sink in the house to throw at the markets. With unlimited quantitative easing, they are now prepared to buy as many bonds as the market wants to sell for as long as it takes to stabilise the market. And yet, the stock markets rallied more than 8% on the news and gave it all up and then some a few minutes after.

This is a telling sign of the market sentiment. The next thing that can be thrown at markets is the much-vaunted stimulus bill from the US government. The market awaits.

FX

STOCK INDICES

TRADING TIP

Beware the Roach Motel…

The Roach Motel is a roach trap that has a lure that attracts roaches to enter but once inside, they get stuck in there and can never escape. This is much like some of the carry trades in this world. Investors are lured by the promise of high yields and high carry. 

All that is needed is for time to pass, and the investors will get to enjoy a high return. Of course, the returns can be spiced up by employing leverage. If you have a dollar, you can use that dollar as collateral to borrow 3 dollars and use that 3 dollars to invest in that carry trade. 

It all goes swimmingly well until things start to go wrong. When something goes wrong with the world, volatility goes up, and liquidity dries up. Every investor now wants to redeem their investment before the losses pile up.

With so much leveraged money invested in the trade, the exit is small, and investors find that the price of earning all that easy money is that it’s not easy to escape when things go wrong. 

This is what the investors of the world are facing right now. Many carry trades (Commercial Paper, high yield bonds, basis trades, Emerging market currencies) are all under stress and many are stuck with their bad investments and facing margin calls. That’s why there’s an indiscriminate rush for cash right now. 

Many trades are easy for you to get into, but some you cannot get out of. Much like the Roach Motel…

WHAT HAPPENED YESTERDAY

As of New York Close 20 Mar 2020,

FX

U.S. Dollar Index, -0.16%, 102.82
USDJPY, +0.09%, $110.82
EURUSD, +0.38%, $1.0695
GBPUSD, +1.35%, $1.1643
USDCAD, -1.02%, $1.4365
AUDUSD, +0.99%, $0.5799
NZDUSD,  +0.65%, $0.5710

STOCK INDICES

S&P500, -4.34%, 2,304,92
Dow Jones, -4.55%, 19,173.98
Nasdaq, -3.79%, 6,879.52
Nikkei Futures, -1.25%, 16,920.0

COMMODITIES

Gold Futures, +1.85%, 1,501,15
Brent Oil Futures, -5.23%, 26.98

SUMMARY: 

The U.S. Dollar had some fatigue set in on Friday after a week of strong performance, allowing other currencies to recover some ground. In the midst of a global capitulation in both risk and safe-haven assets, the U.S. Dollar will continue to be favoured but the moves are unlikely to be as ferocious as much of the capitulation should be done. The rinse in Emerging Markets, however, should continue.

The Nasdaq futures hit limit up briefly during Asian hours, but the S&P 500 futures could not even breach the psychological level of 2498 (which was the limit up level during Asian hours on Tue which failed later on in the day). Stock market volatility as measured by the Vix index fell from 80+ to 57 during the morning session, signalling the market’s expectations that it was going to be an orderly and positive day for the stock market. However, that was not to be. An early rebound effort quickly turned into losses as investors continued to grapple with the persistent shutdown of the economy. California ordered residents to stay at home and not to go out except for essential needs, until further notice, but stocks started the day’s session on a higher note amid hopes for a rebound. It wasn’t until New York announced similar stay-at-home restrictions that optimism started to unravel, as it contributed to the notion that more states will follow suit to limit the spread of Covid-19.  

The major indices sold off as the trading hours waned to close at the lows with the S&P 500 (-4.34%), Dow Jones Industrial Average (-4.55%), and Russell 2000 (-4.2%) declining more than 4.0%, while the Nasdaq Composite declined 3.79%. U.S. 2yr Yields fell 7bp and U.S. 10yr Yields fell 20bp. 

The Fed remained active in trying to further support the financial system. On Friday, the Fed expanded its Money Market Mutual Fund Liquidity Facility (MMLF) to accept municipal debt and stepped up its purchases of Treasury and mortgage-backed securities. The New York Fed said it will now conduct two repo operations totaling $1 trillion for the rest of the month. The Fed also increased the frequency of its USD swap line arrangements with the other major central banks to daily from weekly operations. That should help the USD funding issues that have been plaguing the market. The Fed’s resolve is strong and they will do whatever it takes until the market normalises. 

In early asian trading on Monday, US markets gapped lower (-2.04%) as Mnuchin’s $4 Trillion Covid-Bill was rejected and the unceasing flow of bad news on the Covid-19 front. Ongoing negotiations will take place today. 

CHINA TO RAMP UP SPENDING TO REVIVE THE ECONOMY

China is set to unleash trillions of yuan of fiscal stimulus to revive an economy expected to shrink for the first time in four decades amid the Covid-19 pandemic, while a planned growth target is likely to be cut. The ramped-up spending will aim to spur infrastructure investment, backed by as much as 2.8 trillion yuan ($394 billion) of local government special bonds. 

Beijing is targeting infrastructure investment as a recovery in consumption could be slowed by rising job losses, while exports could be hit as the global economy reels from the pandemic, policy sources said. Local governments will be allowed to issue more special bonds, which could hit 2.5-2.8 trillion yuan this year, compared with 2.15 trillion yuan in 2019. The government aims to speed up the construction of planned key infrastructure projects as well as to launch some new projects for public health, emergency materials supply, 5G networks and data centers that have been endorsed by top leaders.

IMPACT: As China recovers from Covid-19, a well timed and targeted fiscal stimulus package will be effective in jump starting the economy. China may be one of the first few economies to make a recovery, keep an eye on China A50 Futures for any abatement in selloffs.  

$4 TRILLION COVID-19 AID BILL PROPOSED, BUT HITS A SNAG

The much-discussed fiscal stimulus went from 1 trillion to 2 and now the floated figure is US$4 trillion but this includes $2 trillion of loans that the Fed can make to inject liquidity into the system on the back of guarantees from the US Treasury. However, the Democratic party voted against it and a re-vote will be held on Mon morning 9.45 EST.

IMPACT: In a highly-leveraged system, if borders are closed & stores are closed, financial markets will be under stress and markets will likely become a source of cash, the world over. Everything would likely be sold for cash (even sovereign debt) until either a) Markets are closed for a time, or b) Monetary & fiscal authorities print “enough” money to stabilise the panic.

FED INCLUDES MUNICIPAL DEBT IN MONEY-MARKET LENDING BACKSTOP

The battered U.S. municipal bond market could get a limited boost from the Federal Reserve’s announcement it was expanding its money market support program to include short-term municipal debt as collateral, analysts said on Friday. Yields in the $3.8 trillion market where states, cities, schools and other issuers sell debt, have climbed dramatically amid a selling frenzy by investors scrambling for cash as Covid-19 fears wreak havoc on markets.

IMPACT: We might soon see the twin bazookas of the Fed buying enormous amounts of corporate bonds and TARP 2.0. The former effort is almost sure to materially bring down credit spreads (likely through some kind of deal with the Treasury to get around restrictions or perhaps with a special Congressional authorization) while the latter will save vital companies and industries from widespread bankruptcies, avoiding mass layoffs. Moreover, the government will be even better positioned (by firing both bazookas) to realize some gains on viable companies once the worst of Covid-19 passes. This will help fund all the transfer payments to individuals and small businesses being proposed.

DAY AHEAD

With not much on the economic calendar to enthuse markets this week, the virus and its impact on economies globally are likely to remain the primary driver of risk sentiment. Still, there are some important indicators worth keeping an eye on (i.e. Pace of Fed Balance Sheet Expansion, U.S. 2yr-10yr Spread, Size of Fiscal Package / Country’s GDP, Overnight Interbank Funding Rates). Overall, there’s little to suggest that the slide in equities is about to end though the policymakers will try their utmost to introduce measures to stabilise the market. Later today, there will be a teleconference call among the G20 policymakers.

SENTIMENT

OVERALL SENTIMENT: 

As the US congress argues about the fiscal stimulus plan, the situation continues to worsen with the relentless spread of the Covid-19 virus across the US. The people that were exposed to the virus during the Super Tuesday US Presidential primaries for the Democratic party should be starting to show symptoms this week. 

If even US Senator Rand Paul, who was tested positive for Covid-19 today, was gallivanting around, going to the gym and having lunches with other members of the Congress after knowing he might have been exposed to Covid-19, what can be expected of ordinary Joe?

It is bad, but this gets worse.

FX

STOCK INDICES

TRADING TIP

“This time, it is different…”

Of the many famous last words spoken in the financial markets, “This time, it is different” is likely one of the most spoken by traders at various junctures of their careers. However, that doesn’t mean it is never true. 

Many market commentators and experts are still downplaying the economic consequences of this crisis as temporary and assume that there will soon be a V shaped recovery immediately after. Policy makers in the US are so focused on implementing fiscal policies to save the stock markets that the NY governor had to plead for coordination by the Federal government for a coherent response to containing the outbreak. 

In addition to the freezing up of the credit markets, we are also witnessing the wholesale destruction of entire industries that depend on tourists and people gathering in groups to socialise. If this continues, and the likelihood is that it will, this time, indeed, it will be different.

WHAT HAPPENED YESTERDAY

As of New York Close 19 Mar 2020,

FX

U.S. Dollar Index, +1.80%, 102.99
USDJPY, +2.73%, $111.32
EURUSD, -2.64%, $1.0655
GBPUSD, -0.98%, $1.1494
USDCAD, +0.12%, $1.4502
AUDUSD, -0.84%, $0.5742
NZDUSD,  -0.50%, $0.5685

STOCK INDICES

S&P500, +0.47%, 2,409.39
Dow Jones, +0.95%, 20,087.19
Nasdaq, +2.30%, 7,150.58
Nikkei Futures, +3.79%, 17,135.0

COMMODITIES

Gold Futures, -0.27%, 1,473.95
Brent Oil Futures, +12.90%, 28.09

SUMMARY: 

Massive day of volatility in FX. AUD first went down more than 5%, bounced 8% from the lows and after inflicting pain on the shorts, fell almost 4% off the highs. Volatility is high, and both bulls and  bears will not be spared if they are not adapted to the new trading regime. Adjust your trading sizes accordingly!

Dollar reigns supreme again and this trend will continue until governments get the virus under control and supply chain disruptions are figured out. The effect on the global economy is going to be protracted. Bear in mind that a strong Dollar is putting a lot of stress on emerging markets and this will feed into more elevated volatility later on in the cycle as EM economies capitulate under stress.  

The S&P 500 advanced 0.47% on Thursday in a volatile session that saw the benchmark index fall as much as 3.3% in early action and gain as much as 2.9% in the afternoon. The Dow Jones Industrial Average rose 0.95%, while the Nasdaq Composite (+2.3%) and Russell 2000 (+6.8%) were the big movers today amid strong gains in technology and small-cap stocks. U.S. 2yr Yield fell 10bp to 0.44% and U.S. 10yr Yield fell 6bp to 1.12%.

The news cycle wasn’t entirely positive with the number of Covid-19 cases continuing to surge globally, leading more companies to withdraw guidance, suspend dividends, and temporarily lay off workers. The latter started to be quantified in the weekly initial claims, which increased by 70,000 to 281,000 (consensus 220,000) for the week ending March 14.

To mitigate the negative impact of Covid-19, central banks continued to ramp up stimulus efforts, Congress continued to deliberate on the proposed $1.3 trillion fiscal stimulus package, and clinical trials for new therapies remained in progress, according to Trump. The latest central bank moves included the Fed establishing a Money Market Mutual Fund Liquidity Facility (MMLF), the ECB and Bank of Japan announcing emergency bond-buying programs, and the Bank of England issuing a surprise rate cut and raising its daily asset purchases. Although not market-moving, there was an appreciation for the urgency to ease the intense strains on financial markets.

Oil prices were aided by comments from Trump, who said that he will get involved in the price war between Russia and Saudi Arabia at “the appropriate time.” An afternoon report from The Wall Street Journal noted that Texas is considering cutting oil production.

‘WHATEVER IS NECESSARY”, AUSTRALIA DIVES INTO QE / BOE SAYS WILL BUY GILTS AT PACE IN NEW STIMULUS / SWISS NATIONAL BANK BOOSTS FX INTERVENTIONS TO SLOW FRANC RISE

– RBA: Australia made a historic foray into quantitative easing on Thursday and said it would do “whatever is necessary” to ensure funding costs are low and credit is freely available as the coronavirus (Covid-19) pandemic jolts businesses. Following an out-of-schedule meeting, the Reserve Bank of Australia (RBA) reduced its cash rate (-25bp) to an all-time low of 0.25% and said the board would not tighten policy until it achieves its employment and inflation goals. It also set a target for the yield on three-year Australian government bonds at around 0.25%, which it plans to achieve by purchases in the secondary market beginning today. They also said that there was no limit to the purchase amount and it would be unsterilised (i.e. the AUD they use to pay for the bonds will be left in the system).  

– BoE:  The Bank of England said it would buy British government bonds at a much faster pace than normal in response to the Covid-19 outbreak, part of a major stimulus package it announced on Thursday. The BoE cut interest rates (-15bp) to 0.1% on Thursday, its second emergency rate cut in just over a week, and promised 200 billion pounds of additional bond purchases in a fresh attempt to shield Britain’s economy from the impact of the outbreak.

– SNB: The Swiss National Bank (SNB) said on Thursday it was stepping up its currency interventions to prevent the rise of the Swiss Franc, which the central bank said had become “even more highly valued” due to the coronavirus outbreak. The SNB kept its policy rate at -0.75% (as expected) and also maintained the interest rate it charges on overnight deposits it holds for commercial banks at -0.75%. The government, central bank and market supervisor are readying an aid package worth 40 billion to 100 billion Swiss francs ($103.33 billion) to help the economy deal with the fallout, the newspaper Tages-Anzeiger reported. The government, which has promised more steps by today, has already announced an aid package worth 10 billion francs, mostly for workers on short hours because of the spread of the virus.

IMPACT: More of the same pill with no positive effects to show for. Note that unsterilised QE that Australia is embarking on weakens currency in the long run but the AUD which has been battered over the last few sessions rallied as weak shorts were taken out when RBA also noted that they will intervene in the FX market if required. 

COVID-19 DEATHS IN ITALY OVERTAKE CHINA AS ECONOMIC DAMAGE MOUNTS

The world’s richest nations poured unprecedented aid into the global economy on Thursday as Covid-19 cases ballooned in the new epicentre Europe, with the number of deaths in Italy outstripping those in mainland China, where the virus originated.

“This is a moment that demands coordinated, decisive, and innovative policy action from the world’s leading economies,” Guterres told reporters via a video conference. “We are in an unprecedented situation and the normal rules no longer apply.”

IMPACT: At least someone gets it, we are truly living in unprecedented times and until more politicians and leaders get around the fact that we need a whole new playbook, we are driving ourselves into the ground. 

DAY AHEAD

U.S. Senate Majority Leader Mitch McConnell introduced emergency legislation to stem the economic fallout of the Covid-19 pandemic on Thursday and said Republicans were ready to meet their Democratic counterparts later today to seek an agreement. The $1 trillion-plus package will include direct financial help for Americans, relief for small businesses and their employees, steps to stabilize the economy, and new support for healthcare professionals and coronavirus patients, McConnell said.

SENTIMENT

OVERALL SENTIMENT: 

The good news is we are going to bail out some companies and give you free money, but the bad news is many of your friends will get infected, some will be in need of critical care and a few might even die.
How do you feel about that?

FX

STOCK INDICES

TRADING TIP

In order to Thrive, you need to first, Survive

The volatility we are seeing in the market is extremely high and is unprecedented. Some look at past history and say, “Ah ha! Volatility at these levels have always been the highs, so it must be a good sell!”

Sure, that works if there was ever a global pandemic with historical data for you to compare with. There are many opportunities in this market. Try not to lock yourself into trades with limited upside and unlimited downside. 

Click to hear more about what I think about this crisis and what the future holds.

WHAT HAPPENED YESTERDAY

As of New York Close 18 Mar 2020,

FX

U.S. Dollar Index, +1.34%, 100.91
USDJPY, +0.63%, $108.37
EURUSD, -0.49%, $1.0943
GBPUSD, -3.69%, $1.1608
USDCAD, +1.99%, $1.4484
AUDUSD, -3.49%, $0.5791
NZDUSD,  -3.73%, $0.5713

STOCK INDICES

S&P500, -5.18%, 2,398.10
Dow Jones, -6.30%, 19.898.92
Nasdaq, -4.70%, 6,989.84
Nikkei Futures, -1.68%, 16,726.55

COMMODITIES

Gold Futures, -1.68%, 1,500.15
Brent Oil Futures, -7.90%, 26.46

SUMMARY: 

“Dollar Smile” (attached image below for explanation) effect is going to be a consistent theme as global economies capitulate and find respite in the “safest haven” and that is in cash. The Euro which also appeared to take on the role of a safe haven currency in the early innings of the meltdown is fast weakening against the Dollar. Despite promise of a large fiscal stimulus, the single-currency being unable to hold on to gains despite such unprecedented policies out of the Eurozone, is a sign that sentiment is rapidly changing towards all other currencies. When global central banks are all out in synchrony, the Dollar appears to be the cleanest dirty shirt in the basket.

The S&P 500 fell 5.18% on Wednesday, although it did drop as much as 9.8% intraday as pandemic fears continued to hit not only stocks but also Treasuries and commodities. Dow Jones Industrial Average (-6.3%), Nasdaq Composite (-4.7%) and Russell 2000 (-10.4%). US 2yr Yield rose 7bp to 0.54% and US 10yr Yield rose 16bp to 1.18%.

Despite the coordinated stimulus packages announced by central banks and the massive stimulus plans laid out by Washington, confidence was lacking due to the growing outbreak of COVID-19 and the continued shutdown of the economy. Shortly before the close, the Senate finally passed the House bill that provides unemployment and sick leave benefits.

As part of the proposed $1 trillion stimulus package, the Treasury Department clarified today it will seek $300 billion for small business interruption and a secured lending facility of $50 billion for airlines. Separately, the FHFA announced the suspension of foreclosures and evictions for 60 days for enterprise-backed mortgages.

New measures taken to contain the virus includes the closure of the U.S.-Canadian border for non-essential traffic and President Trump invoking the Defense Production Act, which gives the White House the right to require companies to manufacture medical supplies in short supply.

ECB TO GOBBLE UP 750 BILLION EUROS OF DEBT IN EMERGENCY MOVE TO COMBAT VIRUS HIT

The European Central Bank launched a 750 billion euro (US$820 billion) emergency bond purchase scheme after an unscheduled meeting on Wednesday, attempting to stem a spiraling economic and financial crisis.

“Extraordinary times require extraordinary action,” ECB President Christine Lagarde said. “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” The bond purchases will continue until the “crisis phase” of the epidemic is over and non-financial commercial paper will also be included for the first time among eligible assets, the ECB said.

Although the ECB’s purchases will be done according to each country’s shareholder in the bank (the so-called capital key), the ECB said it will be flexible and may deviate from this rule, a hint that it will not tolerate a surge in yield spreads between eurozone members. The purchases will also include for the first time debt from Greece, which has been shut out of ECB buys because of its low credit rating.

IMPACT: Euro and S&P 500 futures made a brief spike on the back of ECB’s announcement, but could not hold onto gains and reversed shortly after. Markets are beginning to understand that demand destruction is not going to be solved with credit and each spike higher is a good opportunity to sell into, there is a good chance risk assets will be repriced lower again. 

TRUMP SAYS HE WILL INVOKE WARTIME ACT TO FIGHT ‘ENEMY’ COVID-19

Trump moved on Wednesday to accelerate production of desperately needed medical equipment to battle the coronavirus pandemic and gave an estimate that U.S. unemployment could conceivably reach 20 percent in the worst-case scenario.

Scrambling to address the virus after initially playing it down, Trump said he is invoking the Defense Production Act, putting in place a law that will allow the U.S. government to speed up production of masks, respirators, ventilators and other needed equipment.

“We’re going to defeat the invisible enemy,” said Trump, who said the unfolding crisis had basically made him a “war-time president.”

IMPACT: The law, which dates back to the Korean War of the 1950s, grants the president broad authority to “expedite and expand the supply of resources from the U.S. industrial base to support the military, energy, space, and homeland security programs.

DEATHS SURGE IN ITALY & FRANCE

There was particular alarm in Italy, which has experienced an unusually high death rate – nearly 3,000 from 35,713 cases. It has called on students and retired doctors to help an overwhelmed health service. On Wednesday Italy reported 475 new deaths, the biggest increase since the outbreak started and the highest one-day total posted by any nation. France also reported a spike in deaths – rising by 89, or 51%, to a total of 264 in 24 hours.

IMPACT: Italy and France have a generally older population who is more susceptible to the virus and this is coupled with the lack of experience as compared to Asian countries to deal with a pandemic. 

DAY AHEAD

In SNB later today, markets put a 90% probability of a 25-bps rate cut to -1.0%. However, pushing borrowing costs below record lows may not significantly aid the economy. Besides, if the bank was rushing to slash rates, it would have called an emergency meeting like its EU and US counterparts did earlier this month. Hence, policymakers in response to the ECB’s neutral response on rates could follow suit by leaving rates steady and announcing other measures that will help banks keep lending to the economy while continuing the FX intervention. Note that no press conference is scheduled at this policy meeting.

SENTIMENT

OVERALL SENTIMENT: 

When a day where the stock market did not close at the lows but was still down on the day is a good day, you know how bad things are getting. Fundamentals continue to deteriorate. Some “experts” are finally coming round to the math that if every country has to shut down production for at least a few weeks, and will likely to suffer a longer period of demand destruction then it will likely lead to not just a slowdown but a downright contraction of significant proportions. Accounting for the fear factor of seeing your friends get infected and having to keep away from everyone, a recession is a certainty and a depression is a possibility – be prepared.

FX

STOCK INDICES

TRADING TIP

Resistance is Futile

In times of crisis, many things will stop making “fundamental” sense. Outsized moves will seem like “It’s too much” and you will be tempted to fade it, because surely it cannot go any further?! Sure, you will eventually be right, but until then you will likely be trampled by the rampaging herd. 

When the margin clerk calls, you got to get out of everything even if you do not want to. Do not fight trends you do not understand. The point is to get rich, not to be right. Just go with it…

WHAT HAPPENED YESTERDAY

As of New York Close 17 Mar 2020,

FX

U.S. Dollar Index, +1.36%, 99.40
USDJPY, +1.44%, $107.38
EURUSD, -1.48%, $1.1017
GBPUSD, -1.23%, $1.2117
USDCAD, +1.61%, $1.4243
AUDUSD, -2.09%, $0.5990
NZDUSD,  -1.64%, $0.5947

STOCK INDICES

S&P500, +6.00%, 2,529.19
Dow Jones, +5.20%, 21,237.38
Nasdaq, +6.23%, 7,334.78
Nikkei Futures, +0.36%, 16,900.0

COMMODITIES

Gold Futures, +3.49%, 1,538.40
Brent Oil Futures, -4.03%, 28.84

SUMMARY: 

As we’ve pointed out in our previous publications, there is a real Dollar shortage due to a cash grab and this is causing funding pressures, inadvertently strengthening the Dollar against all else. This is despite the Fed and other central banks opening up swap lines and may also help to explain the selloff in bonds as everyone struggles to find liquidity in a massive deleveraging. 

The CAD finally woke up from its stupor and got on with the weakening game. It should continue to trade weakly as it bears the brunt of the double blow of lower oil prices and the negative economic impact of Covid-19 spread. The JPY regained its status as the numero uno widow-maker as risk aversion speculators get stopped trying to buy it and risk-seeking punters get stopped trying to sell it. 

New Zealand announced a big fiscal stimulus package of worth 3.5% of GDP and the NZD spiked higher to above .6090s but the poor flightless bird could not stay up. Sellers eventually smacked it down to the low 0.5910s. 

In markets, the S&P 500 rebounded 6.0% on Tuesday, as investors reacted positively to additional monetary stimulus measures and the possibility of an estimated $1 trillion fiscal stimulus package. The Dow Jones Industrial Average rose 5.2%, the Nasdaq Composite rose 6.23%, and the Russell 2000 rose 6.7%. (a caveat is that Index futures gave back all the gains right after the Close as bids could not hold). U.S. 2yr Yield rose 11bp to 0.47% and U.S. 10yr Yield rose 29bp to 1.02%.

The plan from the White House reportedly includes $500-550 billion for direct payments or tax cuts to Americans, $200-300 billion for small business assistance, and $50-100 billion for airline industry relief. The administration is also considering support for homeowners whose income was cut due to the Covid-19, according to Bloomberg.

The Fed, meanwhile, established a temporary commercial paper funding facility to help alleviate strains induced on commercial paper markets. Companies typically acquire short-term financing from this market. The Treasury Secretary approved the decision and will provide the Fed $10 billion in credit protection and the ability to purchase up to $1 trillion in commercial paper if needed. The initially spurred a rally in front end Eurodollar Interest Rates futures contracts (which means a dip in front end LIBOR 3months interest rates ie indicating some relief in funding pressure) but that was short-lived as markets deem the program too little and at not an attractive enough price. 

However, what is key is that the mechanism is now in place, and the Fed and the US Treasury can adjust accordingly if more is needed to support the market. Make no mistake, they will do whatever it takes to prevent a credit crisis. 

On a side note, Trump has resorted to tweeting about the “Chinese virus” per his playbook of blaming everyone else (especially foreigners) but himself for anything that goes wrong. This will not play well with the Chinese government and a spat between the two superpowers are counterproductive, especially in times like these.

TRUMP ‘GOING BIG’’ WITH $1 TRILLION STIMULUS AS U.S. COVID-19 DEATHS TOP 100

The Trump administration on Tuesday pursued a $1 trillion stimulus package that could deliver $1,000 checks to Americans within two weeks to buttress an economy hit by Covid-19, while New York said it might order its residents to stay home. U.S. stocks jumped on Tuesday, a day after their steepest declines since the 1987 crash, as the Federal Reserve took further steps to boost liquidity. The benchmark S&P 500 .SPX closed up 6%. Mnuchin said the government will keep the stock markets open but may shorten trading hours if necessary.

IMPACT: When pumping credit into the system doesn’t work, let’s fast track Modern Monetary Theory (MMT) and send em’ the money! The entire system is predicated on using money to solve issues. Well, that works when everything is hunky dory, but not anymore, as the wise sage says, “money is not everything”. What we are witnessing is a crisis of leadership (amongst other things). 

CHINA EXPELS AMERICAN JOURNALISTS AS SPAT WITH U.S. ESCALATES

China withdrew the press credentials of American journalists at three U.S. newspapers on Wednesday, intensifying a fight between the two over the spread of Covid-19 and press freedoms. The dispute began in February when Beijing expelled three Wall Street Journal correspondents – two Americans and an Australian – after the newspaper ran an opinion column which called China the “real sick man of Asia.” China denounced the column as racist and after the newspaper declined to apologize, revoked the visas of the three reporters in Beijing. Another reporter with the paper had to leave last year after China declined to renew his visa.

A striking aspect of Beijing’s response was its decision to bar the journalists from working in Hong Kong and Macau, two semi-autonomous territories of China with their own media accreditation rules. In the past, foreign journalists kicked out of China were allowed to work in Hong Kong. This raised questions about Hong Kong’s autonomy under the “one country, two systems” agreement that still prevails between the territory and the mainland.

IMPACT: The U.S. and China are in a classic Thucydides trap, where a rising power threatens to disrupt an incumbent. Expect more volatile relations going forward as the virus escalates de-globalisation and will cause countries to rethink their supply chains. 

FED LAUNCHES PRIMARY DEALER CREDIT FACILITY (PDCF) WHICH WILL ACCEPT STOCK AS COLLATERAL

U.S. Treasury Secretary Steven Mnuchin on Tuesday said he approved the creation of a new primary dealer credit facility to ease credit market disruptions caused by the Covid-19 epidemic, resurrecting the second 2008 financial crisis-era backstop in less than a day.

The facility, managed by the Federal Reserve Bank of New York, will offer loans up to 90 days to the two dozen Wall Street primary dealers who are important conduits for the sale of a broad range of bonds and other financial assets. Mnuchin said the primary dealer credit facility would be in place for at least six months and may be extended as conditions warrant. Earlier on Tuesday, Mnuchin approved a Fed backstop for the US$1 trillion commercial paper market, using US$10 billion from the Treasury’s Exchange Stabilization Fund

IMPACT: Desperate times calls for desperate measures. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. This means that as of this moment, equities – which are worth zero in a worst-case scenario – are eligible collateral for Fed liquidity. That said not all equities are eligible as collateral: “the following equities would not be eligible: exchange-traded funds (ETFs), unit investment trusts, mutual funds, rights, and warrants” For those who may not remember, the PDCF was one of the biggest bailout operations of the financial crisis when dealers abused the Fed as they pledged totally worthless stocks for which they got “par” value.

DAY AHEAD

The SNB meets tomorrow, but is the least likely of the three central banks to make any changes to its policy. At -0.75%, Switzerland already has the lowest interest rate in the world and although the country has been hit hard by Covid-19, the SNB has another weapon at its disposal – FX intervention. The SNB’s foreign exchange reserves were up slightly in February, indicating that it was intervening to keep the safe-haven Swiss franc down, particularly against the euro, as risk sentiment soured due to the virus outbreak.

SENTIMENT

OVERALL SENTIMENT: 

Escalating numbers of infected cases and we still have many countries yet to do the testing vigorously, any improvement in sentiment will be temporary. The S&P 500 futures tested the 5% limit up level 4 times in Asian trading hours and could not hold there. Another rally came during NY hours and it managed to break that level but failed yet again. Price action tells you everything you need to know.

FX

STOCK INDICES

TRADING TIP

The Hibernating Bear Awakens… 

I have been fielding many calls from people – friends and random people – who are curious/nervous about current markets. Their questions are invariably either of the following:

– When should I buy?

– Is it time to sell VIX, volatility, some hocus pocus bank product which essentially means you sell volatility?

This is a market conditioned to buy the dip and sell any spikes in volatility. 

Volatility is high relative to historical records of volatility. Sure, it looks juicy to sell but when was the last time stock markets go up and down 5% a few times a day? Sure, it cannot last forever, and it didn’t in the past. When in the past, though, do you remember having such a pandemic sweeping across the world that requires every country to shut down and lockdown all their citizens?

Bear markets do not happen when all the bears are expecting them, they happen when every bear has decided to switch camp and buy the dips. You see now all the so-called experts are saying there is a high risk of recession. Some pundits are still calling it a slowdown. 

If every country in the world is shutting for a few weeks and maybe even months, how are they going to generate enough production the rest of the year to make the numbers show growth vs the numbers last year?