WHAT HAPPENED YESTERDAY

As of New York Close 16 Mar 2020,

FX

U.S. Dollar Index, -0.64%, 98.12
USDJPY, -1.60%, $106.19
EURUSD, +0.52%, $1.1164
GBPUSD, -0.07%, $1.2268
USDCAD, +1.51%, $1.4013
AUDUSD, -1.33%, $0.6102
NZDUSD,  -0.28%, $0.6042

STOCK INDICES

S&P500, -11.98%, 2,386.13
Dow Jones, -12.94%, 20,186.48
Nasdaq, -12.32%, 6904.59
Nikkei Futures, -2.26%, 16,410.0

COMMODITIES

Gold Futures, -0.70%, 1,506.05
Brent Oil Futures, -11.88%, 29.83

SUMMARY: 

Safe haven currencies strengthened amidst the carnage with the Japanese Yen and Euro gaining the most ground as risk sensitive commodity currencies like the Aussie, Kiwi and Canadian Dollars got battered. Volatility was with USDJPY spiking from 106.50s to 107.50s on news that the BoJ was scheduled for an emergency meeting to breaking down back to where it was when the BoJ again did what it has been doing for years with no result i.e. increased support for the stock market through ETFs buying. This is the very definition of insanity – doing the same thing repeatedly and expecting different results. USDJPY eventually broke lower to test 105.15 before rebounding steadily back to 106.50s region. 

It was pretty much a day of pain for many traders where both longs and shorts could be getting stopped out during the course of the day. Speaking of safe havens, Gold seems to have forgotten that it is supposed to play that role for its fans, dropping almost 5% on the day to 1450s on deleveraging flows as speculators rush to cash, before recovering above to close above 1500.

There was a crisis of confidence in the stock market today, which led to the worst day of losses since the crash of 1987. 

Fear ruled when the futures market went limit down within minutes of Asian open after the Federal Reserve announced a surprise Sunday rate cut of a whopping 100bp and a stunning series of policy measures aimed at supporting the financial markets and the flow of credit. That should have led to a stock market rally in normal times, but we are no longer in Kansas, Dorothy. The market spiked was barely a blip and the futures were immediately at the limit down (-5%) for the rest of the day till the NY open. The selling continued despite attempts at rallies through the day.

The Dow Jones Industrial Average declined 12.94%, the S&P 500 fell 11.98%; the Nasdaq Composite dropped 12.32%, and the Russell 2000 plunged 14.3%. U.S. 2yr Yields fell 13bp to 0.36% and U.S. 10yr Yields fell 21bp to 0.73%. 

US FEDERAL RESERVE ROLLS OUT THE BAZOOKA

Specifically, the target range for the fed funds rate was cut by 100 basis points to 0.00%-0.25%, the discount rate was cut by 150 basis points to 0.25%, a $700 billion quantitative easing program is to be implemented, there was coordinated central bank action to enhance liquidity via standing U.S. dollar liquidity swap line arrangements, and bank reserve requirement ratios were reduced to 0.00%, effective March 26. The policy effort is laudable, yet market participants quickly made it known that it isn’t thought to be enough to turn the tide of deteriorating confidence on Main Street and Wall Street.

There was some chatter during the day that the White House is pushing an $800 billion stimulus proposal, half of which would involve a payroll tax cut and an assistance package for the airline industry. Separately, Senate Minority Leader Schumer was reportedly floating a $750 billion stimulus proposal. Notwithstanding those ideas, there was nothing concrete as a step-up measure on the fiscal side to alter investor confidence. The end result was wholesale selling of risk assets, which escalated further in the final hour as President Trump and his coronavirus task force conducted a press conference, which featured a suggestion that the trajectory of the virus might not peak until July or August. Importantly, though, it didn’t feature any announcement of a fiscal stimulus plan.

IMPACT: With everything thrown at the market, you would have expected at least a minor rally. However, the Covid-19 newsflow dominated market sentiment and sellers dominated the flows. What are the politicians and central bankers going to try next? 

CENTRAL BANKS WHO EASED SINCE WEEKEND

• The US Fed slashed its rate on Sunday to between 0 and 0.25 per cent, from a range of 1 to 1.25 per cent, matching its previous record-low.
• Bank of Korea (BOK) cut the 7-Day Repo Rate by 50bps to 0.75% (intra-meeting move).
• New Zealand Central Bank (RBNZ) cuts Official Cash Rate (OCR) by 75bps to 0.25%
• Bank of Japan(BOJ) leave interest rate on Excess Reserves (IOER) unchanged from -0.10%; doubles purchases of ETF and J-REIT purchases
• China PBOC cuts Reserve Ratio Requirement (RRR) between 50-100bps to unleash CNY 550B to banking system; effective Monday, Mar 16th
• The Hong Kong Monetary Authority (HKMA) reduced its rate by 64 basis points to 0.86 per cent
• Czech Central Bank (CNB) cuts repurchase rate by 50bps to 1.75%
• Chile Central Bank (BCCH) cuts overnight rate target by 75 bps to 1.0%
• UAE central bank trimmed its interest rate on one-week certificates of deposit by 75 basis points and decided to maintain the repo rate, applicable to borrowing short-term liquidity from CBUAE against CDs at 50 basis points above the 1-week CD rate, the central bank said in a statement.
• Saudi Arabian Monetary Authority cut repo and reverse repo rates by 75 bps. While Kuwait’s central bank cut its deposit rate by 100 bps (1 per cent) to 1.5 per cent, its lowest ever, it also cut its overnight, one-week and one-month repo rates by 100 bps to 1 per cent, 1.25 per cent, and 1.75 per cent respectively.
• Central Bank of Qatar regulator slashed its deposits, lending, and repo rates. Bahrain’s central bank cut overnight, weekly and monthly deposit rates, in addition to its lending rate.
• Sri Lanka Central Bank (CBSL) cut its key rates (intra-policy move)
• Philippines Central Bank (BSP) said to consider 50bps at upcoming rate meeting this week

IMPACT: Same playbook, wrong game but only thing they know to do.

RBNZ SLASHES RATES AT EMERGENCY MEETING AS COVID-19 WORSENS

New Zealand’s central bank slashed interest rates by 75 basis points to a record low on Monday following an emergency meeting as it prepared for a “significant” hit to the economy from the coronavirus. The Reserve Bank of New Zealand (RBNZ) cut the official cash rate (OCR) to 0.25%, and pledged to keep it at this level for at least 12 months, the banks said in its statement.

RBNZ Governor Adrian Orr told a media conference the virus was expected to have a severe impact on New Zealand’s people and economy over the coming year. But he said the move was also to highlight that RBNZ was not at this point contemplating negative interest rates, even as the policy options for central banks dwindle globally.

IMPACT: Kiwi ended the day modestly lower on the back of the RBNZ rate cut. Emergency cuts are no longer much of a surprise, Kiwi is classified as a risk asset and will be driven by structural flows at this point in time. 

CANADA SHUTS BORDERS

Canadian Prime Minister Justin Trudeau announced on Monday afternoon that Canada would close its borders to anyone who is not a Canadian citizen, except for permanent Canadian residents, close family members of Canadians, diplomats, and US citizens, as the Covid-19 pandemic worsens. Trudeau also asked all Canadian citizens and legal residents to return to Canada “while it is still possible.”

IMPACT: It’s only a matter of time more western countries shut their borders to one another, trade is slowing, sales and manufacturing is plunging, we have seen this movie before in Asia, we should know how this plays out. The measures of governments to contain the virus should take into account the timespan of containment, Singapore, South Korea and China are good benchmarks. 

BOJ EXPANDS MONETARY STIMULUS TO DEFEND ECONOMY FROM COVID-19

The central bank will double its upper limit of annual purchases of exchange-traded funds to 12 trillion yen ($112.46 billion) and of real-estate investment trusts to 180 billion yen per year. It will also expand the upper limit of its corporate bond balance to 4.2 trillion yen and its commercial paper balance to 3.2 trillion yen, each up 1 trillion yen. In addition, it will start a lending program for commercial banks, providing them with one-year loans in exchange for corporate collateral worth 8 trillion yen.

Other policy tools were kept unchanged, with short-term interest rates at -0.1% and long-term interest rates at around zero. It will increase its holding of Japanese government debt by 80 trillion yen a year. “We will purchase ETFs twice as much as before and for as long as necessary,” BOJ Governor Haruhiko Kuroda said at a news conference.

IMPACT: The Nikkei Stock Average spiked upward for a short period of time after the announcement before dropping to close 2.46% lower than it did on Friday. More of the same, for lesser and lesser impact. Keep doing what hasn’t work, in the hope that someday it might – number 1 rule of Japanese central banking. 

DAY AHEAD

Announcements of fiscal stimulus in both Australia and the UK failed to bolster neither the Aussie nor Sterling last week, with both currencies maintaining their downward bias against the Dollar. It’s even less likely therefore that any positives in this week’s job numbers would do much to ease the selling pressure as investors’ sole concern right now is what the economic costs of Covid-19 will be and how quickly it can be contained.

The UK employment report for January is out later today and Australia will publish its figures for February on Thursday. Labour markets in both countries withstood the economic slowdown in 2019 and probably stayed resilient in January/February as well. However, any weakness in the data, especially in Australia’s numbers that are more up to date, could further weigh on the respective currencies.

SENTIMENT

OVERALL SENTIMENT: 

The world is finally waking up to what we have been screaming about – that this is serious, and drastic social distancing measures are needed everywhere. You don’t need to wait for the number of infected to rise to start. The virus doesn’t respect customs and immigration checkpoints. The economic impact is just starting to be felt and it is going to get worse.

FX

STOCK INDICES

TRADING TIP

You can’t defy the Laws of Physics

Make no mistake, this is a bear market. Politicians and so-called experts are still fooling themselves into thinking that this is just a “slow down”. The disruption to supply chains and the demand destruction that the world is experiencing is unprecedented. 

For example, tourist arrivals in Hong Kong for the month of Feb was down 95% year-on-year. Think about that. How does that affect all the businesses that depend on these tourists? How does it affect the employees of all these businesses? Do you think free money from the governments will make them rush out to start consuming again while the virus ravages on?

This will happen all over the cities of the world that depend on tourism. This is just one industry. No amount of fiscal stimulus or interest rate cuts will change that. All those that were calling for recession at the end of last year are now strangely saying that recovery will be fast and swift. 

There is no perpetual motion machine. The Laws of Physics cannot be defied. The economic boom cannot go on forever, no matter how much the policymakers wish for it to be so. All the fiscal spending, interest rate cuts and money printing will have a price. The costs may not be obvious just yet but make no mistake – the price will need to be paid at some point.

Stick around, we’ll talk more about this as time passes…

WHAT HAPPENED YESTERDAY

As of New York Close 16 Mar 2020,

FX

U.S. Dollar Index, +1.31%, 98.75
USDJPY, +3.13%, $107.92
EURUSD, -0.71%, $1.1106
GBPUSD, -2.35%, $1.2277
USDCAD, -0.89%, $1.3804
AUDUSD, -0.83%, $0.6184
NZDUSD,  -0.48%, $0.6059

STOCK INDICES

S&P500, +9.29%, 2,711,02
Dow Jones, +9.36%, 23,185.62
Nasdaq, +9.35%, 7,874.88
Nikkei Futures, -8.55%, 16,790.0

COMMODITIES

Gold Futures, -4.63%, 1,516.70
Brent Oil Futures, +1.90%, 33.85

SUMMARY: 

U.S. Dollar outperformance continues as a global liquidity panic is creating a grab for cash in the global reserve currency. In times of uncertainty, investors do not have time to cherry pick based on a macro perspective, but rather run for the hills first and then access the situation from safer grounds. As panic continues to grip the global economy and central banks throw the kitchen sink to stop the market panic, all correlation goes to one and instinct takes over, the USD is regaining its status as the primary safe haven, and we will continue to see a global dollar shortage as desks and institutions will soon drawdown on credit lines. Extreme JPY weakness was extremely disconcerting for many who are used to seeing JPY perform when fear rules the market. 

The stock market rebounded on Friday, though the advance still left the major averages deep in the red for the week. The S&P 500 rallied 9.29%, narrowing this week’s loss to 8.8% while the Russell 2000 (+7.7%; -16.6% for the week) underperformed.

Stocks jumped out of the gate after equity futures hit a circuit breaker, but this time, it was to the upside. The early rally set expectations for a strong rebound, but the bulk of the cash session was not as inspiring. The first three hours of trade saw a pullback, during which the S&P 500 approached yesterday’s closing level. The index returned to its starting mark in midday trade but regrouped and staged a huge 6.7% rally in the last 30 minutes as Trump was discussing measures to deal with the Covid-19.

Lawmakers in Washington neared an agreement on some fiscal relief measures while Trump declared a national emergency during a late-afternoon speech. The declaration will allow up to $50 bln in spending. Separately, Trump said interest on student loans will be waived until further notice and that the U.S. will be purchasing oil to fill the Strategic Petroleum Reserve. (Clarification later showed that interest waived do not mean lower monthly repayments for those with student loans, just that more of the payment goes to reduce the principal amount of outstanding loans.)

US 2yr Yields opened 16.1bp lower at 0.329% and traded to a low of 0.285% and US 10yr Yields opened 30pb lower at 0.64% – day’s low, early this morning, in reaction to Fed’s emergency cut on Sunday. 

AS COVID-19 CHAOS SPREADS GLOBALLY, TRUMP DECLARES U.S. EMERGENCY

President Donald Trump declared a U.S. national emergency over the quick spreading Covid-19 on Friday, opening the door to more government aid to combat a pathogen that has infected more than 138,000 people worldwide and left over 5,000 dead. “To unleash the full power of the federal government to this effort today, I am officially declaring a national emergency – two very big words,” Trump said in remarks at the White House Rose Garden, adding that the U.S. situation could worsen and “the next eight weeks are critical.”

Trump, whose action makes available $50 billion in federal aid to states and localities, had faced criticism from some experts for being slow and ineffective in his response to the crisis and playing down the threat. The latest steps came two days after Trump announced travel restrictions blocking U.S. entry for most people from continental Europe. While Britain was among the countries exempted, Trump said on Friday that might change because infections there had risen “precipitously.”

IMPACT: Wall Street staged a furious rally in the waning moments of the session on Friday after U.S. President Donald Trump declared a national emergency to combat the rapidly spreading Covid-19, although major averages still suffered sharp losses for the week. Markets were relieved at the fact that Trump is finally taking the threat of the virus seriously and so actual progress can be made in curtailing the impending economic destruction in the U.S. should authorities continue to remain sanguine. 

EU FISCAL STIMULUS

Germany – long criticized by the Commission and other EU nations for running ultra-tight budgets during periods of economic strength – on Friday promised half a trillion euros in guarantees for business in a four-point plan that won a thumbs-up from economists.

Von der Leyen proposed a 37 billion euro ($41 billion) investment initiative based on funds that could be quickly re-channelled to sectors in need, officials said. This revised a figure of 25 billion euros that she previously announced for the same initiative. The commission offered “full flexibility” in its interpretation of fiscal rules, aiming to encourage governments with fiscal space such as Germany and the Netherlands to spend more. However,  Brussels fell short of declaring a full suspension of its fiscal rules, known as the Stability and Growth Pact, in a move probably meant to maintain some ammunition if the crisis worsened.

IMPACT: The EU breaking its tight fiscal gridlock was a positive development as it seems policy makers are putting their differences aside and forging a united front to combat the virus, European risk assets cheered this progress by staging a relief rally. 

BOC EMERGENCY RATE CUT

BOC lowered its policy rate to 0.75% (-50bp) and said it “stands ready” to move again if needed. Governor Stephen Poloz, in a joint press conference Friday afternoon with Finance Minister Bill Morneau, also announced a new facility to support funding markets for small- and medium-sized businesses “at a time when they may have increased funding needs and credit conditions are tightening.”

This marks the first emergency rate cut by the country’s central bank since the last 2008-2009 financial crisis and is part of a coordinated government-wide response to respond to a slowdown that threatens to drive the nation’s economy into a recession. Morneau announced he would deliver a fiscal stimulus package next week that will include an additional $10 billion (US$7.1 billion) in new funding to the country’s two business financing agencies – the Business Development Bank of Canada and Export Development Canada.

IMPACT: The BOC’s move is consistent with expectations. Hence, the Loonie did not respond with a collapse in price. With oil being pinned at such low levels due to a supply glut out of the Middle-East, more headwinds will be coming for the oil dependent Canadian economy and coupled with possible border closure with the U.S., the Loonie may have much lower to go from here as the world’s “most steadfast” central bank capitulates to join the rest of its counterparts in a race to zero. 

FED SLASHES RATES IN EMERGENCY COVID-19 MOVE

With panic buying on Main Street and fear-driven sell-offs on Wall Street, the U.S. Federal Reserve cut interest rates to near-zero on Sunday in another emergency move to help shore up the U.S. economy amid the rapidly escalating global coronavirus pandemic. For the second time since the financial crisis of 2008, the Fed cut rates at an emergency meeting, aiming for a target range of 0% to 0.25% to help put a floor under a rapidly disintegrating global economy.

“We really are going to use our tools to do what we need to do here,” Powell said, adding that the Fed has gone in “strong” and could increase bond-buying and use other tools to support market functioning and the flow of credit, what he called the Fed’s “most important” function. A broader set of Fed powers, including direct lending to financial firms, remains at the Fed’s disposal, and Powell said the central bank would not hesitate to use them if needed.

IMPACT: The old playbook is breaking down, with markets puking back at the Fed after the rate cut to near-zero. This is the Fed’s bazooka. It also means that after this, the Fed – which just cut rates to zero and launched QE5 – is now out of ammo, as Powell will have to cut rates to negative next and/or buy stocks outright for further monetary stimulus, something that would require the permission of Congress. And since that is unlikely absent a total collapse in the financial system, we are now down to fiscal stimulus. Today’s emergency meeting was in lieu of Wednesday’s meeting. 

DAY AHEAD

As the Covid-19 pandemic continues to wreak economic havoc across the globe, the pressure is on central banks to provide more stimulus amid the fast deteriorating outlook. The BoJ will be a more interesting one, however, as, although some action is certain, investors aren’t quite sure what form it will take. BoJ will be having an emergency meeting later at noon today. One central bank that is less likely to announce any change in policy is the Swiss National Bank, despite the Franc’s recent appreciation.

SENTIMENT

OVERALL SENTIMENT: 

You know things are really bad when the Fed cut 100bp 3 days ahead of their scheduled meeting after an emergency cut of 50bp just two weeks ago and the S&P 500 index futures spiked briefly (+0.04%) on Asian open but hit the 5% limit down barrier seconds after. If you are long risk assets, and the Fed just threw everything including the kitchen sink at it, and yet stocks are down – What do you do now?

FX

STOCK INDICES

TRADING TIP

What comes after the kitchen sink?

Everything the market hoped the Fed would do, has now been done. In an emergency meeting on Sunday, the Fed threw everything they had including the kitchen sink at the fear monster in an effort to soothe the market. Emergency rate cuts, bond buying, reassurance that they are willing to do whatever they can to help the market and yet, stocks sold off with barely a blip higher. 

Volatility is extremely high, confusion reigns and uncertainty is now a way of life. In times of uncertainty, many subscribed positions will get unwound regardless of fundamentals. Volatility is only high relative to recent history and yet, is it really high given the unprecedented situation that the world is facing now? 

Size your risk appropriately and tread carefully.

WHAT HAPPENED YESTERDAY

As of New York Close 13 Mar 2020,

FX

U.S. Dollar Index, +1.00%, 97.47
USDJPY, +0.12%, $104.68
EURUSD, -0.76%, $1.1183
GBPUSD, -1.94%, $1.2573
USDCAD, +1.21%, $1.3945
AUDUSD, -3.25%, $0.6274
NZDUSD,  -2.46%, $0.6115

STOCK INDICES

S&P500, -9.51%, 2,480.63
Dow Jones, -9.99%, 21,200.85
Nasdaq, -9.43%, 7,201.80
Nikkei Futures, -13.63%, 16,730.0

COMMODITIES

Gold Futures, -4.00%, 1,576.55
Brent Oil Futures, -8.19%, 32.86

SUMMARY: 

Early Asian hours started off positively with news that Trump was going to address the nation and hopes were lifted that he would announce a fiscal package that would help the markets. Instead, he turned up to shut down the borders to visitors from Europe with the exception of those from the UK (yup, friendly English-speaking tourists are safe from the virus, apparently).

With that, everything went downhill quickly. Equities sold off, USD strengthened against most of everything except EUR and JPY. That only lasted till London strolled in and the mighty USD started to take off and S&P500 index futures hit the 5% limit down level. With USD funding being in high demand through the cross-currency basis market, USD took another leg higher.

ECB did not cut rates but increased their asset purchase amount by an additional 120 billion EUR for the rest of the year, and EUR, for some inexplicable reason, tried to rally. When the rally ran out of steam, everyone realised that it was just more QE and more of the same, USD took centre stage again as stocks hit the next limit down (at 7% on the day) when US hours started.

Things went from bad to worse as the bond market started to lose its gains and dribbled lower. A massive order went through in the late morning and the 10-year bond yield spiked 10bp (basis points) to hit the day’s high of 0.90% in a matter of minutes as risk parity strategies started to unwind their positions. 

When news that the NY Fed will be adding more liquidity into the system with asset purchases broke, the markets tried gamely to retrace, with equities rallying 6% from the lows before getting smacked down again as market realises yet again, it’s more of the same and the virus epidemic is just beginning.

Each of the major indices dropped more than 9% on Thursday, as new stimulus measures from central banks failed to stir confidence among investors without a meaningful fiscal response from Washington. The Russell 2000 (-11.2%) led the retreat, followed by the Dow Jones Industrial Average (-9.99%), S&P 500 (-9.51%), and Nasdaq Composite (-9.43%) with each closing down more than 25% from prior highs. US 2yr Yields finished unchanged at 0.50%. The US 10yr Yields traded in a wild range of 0.63% to 0.90%, and dribbled lower after the close of 0.88% (6bp higher than previous close) to trade around 0.76% in early Asian hours. 

For the second time this week, the S&P 500 triggered a 15-minute trading halt after falling by 7.0% shortly after the open following more economic disruptions caused by Covid-19. Notable ones included Trump suspending travel from most European countries for 30 days and major sports leagues in the U.S. suspending their 2019-2020 seasons. While it’s encouraging that central banks are committed in ensuring ample liquidity in these disastrous trading conditions, it’s unlikely that the measures will boost consumer confidence. Elsewhere, the reported disagreements between Republicans and Democrats regarding a stimulus plan only exacerbated the dire mood on Wall Street. 

FED ANNOUNCES $1.5 TRILLION IN CAPITAL INJECTIONS

The extraordinary funding measure first involves a $500 billion injection at 1:30 p.m. ET on Thursday, the bank said. The cash will be added to money markets through a three-month market repurchase agreement, or repo operation. One-month and three-month repos for $500 billion each will be conducted today and continue to be offered weekly through the calendar month, the bank added.

The central bank said it will also expand its $60 billion reserve-management purchases to buy up “a range of maturities” roughly matching that seen in Treasury assets outstanding. Securities targeted include Treasury bills, floating-rate notes, and nominal coupons. The first such purchase will begin today, the bank said. 

IMPACT: S&P 500 knee-jerked higher by 6% from the lows on the announcement of the stimulus, but couldn’t hold onto gains for long as markets are not getting the stimulus they want, which is fiscal in nature and only Washington can provide it. This is not a crisis that can be saved through credit, but a direct intervention on mainstreet is required, and the bazooka better be sizable because there is blood on the street, anything less than an unprecedented fiscal stimulus might send the market reeling into “unknown depths”. 

COVID-19 PANDEMIC “COULD BE OVER BY JUNE” IF COUNTRIES ACT, SAYS CHINESE ADVISER

The global coronavirus pandemic could be over by June if countries mobilize to fight it, a senior Chinese medical adviser said on Thursday, as China declared the peak had passed there and new cases in Hubei fell to single digits for the first time.

Zhong Nanshan, the government’s senior medical adviser, told reporters that as long as countries take the outbreak seriously and are prepared to take firm measures, it could be over worldwide in a matter of months. “My advice is calling for all countries to follow WHO instructions and intervene on a national scale,” he said. “If all countries could get mobilized, it could be over by June.”

IMPACT: There is light at the end of the tunnel if governments act effectively, we have seen it with China, Singapore and South Korea that the virus can be contained. If western governments follow the same playbook and bite the bitter pill early, the economy can recover a lot quicker. It should be monitored if Washington is going to follow this playbook. 

ECB APPROVES FRESH STIMULUS FOR REELING ECONOMY BUT KEEPS RATES STEADY

The European Central Bank approved fresh stimulus measures on Thursday to help the eurozone economy cope with the growing cost of the Covid-19 epidemic but kept interest rates unchanged (0.00%) in a move that may disappoint financial markets. ECB President Christine Lagarde, who has led the central bank for just over four months, used a press conference to call for an “ambitious and coordinated fiscal policy response” by European governments.

The ECB said it now expects the euro zone’s economy to grow by 0.8% this year, 1.3% in 2021 and 1.4% in 2022. This compares to an expansion of 1.1% for 2020 and of 1.4% for each of the following two years projected in its December forecasts.

IMPACT: With millions of people in lockdown, markets in turmoil and companies struggling with disrupted supply chains, the economy is already reeling so ECB support was fully priced in and investors were only guessing about the extent of any move, as we all know, markets were disappointed with the lack of fiscal response and were repriced lower. 

DAY AHEAD

Market participants will be glued to the screen, watching the tape unravel itself to every piece of news regarding Covid-19, Fiscal Measures and Policy Measures in response to the virus. The “hopium” for an adequate fiscal response is one of the last threads that is keeping the markets from another huge repricing lower, and with liquidity this thin, who knows where the bottom is?

SENTIMENT

OVERALL SENTIMENT: 

This was what we wrote yesterday:

“Sell, Mortimer, Sell! The world is finally waking up to the horror story that is the Covid-19 outbreak. Inevitable and unstoppable until governments impose the draconian measures that are required. Trump imposed a temporary travel ban that “will not only apply to the tremendous amount of trade and cargo, but various other things as we get approval.” If true, markets are going to be under tremendous pressure as they wake up to this development.“

Did you sell Mortimer? Though the White House clarified that the ban only referred to people, and not cargo, the damage was not lessened. From dismissing the gravity of the Covid-19 crisis to suddenly closing its borders to travellers from Europe, Trump must have finally been spooked out of his stupor by some frightening statistics. This is just the beginning of the inevitable spread of the virus. 

Central bankers and governments will throw everything they have to support the asset markets, but you know what to do, Mortimer.   

FX

STOCK INDICES

TRADING TIP

You Heard it HERE first!

For those of you who were surprised by the bloodbath yesterday where every asset class sold off and have no clue what risk parity positions unwinding is, here’s the TIP of the WEEK for you – Read TrackRecord’s stuff diligently! Don’t be lazy, click through and be one step ahead of the market. 

In case you missed out on everything, listen to all of Vee’s thoughts from his radio feature on today’s Money FM’s The Breakfast Huddle: https://trackrecordasia.com/market-watch/vees-segment-money-fm-13-mar-2020

WHAT HAPPENED YESTERDAY

As of New York Close 11 Mar 2020,

FX

U.S. Dollar Index, +0.22%, 96.62
USDJPY, -1.04%, $104.54
EURUSD, -0.16%, $1.1262
GBPUSD, -0.70%, $1.2817
USDCAD, +0.34%, $1.3771
AUDUSD, -0.44%, $0.6478
NZDUSD,  -0.12%, $0.6263

STOCK INDICES

S&P500, -4.89%, 2,741.38
Dow Jones, -5.86%, 23,553.22
Nasdaq, -4.70%, 7,952.05
Nikkei Futures, -5.15%, 18,790.0

COMMODITIES

Gold Futures, -1.02%, 1,643.40
Brent Oil Futures, -3.71%, 35.84

SUMMARY: 

USD ruled the day once again as bad news continued to stream in from the Covid-19 front. Governments all around the world are talking of fiscal stimulus as expected. The disappointment from the lack of details of Trump’s promised tax cuts dominated sentiment throughout the day. The Bank of England cut 50bp in a surprised move that was neither here nor there as they should have either cut last week together with the Fed for maximum impact or just waited for the scheduled meeting later this month. The usual selling on rate cuts which pushed GBP immediately to the low of 1.2830s were met with buyers who managed to squeeze the shorts and print a high of 1.2975. 

That did not last as USD strength took over when equity markets started to sell off to the lows of the day. It was a day of pain for many traders as bonds and commodities all fell on the day despite the weak equity markets.  

It was an ugly day for stocks on Wednesday with the Dow Jones Industrial Average (-5.86%) closing in bear market territory, or down 20% from a recent high, amid recessionary fears induced by Covid-19. The S&P 500 fell 4.89%, the Nasdaq Composite fell 4.7%, and the Russell 2000 fell 6.4%.

The World Health Organization officially declared COVID-19 as a global pandemic, and with no stimulus plan enacted from Washington, the market was left with discouraging news updates that heightened the economic uncertainty.

Large events were banned in Washington State and San Francisco with many more getting canceled or delayed in other U.S. states. Dr. Fauci, the director for the National Institute of Allergy and Infectious Diseases, cautioned that the worst is yet to come. Trump has even imposed new travel restrictions on Europe.

Separately, the NY Fed announced it will raise daily oversight repo limits to $175 billion from $150 billion beginning tomorrow and continuing through April 13 in response to unfavorable market conditions caused by Covid-19 .

Notably, U.S. Treasuries didn’t exhibit the flight-to-safety one would expect during an exodus from stocks. Some profit-taking and speculation that Washington will have to issue more debt to finance a fiscal stimulus plan were the leading explanations for the decline in bonds. The 2-yr yield remained unchanged at 0.50%, and the 10-yr yield increased 6bp to 0.82%.

UK FIRES BOTH BARRELS: EMERGENCY RATE CUT AND BUDGET BOOST

The Bank of England slashed interest rates by half a percentage point on Wednesday (to 0.25%) and announced support for bank lending just hours before the unveiling of a budget splurge designed to stave off a recession triggered by the Covid-19 outbreak. “This is a big package. It’s a big package. It is a big deal,” Carney said, adding that the BoE’s package was equivalent to “north of 1%” of economic output. He said the Bank was coordinating with the government to have “maximum impact”.

Britain’s government promised on Wednesday nearly $39 billion in stimulus to its economy as its new chancellor of the Exchequer, Rishi Sunak, outlined plans to boost public spending and bury the austerity politics of the last decade. Among the pledges he made was about $9 billion to support the self-employed, businesses and vulnerable people and about $6.5 billion for Britain’s frayed National Health Service and other public bodies.

IMPACT: Most UK stocks fell despite the Bank of England’s emergency rate cut, and the government’s Covid-19 stimulus programme. GBP tried gamely to take it as a positive before USD strength pushed it back to end at the lows of the day. The fiscal budget was too underwhelming to sway risk sentiment as market participants foresee that the knock-on effects from a halt in supply chains will require a much more sizable budget. In addition, the BoE’s emergency cut is not much of a surprise as it follows the playbook of other central banks in the past 2 weeks. 

U.S. CONSUMER PRICES UNEXPECTEDLY RISE IN FEBRUARY

U.S. consumer prices unexpectedly rose in February but are likely to decline in the months ahead as the Covid-19 outbreak depresses demand for some goods and services, outweighing price increases related to shortages caused by disruptions to the supply chain.

The Labor Department said its consumer price index increased 0.1% last month, matching January’s gain, as rising food and accommodation costs offset cheaper gasoline. In the 12 months through February, the CPI rose 2.3%. That followed a 2.5% jump in January, which was the biggest year-on-year gain since October 2018. Economists polled had forecast the CPI would be unchanged in February and rise 2.2% year-on-year.

IMPACT: The key takeaway from the report is that it isn’t going to alter the market’s belief that the Federal Reserve will soon be cutting the target range for the fed funds rate in size at next week’s FOMC meeting (if not sooner).

WALL STREET TUMBLES FURTHER AS WHO DECLARES PANDEMIC

WHO chief Tedros Adhanom Ghebreyesus told a news conference that he was deeply concerned by the spread and severity of COVID-19, and by the “alarming levels of inaction” in some countries. Tedros warned that the number of cases reported and the number of countries affected ‘doesn’t tell the full story’. “Pandemic is not a word to use lightly or carelessly,” Dr. Tedros Adhanom Ghebreyesus, chief of the W.H.O., said at a news conference in Geneva.

IMPACT: Until now, the W.H.O. had avoided using the term to describe the epidemic spreading across the world, for fear of giving the impression that it was unstoppable and countries would give up on trying to contain it. The organization had said earlier in the outbreak that it no longer officially declares when an epidemic reaches pandemic proportions, preferring instead to declare global public health emergencies. The designation itself is largely symbolic, but public health officials know that the public will hear in the word elements of danger and risk. Governments have all been waiting for the rise in infection cases before they implement social distancing measures, when the rise is all but a certainty if no measures are imposed. 

DAY AHEAD

After American, Canadian, and Australian, UK central banks all slashed rates to negate the negative effects of Covid-19 on their economies, it’s now the turn of European policymakers to decide whether to follow suit. The ECB will conclude its meeting on Thursday and while markets are convinced rates will be cut by 10 basis points to -0.6%, economists disagree.

And with good reason. European interest rates are deep in negative territory already, meaning that the ECB only has a couple more ‘rate bullets’ left, and it might prefer to save them for a crisis where monetary policy can actually help. Cutting rates is a weak ‘antidote’ for a supply-side shock like this one, and even the positive effects on demand are questionable if fears intensify enough for consumers to curtail spending.

Another issue is how divided ECB officials are. Several policymakers – especially those representing large economies like Germany and France – think that monetary policy is already extremely accommodative and that any more stimulus would do next to nothing to boost the struggling economy. Therefore, cutting rates further may be a bridge too far.

Instead of cutting rates, the ECB could announce a scheme to provide liquidity to businesses impacted by the virus, helping those that have seen their supply lines cut and their cash flows dry up, by giving them very cheap loans. This is arguably the best strategy available, considering that the Bank is low on policy ammunition and highly divided. It won’t really boost market confidence, but it does put a ‘bandage’ on the wound.

SENTIMENT

OVERALL SENTIMENT: 

Sell, Mortimer, Sell! The world is finally waking up to the horror story that is the Covid-19 outbreak. Inevitable and unstoppable until governments impose the draconian measures that are required. Trump imposed a temporary travel ban that “will not only apply to the tremendous amount of trade and cargo, but various other things as we get approval.” If true, markets are going to be under tremendous pressure as they wake up to this development.

FX

STOCK INDICES

TRADING TIP

Where is the Pain?

In times of extreme volatility and uncertainty, investors tend to seek safe havens. Investments that are typically thought to be safe havens are the US government bonds and Gold. On the day that the S&P500 Index fell almost 6% during the US trading session, you would expect those two assets to be doing quite well. 

What happened, instead, was that both fell on the day, with Gold losing nearly 2% from the highs of the day and the 10-year US Treasury bond yield rising 20 basis points (0.20%) from the low of the day. As has been our constant refrain recently, historical relationships cannot be assumed as a given in times of market stress. 

Markets tend to inflict the maximum amount of pain during these times because subscribed positions are usually crowded. The safest haven, when you have no clue what is going on and when the margin clerks are busy on the phones, is cash. 

As such, all subscribed positions tend to come under pressure and get liquidated as investors head for the exit. The strategy of choice in the years since the Great Financial Crisis has been the risk parity strategy where investors are long both bonds and equities (in various proportions, according to some volatility adjusted formulae, for which the investment manager gets paid the big bucks to come up with) for the long term. 

That could very well continue to work in the long term. In the long run, given the untold economic damage that will be inflicted by Covid-19, the race to zero and below for global interest rates will continue apace. 

However, we now live in the short term and in the short term, we know where the crowded positions are. In a crowded room, with a small exit, what do you think happens next, when someone smells smoke?