WHAT HAPPENED YESTERDAY

As of New York Close 09 Mar 2020,

FX

U.S. Dollar Index, -1.10%, 94.89
USDJPY, -2.12%, $103.08
EURUSD, +1.00%, $1.1399
GBPUSD, +0.18%, $1.3073
USDCAD, +1.77%, $1.3662
AUDUSD, -0.81%, $0.6598
NZDUSD,  -0.30%, $0.6338

STOCK INDICES

S&P500, -7.60%, 2,746.56
Dow Jones, -7.82%, 23,844.73
Nasdaq, -7.29%, 7,950.68
Nikkei Futures, -7.73%, 19,107.5

COMMODITIES

Gold Futures, -0.34%, 1,666.75
Brent Oil Futures, -26.40%, 33.32

SUMMARY: 

The USD sold off aggressively as the perfect storm hit the markets. The oil price war and all the bad news on the Covid-19 front led to a gap in risk assets in early Asian hours with S&P500 futures hitting the intraday downside limit down of 5% for most of the hours before US open. USDJPY hit an intraday low of 101.15 before fighting its way back to end just down slightly more than 2%. AUD had a flash crash to touch the low of around 0.6313, almost 4.5% lower than previous close, before creeping back slowly throughout the day to almost flat. EUR/AUD had massive daily reversal candles as it rallied almost 7% during Asian hours before giving up most of the gains towards the end of US trading hours.  

The S&P 500 dropped 7.6%, oil prices tanked around 25%, and Treasury yields continued to fall to unprecedented levels on Monday after Saudi Arabia initiated a price war and Covid-19 cases accelerated. The Dow Jones Industrial Average (-7.8%) and Nasdaq Composite (-7.3%).

Saudi Arabia lowered its oil price for April delivery by $6-$8/bbl and signaled production boosts for an oversupplied market after Russia failed to agree to production cuts last Friday. WTI crude settled the session down 24.8%, or $10.23, to $31.09/bbl for its worst decline since 1991, which took a heavy toll on the S&P 500 energy sector (-20.1%).

The oil shock exacerbated recessionary concerns already fueled by the rapid spread of Covid-19, as speculation arose about potential layoffs and defaults within the highly-leveraged energy space. Stocks were halted from trading for 15 minutes in the opening minutes of action after the S&P 500’s 7.0% decline triggered a circuit breaker. At that point, the S&P 500 was down 18.5% from its all-time high and later it nearly entered bear market territory, which is typically defined as a loss of at least 20% from a recent high.

Expectations for stimulus measures from central bankers and policymakers rose amid the market turmoil. The fed funds futures market is expecting the Fed to cut rates by at least 75 basis points at its policy meeting next week, while the possibility of tax relief was floated by Senate Republicans. U.S. 2yr Yields fell 11bp to 0.38% (traded to a low of 0.257%), while U.S. 10yr Yields fell 20bp (traded to a low of 0.342%).

EU LEADERS TO HOLD CRISIS TELECONFERENCE TO TACKLE COVID-19

European Union leaders will hold emergency talks soon to discuss a joint response to the Covid-19, officials said on Monday, as the bloc’s executive considers relaxing state subsidy rules to allow extra public spending. The announcement of the teleconference, likely to take place on Tuesday, came after Italy and France called for Europe-wide stimulus to counter the economic impact of the epidemic.

Separately, the head of the European Commission Ursula von der Leyen said on Monday the bloc’s executive was considering all options to help the economy. The commission was assessing conditions to grant flexibility to states in providing public subsidies to crisis-hit sectors, she added.

IMPACT: The speed at which a decision must be made (due to the rapid spread of the virus) makes an agreement between EU nations to respond with fiscal measures highly plausible at this point in time. With the Euro trading as if it were a “safe-haven “ asset throughout its spread in the western hemisphere, fiscal measures will give us more reasons to be bullish on the Euro its effect is inflationary in nature. Having said that, the duration and the scope of the measures have to be studied to grasp its full implications on the European economy. 

TRUMP PROMISES “VERY DRAMATIC” ACTIONS TO SUPPORT THE ECONOMY

During the daily virus update press conference, Trump said his administration will discuss a possible payroll tax cut with the U.S. Senate, saying they will seek “very very substantial relief” for the economy that has been roiled by the outbreak of Covid-19.

Trump, speaking at a White House news conference, added his administration plans to speak with lawmakers on Tuesday, seeking the aid to help hourly wage earners “so they don’t get penalized for something that’s not their fault.” Trump also said he plans to announce “very dramatic” actions to support the economy at a press conference on Tuesday.

IMPACT: When governments wake up to the seriousness of this virus and its economic impact the bailouts and monetization will be truly breathtaking. We will be flooded with easy money, but the fear is that easy money will not fix supply chain issues and if markets realize that central banks are impotent, this will create an even greater panic in market sentiment.

OPEC COUNTRIES LOSE $500 MILLION A DAY IN OIL PRICE CRASH

For the most part, oil is a top income source for members of the Organization of the Petroleum Exporting Countries (OPEC) and such a dramatic fall in prices will put strain on their economies, some of which such as Iran and Venezuela, are already on the brink. OPEC had been pushing for expanding the existing cuts with its allies, known as OPEC+, by an additional 1.5 million barrels per day to over 3 million bpd until the end of the year. Russia turned the proposal down, causing the collapse of the alliance and the start of a price war over market share. For some nations, including one the group’s richest members Saudi Arabia, fiscal budget break-even oil prices were already much higher than the oil price before the most recent collapse.

IMPACT: With 60% of Russia’s exports tied to oil, which is about 30% of GDP, it’s going to be interesting to see what Russia does. Russia’s break-even price is $42 per barrel.

Just a few weeks ago Putin promised a massive spending plan (4 trillion rubles, about $60B) on infrastructure and social programs. Putin is on shaky ground with the Russian man in the street. Approval ratings at all-time lows. That spending plan was meant to give that a boost. The Russian government plan on using $15 B of that $60B on their national wealth fund.

Oil prices tanking hurts the inflows into that fund and weakening the ruble. Remember the ruble collapsed 60% against the dollar in 2014 when oil prices tanked. It also hurts their ability to purchase foreign currency to build more reserves.  Russia recently said it could finance its budget for four years at $30 per barrel oil. But it also said if falls below $42 per barrel it will sell foreign reserves in proportion to the dip. This doesn’t help him when the economy is at risk of a huge meltdown. Now think about this, Saudi knows by flooding the world with oil they will crush the US shale sector, which has taken away some of their world leverage in oil markets. It will also hurt Russian exports too. Interesting time to be a distressed investor in US shale names …

DAY AHEAD

U.S. Consumer and Producer price figures – due Wednesday and Thursday, respectively, will be the main release out of the U.S. this week. But with the economic climate being presently overrun by the sweeping Covid-19 epidemic, the data will probably be overlooked as policymakers pay more attention to forward-looking indicators. It also means there’s likely to be more pain to come for the tumbling Dollar, which has been battered by the collapse in Treasury yields. 

SENTIMENT

OVERALL SENTIMENT: 

Sentiment remains awful as policymakers scramble to reassure markets that they will do whatever it takes to help cushion the economic impact of the Covid-19 crisis. With the White House worrying more about the stock market reaction than actually taking the virus seriously, the spread will worsen in the US, and when it gets bad enough, will the US have the stomach to implement the draconian measures such as those introduced by China to contain the outbreak?

FX

STOCK INDICES

TRADING TIP

There will be Blood

 It was essentially a bloodbath in the global equity markets yesterday. The double whammy of an oil price war and the relentless spread of the Covid-19 virus over the weekend knocked the bulls out with S&P500 hitting the limit down barrier of 5% during Asian trading hours.

 Of course, there were those who reason that a lower oil price is good for many economies and for consumers in general but in imes of stress, anything that is unexpected and add to the turmoil will lead to investors running to cash and safe havens for refuge.

 In the longer run, a lower oil price will add more money into the pockets of consumers and remove a potential source of inflation when Central Banks start to print more money but for now markets are running scared.  

 In times of stress, there will be many opportunities as illiquid markets will lead to flash crashes and “irrational moves”. Be wary and be nimble and size your trades correctly so as to not be the ones that are bloodied in the process.

WHAT HAPPENED YESTERDAY

As of New York Close 6 Mar 2020,

FX

U.S. Dollar Index, -0.75%, 96.09
USDJPY, -0.81%, $105.31
EURUSD, +0.40%, $1.1286
GBPUSD, +0.73%, $1.3050
USDCAD, +0.13%, $1.3424
AUDUSD, +0.57%, $0.6652
NZDUSD,  +0.84%, $0.6357

STOCK INDICES

S&P500, -1.71%, 2,972.37
Dow Jones, -0.98%, 25,864.78
Nasdaq, -1.87%, 8,575.62
Nikkei Futures, -3.09%, 20,710.0

COMMODITIES

Gold Futures, +0.26%, 1,672.40
Brent Oil Futures, -9.44%, 45.27

SUMMARY: 

FX markets continue to trade in risk aversion mode. JPY remains the currency of choice as investors seek refuge in times of uncertainty. USDJPY gapped lower more than 1.5% to hit a low of 103.50 in early Asian hours due to the relentless flow of bad news over the weekend. 

The stock market ended a volatile week on a lower note with the S&P 500 (-1.71%) settling just above its low from Monday, Nasdaq (-1.87%) and Dow Jones (-0.89%). Expectations for another sharp rate cut remain in place with the fed funds futures market pointing to a 56.0% implied likelihood of a 75-basis point rate cut at or before the conclusion of the FOMC meeting on March 18.

Bank stocks suffered from the drop in Treasury yields while energy companies struggled as oil fell 9.44%, to $45.27/bbl. The energy component ended the day at its lowest level since mid-2016 after OPEC+ could not agree to a sharp production cut despite previous day’s reports to the contrary. Russia’s Energy Minister, Alexander Novak, said that OPEC+ countries are free to pump at will starting from April 1.

In retaliation, the world’s largest oil exporter engaged in an all-out price war on Saturday by slashing pricing for its crude by the most in more than 30 years. State energy giant Saudi Aramco is offering unprecedented discounts in Asia, Europe, and the U.S. to entice refiners to use Saudi crude.

U.S. 10yr Yields and U.S. 2yr Yields are down 25bp and 20bp (from NY close) in early Asian session due to all the bad news over the weekend and the gap down of nearly 4% in S&P futures . 

U.S. JOBS NUMBERS

The US economy added 273,000 jobs (consensus 175,000) in February, far more than expected, and the unemployment rate returned to a 50-year low in a sign of recent strength as the world’s largest economy eyed the domestic spread of Covid-19.

The unemployment rate eased back to 3.5% (consensus 3.6%), a 50-year low, having ticked up slightly last month.

Speaking to reporters from the White House, Donald Trump said that people were “shocked” at how good the jobs numbers were. Larry Kudlow, the president’s chief economic adviser, appeared on CNBC to underline the administration’s economic approach to the virus: robust growth will need few interventions.

IMPACT: US stocks were not reassured. The S&P 500 sold off for a second straight day, down 1.7%, as stocks around the globe tumbled and government bond prices raced to historic highs. The fallout from China’s sharp downturn and the changes in US firms and households’ behaviour in response to the Covid-19 outbreak — including reduced travel — will doubtless take a toll on the service sector and broader US economic activity from March.

RUSSIA BREAKS OPEC OIL ALLIANCE 

The three-year partnership that joined geopolitical rivals and halted the biggest crude price crash in a generation hit the buffers on Friday when Saudi Arabia-led OPEC and Russia failed to agree on deeper production cuts in response to the spread of Covid-19 that has hit the global economy and its demand for oil.

Russia’s view that rival North American producers would gain most from new efforts to prop up prices killed the deal, said people familiar with the negotiations. Saudi Arabia, unwilling to take on more cuts without Russia as a partner, launched a price war on Saturday (see below). 

IMPACT: Brent crude, down about 30% since January, slumped a further 9% to $45 a barrel on Friday after Russian energy minister Alexander Novak said producers would soon be able to pump at will, ending three years of supply cuts designed to support prices. The impact on the oil price from the collapse of the Vienna negotiations could be severe, said analysts, with some predicting a drop to below $30 a barrel. Russia is not a member of OPEC but now holds huge sway over oil policy after joining the cartel in making production cuts three years ago.  

IN RETALIATION, SAUDIS PLAN BIG OIL OUTPUT HIKE, BEGINNING ALL-OUT PRICE WAR

Saudi Arabia plans to boost oil output next month to well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its OPEC+ alliance with Russia. The world’s largest oil exporter engaged in an all-out price war on Saturday by slashing pricing for its crude by the most in more than 30 years. State energy giant Saudi Aramco is offering unprecedented discounts in Asia, Europe, and the U.S. to entice refiners to use Saudi crude.

IMPACT: The company’s shares plunged 9% in Riyadh on Sunday, the first time the stock slumped below its initial offering price. Aramco traded at 29.95 riyals, giving it a market value of 6 trillion riyals ($1.6 trillion). The Saudi government sold 1.5% of the energy giant’s shares at 32 riyals each in December. 

The Saudi strategy could be an attempt to impose maximum pain in the quickest possible way to Russia and other producers, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved. In a sign that both sides remain in talks, the OPEC+ Joint Technical Committee(JTC), a body of senior oil officials who advise ministers, plans to meet on March 18 to review the global oil market, according to delegates. Saudi and Russian officials are part of the JTC.

ITALY ORDERS LOCKDOWN ON COVID-19 SPIKES, 16 MILLION AFFECTED

Italy ordered a virtual lockdown across much of its wealthy north, including the financial capital Milan, in a drastic new attempt to try to contain an outbreak of Covid-19 that saw the number of deaths leap again sharply on Sunday. The new measures say people should not enter or leave Lombardy, Italy’s richest region, as well as 14 provinces in four other regions, including the cities of Venice, Modena, Parma, Piacenza, Reggio Emilia, and Rimini.

Italy has been hit harder by the crisis than anywhere else in Europe so far and Sunday’s latest figures showed that starkly. The number of coronavirus cases jumped 25% in a 24-hour period to 7,375, while deaths climbed 57% to 366 deaths. It was the largest daily increase for both readings since the contagion came to light on Feb. 21.

IMPACT: If containment in Italy fails and the virus spreads to the rest of Europe and manufacturing powerhouse Germany, another domino in the global supply chain and linchpin of Europe will fall, bringing the EU deeper into contraction territory and closer to fiscal measures. 

DAY AHEAD

Markets are starting the Asian session in the grips of risk aversion as Covid-19 continues to spread widely. Adding the oil price war to the mix is not helping matters. 

The main event this week will be the European Central Bank (ECB) policy meeting, where markets are pricing in a 90% probability for a rate cut even though economists forecast no action. It’s a close call, but the fragmented ECB may opt for more targeted lending measures to shield the economy from the virus fallout, not a rate cut. There’s also a raft of economic data coming up, alongside the UK government budget. All told, markets will continue to dance to the tune of news about the virus.

SENTIMENT

OVERALL SENTIMENT: 

Risk aversion rules. Market is running scared while policymakers, especially those working for the White House, try repeatedly to talk up the stock markets when they should be concentrating on containing the virus spread. The race of rates to negative continues and rallies in asset markets will be sold. 

FX

STOCK INDICES

TRADING TIP

Remove Hope and Fear

This was the piece of trading advice that my trading mentor gave me early on in my career. He was the head of trading at JPM Seoul at the height of the Asian crisis and made hundreds of millions of USD for the bank in those days of crazy volatility.

In times of “abnormal market’ moves, many of us will find it hard to be objective about what are the likely outcomes as our judgement will be swayed by hopes and clouded by fears. Markets are now both hoping for policymakers to come to the rescue, and fearing that anything they do will all be futile.

What are the facts of the current situation and what are the likely outcomes? Keep your hopes and fears out of this process, and it will be easier to find the clarity that you need. 

WHAT HAPPENED YESTERDAY

As of Fri 6 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.76%, 96.60
USDJPY, -1.18%, $106.26
EURUSD, +0.78%, $1.1223
GBPUSD, +0.60%, $1.2950
USDCAD, +0.05%, $1.3392
AUDUSD, -0.16%, $0.6617
NZDUSD, +0.22%, $0.6312

STOCK INDICES

S&P500, -3.39%, 3,023.94
Dow Jones, -3.58%, 26,121,28
Nasdaq, -3.10%, 8,738.59
Nikkei Futures, +1.09%, 21,329.12

COMMODITIES

Gold Futures, +1.96%, 1,675.25
Brent Oil Futures, -1.92%, 51.15

SUMMARY:

USD sold off almost 1.2% against the JPY as more bad news on the Covid-19 front spooked the market. Gold rose close to 2% as traders flocked to safety and risk aversion gripped the equity market once again. The trends are strong, don’t fight them.
A volatile week continued on Thursday as the major averages surrendered the entirety of their big gains from Wednesday, with the S&P 500 (-3.39%) sliding back below its 200-day moving average (3051), Dow Jones (-3.58%) and Nasdaq (-3.10%).

Equities started the day well below yesterday’s closing levels as sentiment remained pressured by the continued uncertainty associated with the spread of the Covid-19 virus. The first couple of hours of action saw a rebound attempt, which ran out of steam after the S&P 500 briefly climbed above its opening mark.

These growth concerns, along with a continuation of negative news flow, kept the market heading southward. Italy reported that the number of deaths among patients diagnosed with Covid-19 increased to 148 from 107 on Wednesday while British Prime Minister, Boris Johnson, has reportedly been advised to expect a significant spread of Covid-19 in the U.K. In the U.S., community spread cases of the virus were reported in New York and San Francisco.

U.S. 10yr yields fell 13.8 basis points and U.S. 2yr yields fell 9 basis points, as curve flattened.

CALIFORNIA DECLARES EMERGENCY OVER COVID-19 AS DEATH TOLL RISES IN U.S.

The U.S. death toll from coronavirus infections rose to 11 on Wednesday as new cases emerged around New York City and Los Angeles, while Seattle-area health officials discouraged social gatherings amid the nation’s largest outbreak.

The first California death from the virus was an elderly person in Placer County, near Sacramento, health officials said. The person had underlying health problems and likely had been exposed on a cruise ship voyage between San Francisco and Mexico last month. Hours after the person’s death was announced, California Governor Gavin Newsom declared a statewide emergency in response to the coronavirus, which he said has resulted in 53 cases across the nation’s most populous state.

IMPACT: Negative development of the virus in the western hemisphere is putting pressure on the S&P500. Since the S&P500 is a global barometer for capital market health, it is driving the recent volatility in risk appetite around the world. It’s interesting to note that Chinese markets have been relatively bid as the west struggles to keep itself buoyant.

JAPAN COMMITTED TO HOSTING OLYMPICS ON SCHEDULE

Japanese Prime Minister Shinzo Abe on Thursday ordered a two-week quarantine for all visitors from China and South Korea in response to the widening coronavirus crisis, and his government signaled that the Tokyo Olympics would go ahead as planned.

The rapid spread of the virus has raised questions about whether Tokyo can host the Olympics as scheduled from July 24, especially with the effect it is having on other sporting events. The Japanese Rugby Football Union has said next month’s Asia Sevens Invitational, which doubles as a test event for rugby sevens at the Tokyo Olympics, had been canceled due to concerns over the outbreak.

IMPACT: The decision to go ahead with the Olympics despite clear failure of containment in Japan may be the biggest healthcare hubris. The Olympics may be an inflection point that sparks an asymmetric spike in viral spread and this will dampen global risk sentiment as tourists and athletes around the world will be affected, resulting in a synchronised health scare impact.

WORK FROM HOME

EY (Ernst & Young) sends around 3,000 Madrid workers home after coronavirus case confirmed

• Accounting and consulting firm EY on Thursday sent around 3,000 employees from its offices in Madrid home after a case of Covid-19 was confirmed among its staff, a company spokesman told Reuters.

Amazon, Facebook ask Seattle employees to work from home over Covid-19 fears

• Amazon.com Inc and Facebook Inc on Thursday joined Microsoft Corp in recommending employees in the Seattle area to work from home after several people in the region were infected with the Covid-19. The companies’ work from home recommendation will affect more than 100,000 people in the Seattle area, as both Microsoft and Amazon employ over 50,000 each. Facebook has more than 5,000 employees in the area.

IMPACT: The global move to offsite work have and will continue to benefit companies like Zoom Video Communications, it’s a risk asset that is trading like a safe haven at this point in time, with the bonus of benefiting from easier monetary policy should the Fed decide to provide more stimulus. Zoom Video Communications Inc.‘s shares gained more than 7% yesterday, as analysts welcomed better-than-expected fourth-quarter earnings and forecast that the Covid-19 will drive demand for the company’s remote-work tools.

DAY AHEAD

Attention turns to the all-important nonfarm payrolls report later today. After a solid gain of 225k jobs in January, the US economy is projected to have added 178k jobs in February. This would represent a notable slowdown but nothing worrying just yet about the labour market. Average hourly earnings are forecast to have risen by 3.2% year-on-year, while the jobless rate is predicted to hold at 3.6%.

This number though does not really account for the full impact of the Covid-19 situation. However, if it should be much weaker than expected, sentiment will worsen even more dramatically.

SENTIMENT

OVERALL SENTIMENT:

No reprieve for the bulls as the bears returned in force. The news flow from the Covid-19 front will continue to get worse, while governments and central banks can only do what they have always done – open the fiscal pipes and cut rates/print money. This is still with mild revisions to economic forecasts. Imagine what happens when the cracks really start to show…

FX

STOCK INDICES

TRADING TIP

Buy the Strong, Sell the Weak

This may sound obvious, but many are conditioned to do just the opposite, because the reference points they use for prices are what they can remember from recent history.

So, something that has come down 10% in price will seem cheap to them, and they are more likely to buy it than to sell it. This works if we are talking about a pack of candy in the supermarket.

If a stock is down 10%, the tendency of many is to say, “Ah, it’s come down so much, so I should buy some soon”. They will have it impossible to sell because they are always rueing the fact that they could have sold 10% higher.

In financial markets, the questions you need to ask first and foremost, is that, “Is the price move justified by a change of facts?” and “Is this change temporary or will it persist and continue to exert itself on prices?”

For example, if Covid-19 stays bad or worsen, can you imagine yourself going to cinemas to watch a movie or booking your family on a cruise anytime in the near future? Will you be getting more of your entertainment and more of your work done via the internet?

Ask yourself, what are the change of habits that are required and will likely persist? Multiply that by what hundreds of millions and billions of people will be doing and you can imagine who are the winners and the losers of the world that is to come.

WHAT HAPPENED YESTERDAY

As of Thu 5 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, +0.23%, 97.37
USDJPY, +0.54%, $107.71
EURUSD, -0.31%, $1.1138
GBPUSD, +0.46%, $1.2871
USDCAD, +0.00%, $1.3386
AUDUSD, +0.70%, $0.6629
NZDUSD,  +0.41%, $0.6301

STOCK INDICES

S&P500, +4.22%, 3,130.12
Dow Jones, +4.54%, 27,090.42
Nasdaq, +3.85%, 9,018.09
Nikkei Futures, +2.12%, 21,425.0

COMMODITIES

Gold Futures, -0.41%, 1,637.70
Brent Oil Futures, -0.56%, 51.57

SUMMARY: 

FX was relatively calm with mixed performance for the USD. As risk aversion eased, EUR pulled back a little vs the USD (-0.3%), the first real down-move since 21 Feb and lost ground by almost a percent vs the AUD. The FX market will likely be driven by the stock market sentiment for now. 

U.S. markets rallied on Wednesday with the Dow (+4.5%), Nasdaq (+3.9%), and S&P 500 (+4.2%) erasing their losses from Tuesday and then some.

Equities benefited from a general improvement in sentiment, which was reflected by a mixed stock session in Asia and gains in European markets. The US Congress approved $8.3 billion in emergency funding to respond to the Covid-19 crisis and the IMF announced a $50 billion aid package to help emerging market countries to combat Covid-19. Those developments provided significant encouragement for U.S. equities even though there was no improvement on the Covid-19 front. 

On the contrary, Italy’s Prime Minister, Giuseppe Conte, warned that Italy’s health care system, which is among the best in the world, is on the verge of being overwhelmed while sporting events will be conducted without fans through April 3. California declared a state of emergency after the first death due to Covid-19. 

The ISM Non-Manufacturing Index for February registered a 57.3% reading (consensus 54.8%) versus 55.5% in January. The key takeaway from the report is that the February number is encouraging in its own right, but with the Covid-19 caseload rising in the U.S. and the public’s attention to containing it increasing, doubts are festering that the strength can be sustained.

The 10-yr yield rose another 6.8 basis points to 1.052% while the 2-yr yield rose 0.9 basis points to 0.698%, in a curve steepening trade. 

CHINA’S SERVICES ACTIVITY PLUNGES AS VIRUS WIPES SALES, MARKET REMAINS BID

China’s services sector had its worst month on record in February as new orders plummeted to their lowest level since the global financial crisis, a business survey showed on Wednesday, with economists urging swift support to avoid mass bankruptcies.

The Caixin/Markit services purchasing managers’ index (PMI) almost halved last month to just 26.5 from 51.8 in January, the lowest it’s ever been since the survey began almost 15 years ago in late 2005. A reading below 50 on the index denotes contraction and above, expansion. A China Merchants Bank survey of over 20,000 companies mostly in the services sector conducted in February showed nearly 20% of the companies face “severe difficulties” due to the Covid-19, while nearly 6% are on the brink of collapse. 

IMPACT: Despite the huge miss in economic print and the presumably dire narrative around chinese companies, ChinaA50 Futures and CSI300 were healthily bid on the day. This may be due to confidence in Xi’s resolve to do whatever it takes to ensure the chinese economy remains buoyant and the fact that China’s Covid-19 situation right now seems less viral (pun intended) as compared to its North Asian neighbours. Since a poor print did little to dent risk sentiment, any pick up in China should see Emerging Market and Commodity related Currencies start to get bids. 

SUPER TUESDAY TRIUMPH FOR BIDEN SETS UP ONE-ON-ONE BATTLE AGAINST SANDERS

Biden, the former vice president whose campaign was on life support just weeks ago, won nine of 14 states voting on “Super Tuesday”, including surprise wins in Texas and Massachusetts, in the race to face President Donald Trump in November.

Just days after his campaign was resurrected by a thumping win in South Carolina, Biden, 77, emerged as a consensus champion for the moderate wing of the party against Sanders, 78, a left-wing senator with strong support among the youth. Biden, with overwhelming support from African-American, moderate and older voters, swept to wins in Alabama, Arkansas, Massachusetts, Minnesota, North Carolina, Oklahoma, Tennessee and Virginia. 

IMPACT: Financial markets seemed to sense a swing in Biden’s direction. After a volatile day on Tuesday, U.S. stock futures jumped on Wednesday after the strong showing for the more market-friendly candidate. Sen. Bernie Sanders, the fiery populist, did score the biggest victory of the night in California. But after Super Tuesday, Biden according to projections leads in the delegate count, and now has the momentum. In the political betting market PredictIt, the Biden contract shot up to 74%, versus Sanders on just 18%. On another note, voters going out in droves to vote during a Covid-19 crisis seems like a script for a bad horror/disaster movie. 

BOC CUTS INTEREST RATE

The Bank of Canada cut its benchmark interest rate to 1.25% from 1.75% on Wednesday in the face of a fast-spreading Covid-19 outbreak and said it was prepared to cut again if needed to support economic growth. “Before the outbreak, the global economy was showing signs of stabilizing,” the Bank of Canada said in a statement. “While Canada’s economy has been operating close to potential with inflation on target, the Covid-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding.”

IMPACT: If not for the Fed, the Bank of Canada might have opted for a smaller quarter-point cut. All things equal, lower interest rates will stoke demand for mortgages, and policy-makers worry that Canadian households are already carrying too much debt. Poloz and his deputies noted that consumption was stronger than expected in the first quarter, easing concerns that an important engine of economic growth might have been sputtering.

But external conditions trumped all other considerations. A gap between U.S. and Canadian benchmark rates could have put upward pressure on Canadian Dollar, or simply introduce more volatility in the exchange rate. Either would only add to the current trials of exporters. “Business activity in some regions has fallen sharply and supply chains have been disrupted,” the central bank said. “It is likely that as the virus spreads, business and consumer confidence will deteriorate further.”

DAY AHEAD

OPEC and its allies (known as OPEC+) will hold a scheduled meeting on Thursday and Friday and are likely to agree to additional output cuts as the demand outlook for oil continues to deteriorate in the face of a long-term impact on the global economy from the Covid-19. But there are doubts as to whether the alliance will be able to agree to lower production caps as key member Russia does not appear to have yet come around to the idea even as oil prices slump to more than one-year lows.

Russia had rebuffed attempts to hold an emergency meeting earlier in February and its refusal to back new output reductions could force Saudi Arabia to go it alone, with some other Arab nations possibly joining it. The lack of unity among the major producers does not bode well for oil so anything less than the recommended cut of 600,000 bpd will not do much in boosting prices.

SENTIMENT

OVERALL SENTIMENT: 

As the market gets desensitised to the constant stream of bad news regarding the Covid-19 situation, relative calm returned to the market. Sentiment remains fragile and will be sensitive to worsening economic data. Increasing number of infections is now the norm and will take unexpected developments to shock the market. For example, an escalation in a country with hot weather will be especially bad as many expect/hope that the virus spread will be fizzling out come warmer weather. 

FX

STOCK INDICES

TRADING TIP

Know what you do not know 

Many people have a tendency to stick to convictions that they have no way of knowing to be true. For example, before the Covid-19 infection cases started popping up everywhere, the general view was that it was China’s problem and that it won’t be a problem anywhere else. 

Of course, now that it’s patently obvious it has spread everywhere, it’s become obvious that it was just a matter of time before it does. For regular readers of our post, you will remember that you did hear it here first. 

How then did we know that it will spread? Well, we didn’t but we also knew that we didn’t know that it wouldn’t. What the world did know then was that Wuhan had a population of 11 million, and when the border closed, 5 million of those were not within the city. 

Most were somewhere in China, but some were overseas. The first infection cases in South East Asia were traced to these tourists. Why would these tourists only be hanging out exclusively in S.E. Asia? Chances are they would be elsewhere too. Cases increased in the infected countries soon after because local transmission occurred. 

For the longest time, many were waiting for the media to confirm that human-to-human transmission was possible. Why would China close down cities, affecting lives of tens of millions of people and cancelling Chinese New Year celebrations, if human-to-human transmission was not already happening? Was it possible that millions of people would be rabidly eating wild animals (thought to be the likely original source of infection) even though people are getting sick from doing so?

It was also known then that each infected case spreads the infection to between 2-3 people on average and asymptomatic infected cases can still be infectious. Given those facts, it was just a matter of time before it spreads as no other country was seriously screening for the infected and it was impossible to screen for infected people who showed no symptoms. 

What then do we not know now? The market generally assumes that this virus will fade away come the warmer months. How can anyone be sure of this? There are currently infection cases in countries with warm weather. Also, a study shows that most of the transmission between humans occurred in indoor settings. Sure, the virus does not survive well in warm places with bright sunlight, but does an air-conditioned room in Malaysia differ from an air-conditioned room in China that much? 

An increase in cases in hot countries will test the conviction that this is going to be a short-lived problem that will disappear in the months ahead. Be vigilant!