WHAT HAPPENED YESTERDAY

As of New York Close 30 Mar 2020,

FX

U.S. Dollar Index, +0.86%, 99.21
USDJPY, +0.15%, $108.06
EURUSD, -1.01%, $1.1029
GBPUSD, -0.69%, $1.2371
USDCAD, +1.44%, $1.4181
AUDUSD,  0.00%, $0.6166
NZDUSD,  -0.46%, $0.6009

STOCK INDICES

S&P500, +3.29%, 2,625.10
Dow Jones, +3.18%, 22,325.10
Nasdaq, +3.62%, 7,774.15
Nikkei Futures, +0.25%, 19,128.0

COMMODITIES

Gold Futures, +0.80%, 1,638.00
Brent Oil Futures, +6.14%, 26.46

SUMMARY:

Dollar advanced on Monday, snapping a week of declines, as investors braced for prolonged uncertainty as governments tightened lockdowns and launched monetary and fiscal measures. China’s central bank (People’s Bank of China) cut the 7D reverse repo from 2.4% to 2.2% when it injected CNY50 billion into the interbank market (Renminbi closed lower, -0.36%). Overall, FX moves on Monday were relatively well contained. 

S&P 500 climbed 3.29% on Monday, led higher by shares of healthcare and technology companies, even as the White House extended its social distancing guideline through the end of April. The Dow Jones Industrial Average (+3.18%) and Nasdaq Composite (+3.62%) also rose more than 3.0%, while the Russell 2000 increased 2.3%. U.S. 2yr Yield fell 2bp to 0.23% and U.S. 10yr Yield fell 2bp to 0.70%.

In addition, quarter-end rebalancing continued to play a factor in providing a bid in the stock market, while medical breakthroughs from Abbott Labs (ABT 79.34, +4.78, +6.4%) and Johnson & Johnson (JNJ 133.01, +9.85, +8.0%) helped sentiment. Specifically, Abbott Labs is launching a point-of-care test to detect COVID-19 in as little as five minutes, while JNJ said it selected a lead vaccine candidate that it plans to test in clinical trials by September.

Separately, oil prices continued to falter with WTI crude falling 6.6%, or $1.43, to $20.22/bbl, as the market remained plagued by excess supply and dwindling demand. On a related note, Putin and Trump discussed oil in a phone call on Monday, and ordered their energy ministries to hold further talks on global oil markets, the Kremlin said. The Kremlin did not say what exactly the ministers will discuss, but Moscow has previously signalled it would like to see more countries joining efforts to balance global oil markets following the collapse of its deal with OPEC earlier this month. 

FORD, GE TO PRODUCE 50,000 VENTILATORS IN 100 days

Ford Motor Co said on Monday it will produce 50,000 ventilators over the next 100 days at a plant in Michigan in cooperation with General Electric’s healthcare unit, and can then build 30,000 per month as needed to treat patients afflicted with Covid-19.

On Friday, Trump said he would invoke powers under the Defense Production Act to direct manufacturers, including Ford and General Motors Co, to produce ventilators. On Monday, the head of the United Auto Workers and other officials compared the auto industry’s effort to build ventilators to Detroit’s conversion to bomber production during World War Two. 

IMPACT: Firing up America’s manufacturing industry to help with the virus situation and pharmaceutical innovations made by Abbot, Gilead and Johnson & Johnson may be the turning point for America and global sentiment should these measures and drugs prove to be successful. It is important to note that there are turnaround times for these advancements to take effect and it’s the on-going narrative that markets are constantly pricing in. Until then, expect continued volatility in the market. 

BRAZIL’S BOLSONARO URGES NO MORE COVID-19 QUARANTINE, SAYS JOBS BEING LOST

Brazil’s President Jair Bolsonaro said on Monday that there can be no more quarantine measures imposed on the country than those already in place to combat Covid-19 because jobs are being destroyed and the poor are suffering disproportionately.

Brazil’s Senate passed a bill on Monday evening guaranteeing some of the country’s poorest citizens’ income of 600 reais ($117) a month for three months, a package that could cost almost 50 billion reais. According to Bolsonaro, all measures to combat the crisis could cost 800 billion reais, and the economy, which is expected to contract this year, could rebound and be back on track within a year.

Earlier on Monday, Bolsonaro had stepped up his stand-off with state governments, branding governors in the hardest-hit states “job-killers” and suggesting that democracy could be at risk if the Covid-19 crisis leads to social chaos.

IMPACT:  Brazil’s political leaders have been eager to negotiate emergency measures such as a “war budget” exempt from fiscal rules, but many have criticized the president, who lacks a solid alliance in Congress, for downplaying health risks. If Brazil does not handle the situation with prudence, the virus can wreak more economic and social turmoil than what Bolsonaro fears, what the president is insisting is the definition of “penny wise pound foolish” actions.  

U.S. CONGRESS EYES NEXT STEPS IN COVID-19 RESPONSE

Three days after passing a $2.2 trillion package aimed at easing the heavy economic blow of the Covid-19 pandemic, the U.S. Congress was looking on Monday at additional steps it might take as the country’s death toll approached 3,000.

Democrats who control the House of Representatives were discussing boosting payments to low- and middle-income workers, likely to be among the most vulnerable as companies lay off and furlough millions of workers, as well as eliminating out-of-pocket costs for Covid-19 medical treatment.

House Speaker Nancy Pelosi said she would work with Republicans to craft a bill that could also provide added protection for front-line workers and substantially more support for state and local governments to deal with one of the largest public health crises in U.S. history. Pelosi, the top U.S. Democrat, said she did not expect new legislation to be completed until sometime after Easter, which is on April 12.

IMPACT: More fiscal measures are coming as governments understand that the economic impact of the virus on families is another crisis that should be preemptively stemmed before it blows out into social unrest. 

DAY AHEAD

It’s a busy data week in America. Besides the nonfarm payrolls report, there’s also the latest ISM manufacturing and non-manufacturing PMIs coming up on Wednesday and Friday respectively. These surveys will give us a taste of how much damage the virus has inflicted on the U.S. economy and therefore, of how deep the upcoming recession will be. As far as economic data go these days, these are extremely important, and a serious disappointment could derail the latest rebound in stocks. 

SENTIMENT

OVERALL SENTIMENT: Though volatility remains high, market participants are getting conditioned to the swings. Sentiment has stabilised despite worsening news from the virus spread because everyone has become conditioned to bad news. The good news from policymakers have also been well publicised, so more of the same is unlikely to move the needle until some effects are felt. While the market waits for new drivers and expects volatility to remain high within a wide range.

FX

STOCK INDICES

TRADING TIP

Money for Nothing…

In the world to come, we will have unlimited supply of fiat money especially USD given that the Fed’s printing presses are working non-stop these days. Many central banks around the world are doing the same and this flow of money will eventually start to affect prices of things. 

When something is unlimited in supply, its value drops relative to things which are limited in supply. The task then is up to us to find what is it that is finite in supply and will be demanded in the world to come. So, the questions we must ask are what are the stores of value in this world that are finite in supply and what are the goods that have limited production and consumers will need in the world to come?

The answers to these questions will give you clarity on what are the trends that will soon emerge in time to come.

WHAT HAPPENED YESTERDAY

As of New York Close 27 Mar 2020,

FX

U.S. Dollar Index, -0.94%, 98.36
USDJPY, -1.54%, $107.90
EURUSD, +1.02%, $1.1142
GBPUSD, +2.09%, $1.2457
USDCAD, -0.27%, $1.3980
AUDUSD, +1.68%, $0.6166
NZDUSD,  +1.27%, $0.6037

STOCK INDICES

S&P500, -3.37%, 2,541.47
Dow Jones, -4.06%, 21,636.78
Nasdaq, -3.79%, 7,502.38
Nikkei Futures, +3.92%,19,080.0

COMMODITIES

Gold Futures, -1.59%, 1,625.00
Brent Oil Futures, -5.35%, 24.93

SUMMARY: 

Dollar continued its descent after a week of declines and the safe-haven Yen powered on, as Covid-19 lockdowns tightened across the world and investors braced for a prolonged period of uncertainty. The weekend brought more bad news on the virus front. The U.S. has emerged as the latest epicenter of the outbreak, with more than 137,000 cases and 2,400 deaths. Trump, who had talked about reopening the economy for Easter, on Sunday extended guidelines for social restrictions to April 30 and said the peak of the death rate could be two weeks away.

The S&P 500 declined 3.37% on Friday after a rebound effort faded into the close, the benchmark index had started the session down 4.2%, then cut its losses to just 0.5% after the House passed the $2 trillion stimulus bill in the afternoon. The Dow Jones Industrial Average lost 4.06%, the Nasdaq Composite lost 3.79%, and the Russell 2000 lost 4.1%. U.S. 2yr Yield fell 5bp to 0.25% and U.S. 10yr Yield fell 11bp to 0.73%. 

The stimulus bill will provide relief for U.S. households and businesses, as the rising number of Covid-19 infections continues to keep much of America in shutdown mode. On a related note, the U.S. surpassed China and Italy for the most confirmed cases of Covid-19.

Before the close, United Airlines (UAL 32.84, -2.71, -7.6%) said it isn’t going to conduct involuntary furloughs or pay cuts in the U.S. before September 30; however, it cautioned that air travel demand could remain suppressed possibly into next year. Within the Dow, shares of Boeing (BA 162.00, -18.55, -10.3%) fell 10% after Treasury Secretary Mnuchin said the company has no plans of using government aid at this time. 

U.S. VIRUS CASES EXCEED 100,000

Doctors and nurses on the front lines of the U.S. Covid-19 crisis pleaded on Friday for more protective gear and equipment to treat waves of patients expected to overwhelm hospitals as the sum of known U.S. infections climbed well past 100,000, with more than 1,600 dead.

“We are scared,” said Dr. Arabia Mollette of Brookdale University Hospital and Medical Center in Brooklyn. “We’re trying to fight for everyone else’s life, but we also fight for our lives as well, because we’re also at the highest risk of exposure.” One emergency room doctor in Michigan, an emerging epicenter of the pandemic, said he was using one paper face mask for an entire shift due to a shortage and that hospitals in the Detroit area would soon run out of ventilators.

IMPACT: The United States ranked sixth in death toll among the hardest-hit countries, with at least 1,632 lives lost as of Friday night, a record daily increase of 370 according to a tabulation of official data. Worldwide, confirmed cases rose above 720,000 with 33,958 deaths, the Johns Hopkins Covid-19 Resource Center reported.

HISTORIC $2.2 TRILLION COVID-19 BILL PASSES U.S. HOUSE, BECOMES LAW

The U.S. House of Representatives on Friday approved a $2.2 trillion aid package – the largest in history – to help cope with the economic downturn inflicted by the intensifying Covid-19 pandemic, and Trump quickly signed it into law.

The massive bill passed the Senate and House of Representatives nearly unanimously. The rare bipartisan action underscored how seriously Republican and Democratic lawmakers are taking the global pandemic that has killed more than 1,500 Americans and shaken the nation’s medical system.

“Our nation faces an economic and health emergency of historic proportions due to the Covid-19 pandemic, the worst pandemic in over 100 years,” House Speaker Nancy Pelosi said at the close of a three-hour debate before the lower chamber approved the bill. “Whatever we do next, right now we’re going to pass this legislation.”

IMPACT: The rescue package is the largest fiscal relief measure ever passed by Congress. The $2.2 trillion measure includes $500 billion to help hard-hit industries and $290 billion for payments of up to $3,000 to millions of families. It will also provide $350 billion for small-business loans, $250 billion for expanded unemployment aid and at least $100 billion for hospitals and related health systems.

U.S. COULD FACE 200,000 COVID-19 DEATHS, MILLIONS OF CASES, FAUCI WARNS

U.S. deaths from Covid-19 could reach 200,000 with millions of cases, the government’s top infectious diseases expert warned on Sunday as New York, New Orleans and other major cities pleaded for more medical supplies.

Since 2010, the flu has killed between 12,000 and 61,000 Americans a year, according to the U.S. Centers for Disease Control and Prevention. The 1918-19 flu pandemic killed 675,000 in the United States. The U.S. Covid-19 death toll topped 2,400 on Sunday after deaths on Saturday more than doubled from the level two days prior. The United States has now recorded more than 137,000 cases of COVID-19, the disease caused by the virus, the most of any country in the world.

IMPACT: Trump has bowed to the inevitable and accepted that his ambition of 12 April, Easter, as a date on which social distancing restrictions on Americans could start to be lifted was always a pipe dream. The new date he gave was the end of April. Whether that sticks remains to be seen. Tests to track the disease’s progress also remain in short supply, despite repeated White House promises that they would be widely available. As the crisis continues to escalate, the economic damage will get worse and will weigh heavily on market sentiment. 

DAY AHEAD

The global crisis from the Covid-19 pandemic has produced much turmoil in financial markets even though economic data on the impact has so far been scarce. That is about to change as March figures start rolling in. Given the extent of the market fallout, investors may already be expecting the worst. That’s not to say, however, that once the data lay bare the true scale of the economic damage, investors won’t be unnerved. The main releases this week that could jolt traders are the manufacturing PMIs out of China, and the ISM PMIs together with the latest jobs report from the United States.

SENTIMENT

OVERALL SENTIMENT: The virus spreads on relentlessly while Trump keeps talking about reopening the economy and questioning the requests for help from those at the frontlines of the outbreaks. It is a train wreck happening in slow motion. With all the measures introduced by the central banks and governments, the market now is left to struggle between the flow of unlimited money and the very real effects of a global economy being crushed by both demand destruction and supply disruption. 

The escalation in the US is inevitable. Expect more bad news in the days ahead.

FX

STOCK INDICES

TRADING TIP

Mind the Gap

There seems to be many weekend price gaps in markets recently where the opening levels on Monday mornings in Asia are substantially different from the prices that were last traded at New York close on Fridays. 

Traders should be aware of this risk as that would mean that even if you have stop-loss orders, you might not be filled at that level you wanted to exit the risk positions that you have. Losses that you actually take may be substantially more than what you were prepared for. 

As such, it is imperative to be cognisant of this risk and reduce your risk positions accordingly into the weekends, especially if the risks are skewed against your position. For now, the situation for the Covid-19 spread continues to deteriorate as the virus never sleeps, while policymakers tend to not be at work during weekends. With the policymakers having thrown almost everything they can think of at the problem, the likelihood of more measures is lessened unless there’s renewed panic in the markets. 

Always put yourself in the shoes of other investors as you face the prospect of the looming weekend. What would you do if you were the ones who were long instead of short and vice versa? 

When in doubt, just follow us on social media as that’s a constant topic of discussion for us! 😊

WHAT HAPPENED YESTERDAY

As of New York Close 26 Mar 2020,

FX

U.S. Dollar Index, -1.60%, 99.29
USDJPY, -1.87%, $109.13
EURUSD, +1.52%, $1.1048
GBPUSD, +2.57%, $1.2193
USDCAD, -1.05%, $1.4043
AUDUSD, +2.01%, $0.6079
NZDUSD,  +2.15%, $0.5975

STOCK INDICES

S&P500, +6.24%, 2,630.07
Dow Jones, +6.38%, 22,552.17
Nasdaq, +5.60%, 7,797.54
Nikkei Futures, -0.62%,19,120.0

COMMODITIES

Gold Futures, +0.18%, 1,636.40
Brent Oil Futures, -1.61%, 26.95

SUMMARY: 

Dollar traded lower against all of the major currencies after jobless claims topped 3.2 million. In anticipation of this blowout report, Powell gave a rare broadcast interview on NBC’s “Today Show” to reassure investors that the Fed is “not going to run out of ammunition” and they still have “policy room in other dimensions to support the economy.” The Dollar was the weakest of the major currencies by far, falling by -1.05% against the Loonie and up to -2.57% versus Sterling. 

S&P 500 extended its weekly rally by 6.24% on Thursday after the Senate approved the $2 trillion fiscal stimulus package for the economy, which saw a record surge in weekly jobless claims. The Dow Jones Industrial Average rose 6.38%, the Nasdaq Composite rose 5.60%, and the Russell 2000 rose 6.3%. U.S. 2yr Yield fell 4bp to 0.30% and U.S. 10yr Yield fell 5bp to 0.83%. 

Initial claims for the week ending March 21 was a whopping 3.2 million (consensus 1.6 mio), which was above most expectations but also unsurprising given the slew of economic shutdowns aimed at slowing the rate of Covid-19  infections. For the market, and Congress, it quantified how bad the situation has been for American workers. 

House Speaker Pelosi (D-CA) said the stimulus bill will be passed later today by voice vote with “strong bipartisan support” despite some speculation that objecting members would request a roll call vote, which would further delay its passage. The impending fiscal relief, then, provided investors some reassurance while doing some quarter-end rebalancing.

U.S. HOUSE LEADERS PLAN TO PASS $2.2 TRILLION COVID-19 BILL FRIDAY

U.S. House Speaker Nancy Pelosi said she expected the chamber to pass an estimated $2.2 trillion Covid-19 relief bill when it meets later today after the Senate overwhelmingly approved the unprecedented economic rescue legislation on Wednesday evening.

The legislation will rush direct payments to Americans within three weeks once the Democratic-controlled House of Representatives passes it and Republican President Donald Trump signs it into law, Treasury Secretary Steven Mnuchin said.

IMPACT: The unanimous Senate vote, a rare departure from bitter partisanship in Washington, underscored how seriously members of Congress are taking the global pandemic as Americans suffer and the medical system reels. The massive Covid-19 rescue bill follows two others that became law this month. The money at stake amounts to nearly half of the total $4.7 trillion the federal government spends annually. Trump has promised to sign the bill as soon as it passes the House.

BANK OF ENGLAND WARNS OF LONG TERM DAMAGE TO ECONOMY

The Bank of England has warned there are mounting risks of widespread job losses and companies going out of business across Britain as the economic costs of the Covid-19 outbreak become more apparent. In a reflection of the scale of the crisis, the central bank’s rate-setting monetary policy committee declared after its scheduled meeting on Wednesday that it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions and support the economy.

The MPC voted unanimously to maintain Bank Rate at 0.1% (expected). The committee also voted unanimously to continue with the program of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.

IMPACT: Sterling rebounded as the Bank of England kept interest rates unchanged at a record low of 0.1% and its asset purchase program steady at GBP200 billion.

NEW YORK, NEW ORLEANS HOSPITALS REEL AS U.S. LEADS WORLD IN COVID-19 CASES

The United States on Thursday surpassed China and Italy as the country with the most Covid-19 cases, as New York, New Orleans, and other hot spots face a surge in hospitalizations and looming shortages in supplies, staff, and sick beds. The number of U.S. cases of Covid-19 reached 81,378. China was second with 81,285 cases, and Italy third with 80,539 cases.

IMPACT: At least one New York hospital has begun a trial of sharing single ventilators between two patients. Dr. Craig Smith, surgeon in chief at New York-Presbyterian/Columbia University Medical Center in Manhattan, wrote to staff that teams had worked “day and night” to get the split-ventilation experiment going. The projected ventilator shortfall and the surge in hospitalizations have already raised the prospect of rationing healthcare. Asked about guidelines being drafted on how to allocate ventilators to patients in case of a shortage, New Jersey Governor Phil Murphy said such bioethical discussions “haunted him” but were unavoidable in the current situation.

China reached the peak in the number of cases after a total shutdown of the whole country, while the US has yet to do so and Trump is already contemplating reopening the places that have shutdown. The number of cases that we are about to see in the US will be unimaginable if the mismanagement continues.

DAY AHEAD

The next few jobless claims reports could be even worse, many investors are wondering if yesterday’s rally in stocks is indicative of a bottom. It is hard to imagine that being the case as this is only the start of a long period of very high jobless claims. The incessant fall in Treasury yields and decline in the Dollar indicates that investors are not convinced.

SENTIMENT

OVERALL SENTIMENT: 

The stock market roared back for a 3rd day of gains amid optimism on the much discussed multi-trillion dollar stimulus package. Month-end rebalancing (where pension funds sell bonds which have gone up a lot and buy stocks which have fallen a lot) were also a factor in the relentless buying of stocks. Free money from the government can change prices of assets when denominated in the currency that is being printed in huge quantities but what about prices when denominated in hard assets or other currencies with lesser supply? 

With the Fed now ready to supply the world with unlimited USD, the value of the USD will eventually be eroded against currencies with lesser supply.

FX

STOCK INDICES

TRADING TIP

There’s more to Life than Trading

Despite the recent doom and gloom amid the crazy market volatility, there’s always time to take stock and reflect on things that are important in life. This Covid-19 outbreak gives us an opportunity to take a step back from the relentless routine of life and re-evaluate what are the things that are important to us. 

Although, every message of mine is invariably about how bad it actually is and how much worse it will be (primarily because of inaction and mismanagement by policymakers), I do believe in spite of the carnage that is currently being wrought, it will eventually become better.

As human civilisation comes to grips with what is required to stop the spread of the virus, the planet in general is given an opportunity to heal. We, too, should take this required social distancing as an opportunity to reflect and reconnect with our loved ones. 

Take the time to listen to this song with headphones on both ears. You will be surprised by the effects of what they call 8D music. The music seems to come from somewhere further than the headphones. Enjoy the magic that technology brings to our lives as the song swirls around you. 

TGIF! The weekend is almost upon us. 😊

WHAT HAPPENED YESTERDAY

As of New York Close 25 Mar 2020,

FX

U.S. Dollar Index, -0.74%, 100.91
USDJPY, -0.34%, $110.85
EURUSD, +0.92%, $1.0889
GBPUSD, +0.77%, $1.1849
USDCAD, -1.65%, $1.4223
AUDUSD, -0.90%, $0.5904
NZDUSD,  -0.36%, $0.5807

STOCK INDICES

S&P500, +1.15%, 2,475.56
Dow Jones, +2.39%, 21,200.55
Nasdaq, -0.45%, 7,384.29
Nikkei Futures, -1.59%,18,810.0

COMMODITIES

Gold Futures, -1.35%, 1,638.45
Brent Oil Futures, +1.33%, 27.51

SUMMARY: 

To say volatility was high is an understatement. GBP opened at 1.1755 and crept higher throughout the day before rallying hard to a high of 1.1973. Then it started to fall like a rock to 1.1640s before bouncing hard all the way to 1.1912. All these movements could not really be explained by any headlines and left many traders scratching their heads and licking their wounds. 

The outperformer of the day was CAD which strengthened relentlessly throughout the day. The Dollar is waiting upon the U.S. Fiscal Bill approval and Unemployment Claims before making some purposeful headway. Expect elevated volatility in FX markets until these two key events are cleared. 

S&P 500 advanced as much as 5.1% on Wednesday, as investors continued to buy beaten-up shares of companies after the Senate agreed to a revised stimulus plan, but the market faltered into the close amid some political drama and profit-taking. The benchmark index finished up 1.15% for the session. The Dow Jones Industrial Average (+2.39%) outperformed on the back of a strong showing by Boeing (BA 158.73, +31.05, +24.3%). Boeing shares surged 24%, as the company stands to benefit from the stimulus bill that will rescue the airline industry. Reports indicated the company could also receive direct aid from Washington and that the company aims to restart production of the 737 MAX by May. The Russell 2000 increased 1.3%, while Nasdaq Composite declined 0.45%. U.S. 2yr Yields fell 4bp to 0.34% and U.S. 10yr Yields rose 4bp to 0.88%

An agreement was reached in the early hours of the morning, but a vote in the Senate was delayed due to a “massive drafting error” in the bill (error is explained more below). There was some hope that the House would then approve the bill with a unanimous consent resolution despite lingering complaints in order to provide financial relief for Americans and businesses as soon as possible.

Sentiment soured after Senator Sanders threatened to hold up the Covid-19 bill and demand new restrictions on the $500 billion fund for corporations. Rep. Alexandria Ocasio-Cortez also warned she may oppose the unanimous consent resolution, which could further delay financial relief. 

“Massive Drafting Error”: Four Republican senators are warning that they will oppose fast-tracking the $2 trillion coronavirus response package unless a “massive drafting error” in the legislation, which they say would create an incentive for employers to lay off employees, is fixed. The concern from Sens. Graham, Tim Scott, R-S.C., Ben Sasse, R-Neb., and Rick Scott, R-Fla., is that the current version could pay workers more in unemployment benefits than they’re currently making, by sticking a $600 per week payment on top of ordinary benefits that are calculated as a percentage of income. This could disrupt the labor market further, the lawmakers warn.

TEMPERS RISE AS U.S. SENATE AWAITS VOTE ON $2 TRILLION COVID-19 BILL

Republican and Democratic leaders of the U.S. Senate hoped to vote on Wednesday on a $2 trillion emergency package to alleviate the devastating economic impact of the Covid-19 pandemic but found themselves fending off critics from the right and left who threatened to hold up the bill.

Several Republican senators said the bill needed to be changed to ensure that laid-off workers would not be paid more than they earned on the job. “Why would the senators hold up this really important bill because they resent people at the low end of the spectrum who have lost their jobs, from getting $600?” House of Representatives Speaker Nancy Pelosi asked on CNN.

The legislation will also provide $350 billion for small-business loans, $250 billion for expanded unemployment aid and at least $100 billion for hospitals and related health systems. The rescue package would be the largest ever approved by Congress and follows two others that became law earlier this month. The money at stake amounts to nearly half of the $4.7 trillion the U.S. government spends annually.

IMPACT: The stimulus isn’t going to help slow down the rate of Covid-19 infections, but it may speed an economic recovery if the nationwide efforts to curb the virus prove successful. Granted, there’s still uncertainty about that outlook, but the market has gotten anxious about getting funding to the businesses and workers who need it most right now.

CANADA DOUBLES VALUE OF COVID-19 STIMULUS PACKAGE, PROMISES CASH, LOAN DELAYS

The package is worth C$52 billion ($36.62 billion), up from an initial C$27 billion outlined last week. More than a million people signed up for unemployment benefits last week. Oil companies asked Ottawa to free up cash and credit to survive, and banks could be hit harder than during the 2008 financial crisis. The package, which Parliament approved earlier on Wednesday, includes an additional C$55 billion in tax deferrals.

The aid package will give people affected by the outbreak C$2,000 a month and delay student loan repayments, among other measures to boost the economy, Prime Minister Justin Trudeau said. A portal will be set up by April 6 for people who have lost jobs or are unable to work to apply for monthly payments, which will run for four months. The plan delays student loan payments for three months.

IMPACT: The government said Canadians made nearly one million claims for unemployment benefits last week, which is equivalent to about 5% of Canada’s workforce. A survey found that 44% of Canadian households had someone who had lost hours due to the Covid-19 shutdown. A third said they were concerned about missing a mortgage or rent payment.

SPAIN’S COVID-19 DEATH TOLL OVERTAKES CHINA’S

Spain’s Covid-19 death toll jumped by 738 overnight to exceed that of China, as the country struggled to cope with an accelerating health crisis and another senior government minister was diagnosed with the virus.

With 3,434 fatalities, Spain now has the second-highest number of deaths globally after Italy’s 6,820. Nursing homes across the country have been overwhelmed by cases and a skating rink in Madrid has been turned into a makeshift morgue.

IMPACT: Spain is on Day 11 of a 15-day nationwide lockdown which is likely to be extended to 30 days. Schools, bars, restaurants, and most shops are shuttered. Social gatherings are banned. People are confined to their homes. Aside from the devastating health impact, the lockdown has dealt a punishing blow to the Spanish economy, with tens of thousands of workers temporarily laid off as sectors such as retail, tourism and manufacturing grind to a halt. One of Spain’s biggest employers, El Corte Inglés, said it would temporarily lay off 22,000 workers at its department stores. The Bank of Spain said on Wednesday that there had been severe disruption to the economy since early March and a sharp contraction in consumer spending.

DAY AHEAD

The panic that has gripped financial markets is unlikely to subside, and if anything, the upcoming Initial Jobless Claims data could pour more gasoline on the fire. All this time, investors had been ‘flying blind’ as they were merely guessing how big the virus impact would be – but this changes later today. The weekly numbers of Americans filing for unemployment benefits will give markets a taste of just how big the damage is.

And it’s likely to be enormous. Forecasts suggest that Initial Jobless Claims will shoot up to 1 million, from 281k last week. If true, this would be the highest print ever, far exceeding the previous record of 695k from back in 1982. In fact, the risks seem tilted towards an even bigger surge than what’s expected. Preliminary data from some US states that have reported their own claims already point to a much larger nationwide increase. Take Ohio for example – a state with less than 12 million in population – reported roughly 140k jobless claims for the week in question, a 28-fold increase from the previous week.

Similar increases have been reported in other states. The most worrisome part is that several states saw their employment websites crash due to a surge in traffic, so the real number of benefit seekers may be even higher than what’s been reported so far.

SENTIMENT

OVERALL SENTIMENT: 

It was the first two-day streak of gains for the US stock markets since Feb, amid improvement in sentiment due to more positive talk of the impending stimulus package. However, with key issues remaining to be sorted out, the world still needs to wait for the vote on the bill. With the Fed now focusing on the implementation of the various programmes that it had announced to stabilise the funding and credit markets, some sense of stability will slowly return. The fundamentals of the economy remain poor and will continue to plague the minds of investors. Trump’s insistence on re-opening the economy ASAP is a key risk and is much like the script of a movie where the mayor of a town insists on reopening the beaches because there hasn’t been a shark sighting for a few days. 

For those celebrating one of the biggest rallies in the stock markets in history, seeing when 9 of the other top 10 stock rallies in history occurred should adequately curb your enthusiasm.

FX

STOCK INDICES

TRADING TIP

Resist the FOMO

In volatile times like these, there will always be the Fear of Missing Out as markets swing from one extreme to the other. We are living through the biggest disruption to the world economy in years, if not ever. There will be many opportunities and a crisis such as this does not get resolved within a few weeks. 

Do not rush into chasing moves just because things are moving fast. Take a deep breath, focus on picking the lower hanging fruits as there are many opportunities and just because you miss one today, it doesn’t mean you have to settle for marginal trades.

The objective is to be profitable, not to be involved.

WHAT HAPPENED YESTERDAY

As of New York Close 24 Mar 2020,

FX

U.S. Dollar Index, -0.81%, 101.66
USDJPY, -0.08%, $111.13
EURUSD, +0.70%, $1.0798
GBPUSD, +2.07%, $1.1789
USDCAD, -0.39%, $1.4442
AUDUSD, +2.40%, $0.5968
NZDUSD,  +1.77%, $0.5824

STOCK INDICES

S&P500, +9.38%, 2,447.33
<b>Dow Jones, +11.37%, 20,704.91
Nasdaq, +8.12%, 7,417.86
Nikkei Futures, +10.58%,18,742.5

COMMODITIES

Gold Futures, +7.97%, 1,692.55
Brent Oil Futures, +2.33%, 27.66

SUMMARY: 

The Dollar remained on the backfoot on Wednesday as global markets await the stimulus package out of the U.S., before deciding if further flight to cash due to lack of cooperation from the government is necessary. Gold had a big up move, especially in the futures market (more on that below). JPY trades weak despite general USD weakness. No good reason can be found except that maybe Japanese investors are continuing to invest in overseas assets. The Japanese pension fund GPIF (160 trillion JPY (1.45 trillion USD)) is seeking approval to increase its allocation to foreign bonds from 15% to 25% with effect from 1 April. The final decision will be announced on 31 March.

S&P 500 surged 9.38% on Tuesday, as news that the elusive fiscal stimulus package was close to being agreed to in the Senate spurred a broad-based rebound. The Dow Jones Industrial Average climbed 11.37%, the Nasdaq Composite climbed 8.12%, and the Russell 2000 climbed 9.4%. U.S. 2yr Yield rose 10bp to 0.38% and U.S. 10yr Yield rose 8bp to 0.84%.

Lawmakers continued to narrow their differences on the stimulus bill, with Senate Minority Leader Schumer (D-NY) placing negotiations “on the two-yard line” around lunchtime. According to CNBC, the White House is hopeful to have an agreement in principle by “sunset,” but noted it was unlikely that an actual Senate vote would take place tonight.

An agreement is needed to restore some confidence for consumers, investors, and businesses during the economic shutdowns across the country. The Fed has already stepped in numerous times to expand credit and liquidity, while Trump today said he would like to have the economy to reopen by Easter (12 April) despite the outbreak.

New York Governor Cuomo, who has been very active in trying to slow the rising rate of infections, empathized with the president but argued that we shouldn’t “accelerate the economy at the cost of human life.” NYC Mayor De Blasio was blunter, saying Trump is wrong and April will be worse than March. 

The situation in NYC is extremely worrying as I personally have a few friends who are experiencing symptoms of Covid-19 infection but are not in the official statistics. They are quarantining themselves at home and will only seek treatment if their condition worsens because the hospitals are currently swamped.

$2 TRILLION COVID-19 AID DEAL TAKES SHAPE IN U.S. CONGRESS

Senior Democrats and Republicans in the divided U.S. Congress said on Tuesday they were close to a deal on a $2 trillion stimulus package to limit the Covid-19 pandemic’s economic toll, but it was unclear when they will be ready to vote on a bill.

The $2 trillion package includes a proposed $500 billion fund to help hard-hit industries and a comparable amount to send direct payments of up to $3,000 to millions of U.S. families, as well as $350 billion for small-business loans, $250 billion for expanded unemployment aid and at least $75 billion for hospitals.

House of Representatives Speaker Nancy Pelosi, the top Democrat in Congress, said the sides had agreed to more oversight provisions for the proposed $500 billion to help hard-hit industries, resolving a key sticking point. The latest version would increase unemployment benefits by up to $600 per week, ensuring that many who lose their jobs would not see a drop in income, according to a Democratic aide. Jobless benefits currently pay workers a fraction of their salaries.

IMPACT: Republicans normally hold a slim 53-47 majority in the Senate, meaning they need Democratic support to garner the 60 votes required to advance most legislation. But the Covid-19 has affected their ranks, giving Democrats more leverage. Republican Senator Rand Paul has tested positive for the Covid-19 virus and four other Republicans are also unable to vote because they were exposed to Paul or others with the virus. Wall Street bounced from three-year lows on Tuesday on hopes the Senate might be close to ending its standoff. Markets are buying on the rumour that it will soon be announced, what happens when it becomes fact?

MODI PUTS ALL OF INDIA UNDER LOCKDOWN FOR 21 DAYS TO  FIGHT COVID-19

Indian Prime Minister Narendra Modi said on Tuesday the government would impose a nationwide lockdown from midnight for 21 days to stem the spread of the Covid-19. “There will be a total ban on venturing out of your homes,” Modi said in a televised address. India has so far reported 482 confirmed cases of the Covid-19 and nine deaths.

IMPACT: Modi accepted the lockdown would come at an economic cost, while announcing 150 billion rupees (S$2.8 billion) for strengthening testing facilities, personal protective gear, isolation, and intensive care unit (ICU) beds and other essential equipment. With less than 500 confirmed cases, Modi is shutting a country with a population of 1.3 billion. He is doing what is required to stop the spread of the virus instead of waiting to react to the inevitable spread and make it even harder to contain the outbreak. 

AMID WORSENING PANDEMIC, TRUMP SAYS AMERICA SHOULD RE-OPEN FOR BUSINESS BY MID-APRIL

Trump pressed his case on Tuesday for a re-opening of the U.S. economy by mid-April despite a surge in Covid-19 cases, downplaying the pandemic as he did in its early stages by comparing it to the seasonal flu.

During a live town hall broadcast on Fox News Channel, he said he would like to have businesses opening their doors again by Easter, which will be celebrated on April 12. “I would love to have the country opened up and just raring to go by Easter,” he said.

Trump said the country did not take drastic measures to fight car crashes and flu deaths similar to those it is taking for the Covid-19. He said Americans could continue practicing social-distancing measures, which health experts say are crucial to prevent infection, while also going back to work.

“Our people want to return to work,” he said on Twitter earlier on Tuesday. “They will practice Social Distancing and all else, and Seniors will be watched over protectively & lovingly. We can do two things together. THE CURE CANNOT BE WORSE (by far) THAN THE PROBLEM!”

IMPACT: Trump and his economic and health advisers are mulling how to proceed after the 15-day period of tough measures to slow the pandemic. White House economic adviser Larry Kudlow, speaking to reporters at the White House, said the Trump administration was looking at low-infection areas where the economy might be reopened after a 15-day shutdown period ends next week. Trump’s desire to get the economy back to normal right away has faced criticism from Democrats and Republicans as the Pentagon and others forecast the outbreak could last for months.

CME TO LAUNCH NEW GOLD FUTURES CONTRACT WITH EXPANDED DELIVERY OPTIONS (DUE TO PHYSICAL GOLD SUPPLY DISRUPTION)

On Tuesday, Reuters reported the London Bullion Market Association (LMBA) and several major banks that trade gold had asked CME Group to allow gold bars in London to be used to settle its contracts to ease disruption to trading.

In response, U.S. exchange operator CME Group Inc said on Tuesday it was launching a new gold futures contract with expanded delivery options that include gold bars, in a bid to address the disruptions. The gap between gold futures on the CME’s Comex exchange in New York widened above London spot prices by as much as more than $70 per ounce (4%). 

IMPACT: The two usually remain within a few dollars of one another, and the gap skewed trading in the London market. This is a good example of how normal market pricing relationships breakdown in times of stress. This explosion in the difference of the April futures (which has 6 days left to Notice day) and spot cash price is due to a breakdown in logistics impairing the ability of gold miners/owners, who sold the futures to hedge, to deliver physical gold to the longs of the futures contract.

DAY AHEAD

In the U.S, all eyes will be on the weekly jobless claims, which will be released on Thursday. This will reveal how much damage the virus outbreak has already inflicted on the US economy, and investors are terrified that the number of Americans filing for unemployment benefits is about to skyrocket as consumption collapses and businesses lay people off. A huge surge in jobless claims could cement fears of a recession and therefore spell more trouble for stock markets, though the strong Dollar may not be affected as much. 

SENTIMENT

OVERALL SENTIMENT: Markets started celebrating the “imminent” approval of the stimulus package from the US with the biggest rally in history. Covid-19 infection continues to spread yet Trump is talking about reopening the economy in a matter of weeks. NYC Mayor immediately commented that Trump is wrong, and it will be much worse in April than in March. 

It is clear that Trump’s priority is to get the stock markets higher, but it will end up risking more lives and prolonging the crisis. Bear markets are full of fierce rallies but make no mistake, it remains a bear market.

FX

STOCK INDICES

TRADING TIP

The Cat Bounces High

Bull markets occur in typically low volatility environments because not only are the fundamentals driving the markets higher, there is no one opposing the move except the bears who are losing money. Policymakers are all busy congratulating themselves on a job well done and everyone else in general is doing well because of their 401k’s and passive investments. 

On the other hand, bear markets are never easy to trade as shorts will have to contend with policymakers who are incentivised to fight the fundamentals. As such, bear markets are characterised by aggressive rallies amid high volatility as central bankers and politicians alike implement policies to thwart the repricing of risk assets. 

As we’ve said before, markets rarely go down in a straight line. However, if you drop a cat from a high enough building, it will bounce. However high it bounces, the cat is still dead. The higher the bounce, the further it has to fall again.

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?