WHAT HAPPENED YESTERDAY

As of 3 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.63%, 97.51
USDJPY, +0.42%, $108.53
EURUSD, +1.07%, $1.1144
GBPUSD, -0.42%, $1.2767
USDCAD, -0.54%, $1.3325
AUDUSD, +0.60%, $0.6549
NZDUSD, +0.21%, $0.6266

STOCK INDICES

S&P500, +4.60%, 3,090.23
Dow Jones, +5.10%, 26,706.17
Nasdaq, +4.49%, 8,952.17
Nikkei Futures, +2.83%, 21,677.5

COMMODITIES

Gold Futures, +1.65%, 1,592.60
Brent Oil Futures, +5.09%, 53.09

SUMMARY:

FX markets started off risk-averse with a gap lower in AUD and USDJPY (about 0.5% lower than previous close at 0.6466 and 107.46 respectively) and steadily climbed higher throughout the day as rumours that coordinated action from the major central banks will be forthcoming. As the day progressed, risk-seeking sentiment started to dominate with FX recovering the opening losses and AUD testing above 0.6560s, more than 1.5% above the day’s low.

EUR stole the show as it relentlessly marched higher again. Stocks selling off? Oh, risk aversion, buy some EUR! Stocks rising fast? Oh, rate cuts from the Fed, buy some EUR! For now, this seems to be dynamic. How long can this last? Till all the shorts capitulate and everyone you know is long, and there’s no one left to buy the next EUR!

At the end of the Tokyo session, the BOJ announced that they bought a record total of 101 bn JPY worth of ETFs to support the stock market. Confirmations of a teleconference between G7 officials, including central bankers, on Tue, cheered the battered bulls and we were off to the races.

The major stock indices surged with the S&P 500 (+4.6%) recording its first gain since February 19, Nasdaq (+4.49%), while the Dow Jones Industrial Average (+5.1%) outperformed.

Equities started the new week on a firmly higher note even though the number of new Covid-19 cases in the United States continued increasing while China reported its worst Manufacturing (35.7) and Non-Manufacturing PMI (29.6) readings in history.

China’s PMI readings were much weaker than what was reported at the depth of the financial crisis, which promptly led to more calls for stimulus from the People’s Bank of China. The Bank of Japan, meanwhile, offered to purchase JPY500 bln worth of JGBs. The fed funds futures market continued pointing to expectations for a 50-basis point cut at the March 18 meeting or before.

Growing stimulus hopes contributed to another day of gains in the Treasury Yield market, pressuring the 10-yr yield to a record low of 1.043%, and 2-yr yield to a record low of 0.713% in early U.S. trading. However, as the stock markets stabilised and climbed higher, yields recovered and closed the day relatively unchanged with the 10y at 1.163% and 2-yr at 0.909%.

Small, medium and long term investors are all long US Treasuries. If things start to calm down, there could be a washout if aggressive Fed action is not forthcoming. If the Fed is aggressive in cutting, the curve could steepen with the 10year sector underperforming. A positioning washout much like what we saw in Gold previously could be on the cards if stocks rally further.

US MANUFACTURING

The ISM Manufacturing Index for February managed to eke out an expansion reading at 50.1 (consensus 50.5), but that was weaker than expected and down from 50.9 in January. The dividing line between growth and contraction is 50.0.

IMPACT: The key takeaway from the report is that there were noted concerns in respondents’ commentary about the negative impact of Covid-19, which is telling, because the virus has continued to spread globally since the report was compiled, implying there is an increased risk of the index falling below 50.0 in March. Reports from around the world on Monday also showed factories taking a beating from the Covid-19 outbreak, with activity in China shrinking at a record pace. Japan’s PMI showed its factory activity was hit by the sharpest contraction in nearly four years in February. In South Korea, factory activity also shrank faster in February.

A sharp contraction in manufacturing has raised calls for stimulus from central banks, this was one of the primary reasons for the risk rally yesterday. If central banks do not provide the stimulus the market calls for or provide adequate jawboning and manufacturing continues to contract, risk assets will be re-priced much lower.

CHILD DROWNS AT SEA OFF GREECE IN THE FIRST FATALITY AFTER TURKEY OPENS BORDER

A young Syrian boy died on Monday after being pulled from the sea when a boat capsized off the Greek island of Lesbos, Greek officials said, the first reported fatality since Turkey opened its border last week to let migrants reach Europe. The surge, which has led to Greek and Turkish police firing tear gas into crowds caught in the no-man’s land between the two borders, has revived memories of the 2015-16 refugee crisis when more than a million people arrived in Europe from Turkey.

IMPACT: The latest migrant surge follows Turkey’s decision to stop enforcing a 2016 accord with the European Union whereby it stopped migrants entering the bloc in return for cash. Turkey, already home to 3.7 million Syrian refugees, has another million arriving on its doorstep from a new surge of fighting in northern Syria and says it cannot handle anymore.

The migrant crisis coupled with Covid-19 may just be the straw that breaks the camel’s back in the EU, tipping them over to embrace a fiscal package to stimulate the economy. Migrants in Turkey are already putting a lot of stress on the Turkish economy and as the war in Idlib rages on, more waves of migrants will arrive on Turkish and Greek shores (turkey will probably open the borders for them to pass through to Europe) and this will create more political turmoil in the EU.

COVID-19 DEATHS RISE TO SIX IN SEATTLE AREA AS U.S. PUSHES FOR MORE TESTING

Six people in the Seattle area have died of the illness caused by the new Covid-19, health officials said on Monday, as authorities across the United States scrambled to prepare for more infections with the emphasis on increasing testing capacity.

The total number of cases detected by the public health system in Washington state now stands at 18, the most of any state. In addition to the 14 King County cases, four residents of nearby Snohomish County have tested positive for the virus, officials said. In addition to confirmed cases, King County has about 29 potential cases awaiting test results, so the number there could soon rise, officials said. Tests were being conducted on about 200 samples per day, and health officials said they expect to boost the number of tests to at least 1,000 a day in the near future.

IMPACT: Federal health officials have said the number of test kits for coronavirus would be radically expanded in the coming weeks. The United States appeared poised for a spike in cases, partly because there would be more testing to confirm infections. Trump said his administration has asked pharmaceutical companies to accelerate work on the development of a coronavirus vaccine, but provided no details. Top U.S. health officials have said any vaccine is up to 18 months away and there is no treatment for the respiratory disease, although patients can receive supportive care.

A spike higher in U.S. Covid-19 cases may cause a knee-jerk selloff in risk assets, but the extent of the spike will play a role in how the Covid-19 narrative in the western hemisphere will develop. (will it be mania or confidence that it might be under control?)

DAY AHEAD

‘Hard Brexit’ fears have unnerved investors after both the UK and the EU set out tough negotiating positions for future trade talks. UK PM Boris Johnson went a step further and warned he could walk away from the talks in June if by then the broad outline of a deal does not conform to that of a Canada-style agreement.

With negotiations due to formally start later today, Brexit headlines are likely to be the main driver for Sterling over the coming days as it will be extremely quiet on the data front apart from the final UK PMI readings.

SENTIMENT

OVERALL SENTIMENT: 

The news of the G7 teleconference reassured investors that help from the governments will be forthcoming. Fear ebbed and battered bulls are vindicated for holding on for now. Sentiment remains fragile and volatility will remain elevated.

FX

MARKETS

TRADING TIP

It doesn’t really fall like a rock… 

With governments showing again their propensity in implementing policies to support asset prices, the battered bulls are now heaving a sigh of relief and high-fiving themselves for not giving up. In a market conditioned to years of buying the dip, many would-be kicking themselves at this moment on why they lost their nerves and didn’t just close their eyes and stick a bid into the falling stock market.

It remains to be seen if this is the start of a bear market or just another retracement in a long multi-year bull market where it has always paid off to buy any dips that occur.

What is different this time though is that the Covid-19 crisis is causing not just a shock to confidence and demand, but also to supply. The question you have to ask yourself is, “Will more easy money from central banks and tax cuts from governments solve all that?”

If this is a bear market, it will be filled with relief rallies much like what we saw yesterday. Bear markets don’t just fall like a rock in a straight line. Be wary, and tread carefully. The key is to survive till the clear good risk vs reward trades appear. There is no rush to get into marginal positions. Do not give in to FOMO and find yourself out of the game.

Be sure to stick around. The markets are just beginning to get interesting!

WHAT HAPPENED YESTERDAY

As of 2 Mar, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.39%, 98.13
USDJPY, -1.38%, $108.08
EURUSD, +0.24%, $1.1026
GBPUSD, -0.50%, $1.2821
USDCAD, +0.05%, $1.3398
AUDUSD, -0.90%, $0.6510
NZDUSD, -0.87%, $0.6253

STOCK INDICES

S&P500, -0.82%, 2,954.22
Dow Jones, -1.39%, 25,409.36
Nasdaq, +0.01%, 8,567.37
Nikkei Futures, -3.52%, 21,080.0

COMMODITIES

Gold Futures, -4.61%, 1,566.70
Brent Oil Futures, -3.18%, 50.51

SUMMARY:

FX started to break out of range with AUD and NZD testing new lows. USD/JPY fell as JPY reiterated its status as the safe-haven currency. Powell comments (elaborated on below) led to a retracement in the risk aversion move. Gold fell out of bed despite the negative risk sentiment as it has been trading week for the past few sessions despite the continuous selling in equity indices. Speculators who were long Gold to hedge their underwater risk assets and leveraged longs finally had to capitulate as margin calls need to be answered. Traditional correlations (gold tends to go up when equities are down and yields are lower) break down when your broker calls up for cash. 

The stock market put up a bit of a fight on Friday, but when the dust settled, it was still the worst week for equities since late 2008, as the S&P 500 fell -0.82% on the day for a total loss of -11.5% since last Friday.

The benchmark index recorded its seventh consecutive day of losses, falling to its lowest level since early October as Covid-19-related fears kept participants on edge. Today’s action saw a sharply lower start, followed by an intraday churn as the market attempted a rebound after more than a week of losses.

Various U.S. officials offered reassurances throughout the day, but their comments did little to dispel the uncertainty associated with a disease that has a long incubation period and a seemingly high propensity to spread. The World Health Organization, for its part, raised its risk assessment of Covid-19 to “very high.”

Afternoon action saw the release of the following statement from Fed Chairman Jay Powell: “The fundamentals of the U.S. economy remain strong. However, the Covid-19 poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

Besides the mention of the Covid-19, the statement was essentially a carbon copy of comments that Fed Chairman Jay Powell has been making throughout his tenure. The softly worded statement was particularly underwhelming because it was drowned out by a screaming bond market. The 10-yr yield fell another 17 basis points to a fresh record low of 1.13% while the 30-yr yield slid 11 basis points to 1.67%. Upfront, the 2-yr yield fell 22 basis points to 0.88%. Thanks to these moves, the day ended with the fed funds futures market pointing to a 96.0% implied likelihood of a 50-basis point rate cut in March, followed by a 74.0% implied probability of another 25-basis point rate cut in April.

COVID-19 CASES IN GERMANY JUMP TO 117

The number of confirmed Covid-19 cases in Germany has jumped to 117 from 66, the Robert Koch Institute for disease control said on Sunday. A German government crisis committee has widened cross-border travel guidelines and cancelled major international events, and the health minister has advised people with cold symptoms to stay away from mass events.

More than half of the cases are in North Rhine-Westphalia, Germany’s most populous state where several schools and daycare centers will be closed on Monday to try to prevent the spread of the virus after staff members tested positive.

IMPACT: Finance Minister Olaf Scholz said in remarks published on Sunday that Germany would be in a position to introduce fiscal stimulus measures should the Covid-19 spark a global economic crisis. Fiscal Measures benefit main street in a more direct fashion because governments will be spending directly into the economy, rather than through capital market mechanisms. This, in turn, will make the private sector more affluent over time and potentially impact wages positively. This should generally be good for risk assets and the Euro. 

ERDOGAN ASKS PUTIN TO STEP ASIDE IN SYRIA

Turkish President Tayyip Erdogan said on Saturday that he had asked President Vladimir Putin for Russia to step aside in Syria and leave Turkey to deal with Syrian government forces alone after 34 Turkish soldiers were killed this week. Government forces, backed by Russian airpower, have waged a major assault to capture the northwest province of Idlib, the last remaining territory held by rebels backed by Turkey.

With diplomacy sponsored by Ankara and Moscow to ease tensions in tatters, Turkey has come closer than ever to a confrontation with Russia on the battlefield.

IMPACT: Russia’s Foreign Ministry said on Saturday that the two sides agreed in this week’s talks to reduce tensions on the ground in Idlib while continuing military action there. After the death of its soldiers in a Syrian government airstrike on Thursday, Turkey said it would allow migrants it hosts to freely pass to Europe.

Erdogan said in Istanbul on Saturday that 18,000 migrants have crossed the border, without providing evidence, adding that the number could rise to 25,000-30,000 on Saturday. Greek police fired teargas toward migrants who were gathered on its border with Turkey and demanding entry on Saturday. Turkey’s borders to Europe were closed to migrants under an accord between Turkey and the European Union that halted the 2015-16 migration crisis when more than a million people crossed into Europe on foot. Any escalation of the migrant crisis into Turkey will put downward pressure on the Turkish Lira as the economy is not in the right shape to support the humanitarian crisis. 

CHINA FACTORY INDEX HITS RECORD LOW ON COVID-19

Manufacturing activity in China plunged in February to 35.7 (Consensus 45.1, Prev 50.0), according to one of the first official economic indicators published since the Covid-19 outbreak, while the US Federal Reserve signalled that the central bank was considering cutting interest rates in response to “evolving risks” to the US economy. The collapse in China’s manufacturing activity, which exceeded its collapse during the global financial crisis of 2008, shows the severity of the problem faced by President Xi Jinping in restarting the world’s second-largest economy. Last weekend, Xi told local officials that low-risk areas should “resume full production and normal life”.

IMPACT: Local officials face two conflicting objectives. They must control the outbreak, which has killed 2,835 people in China and also get the country back to work after the extended lunar new year holidays when most of the migrant workers upon whom China’s factories depend return to their rural homes. Based on migration data, ANZ said the Chinese economy was operating at 20 percent capacity, with about 50 percent of workers back at their posts as of this weekend. As China continues to remain shut, companies that rely on supply chains continue to accrue the impact, the potential trifecta of China, South Korea and Japan going into shutdown concurrently is a looming risk for markets and the effect may cause risk appetite to be repriced much lower. 

DAY AHEAD

Central banks in Australia and Canada will hold policy meetings this week – the first since the outbreak of the Covid-19 escalated into a global crisis. But with policymakers having limited firepower, they will probably maintain a wait-and-see approach until a clearer picture starts emerging about the impact of the virus, whose spread has multiplied several-fold in the past week. Investors will also be waiting anxiously for the latest Non-Farm Payrolls report out of the United States as they push up their bets that the Federal Reserve will be compelled to slash interest rates soon. OPEC will come under the spotlight too as it meets to decide if there is a need for additional output cuts.

SENTIMENT

OVERALL SENTIMENT: 

Sentiment turned extremely weak and every trade is now watching Covid-19 updates with fear. Hopes of Fed rate cuts and possible coordinated easing by global central banks are what the markets are banking on to keep asset prices afloat. The virus is relentless, the spread is inevitable. US Presidential primaries to select the Democratic candidate are getting voters out and increasing the risk of exposure. That is not good. 

FX

MARKETS

TRADING TIP

What has always been, will not always be

That’s what gold traders rudely found out on Friday when Gold collapsed more than 4% in spite of the weakness in equities. The relationship has always been that when equities are extremely weak, the fear among investors is high, and hence Gold as a safe haven asset should be doing well as investors seek refuge.

However, what matters as well is market positioning. Gold has been going up, and speculators are leveraged long, and investors with equity positions that are losing money have been hedging their risk with purchases of Gold (hoping that profits from Gold will make up for the losses in the equity sell-off). That works till it doesn’t. 

When the rise in Gold started to stall as equities continued to sell off, everyone that was long Gold started to worry. As price action weakened, nervous longs started to sell. As Gold prices started to fall even as equities continued to fall, everyone started to unload their positions and the frenzy intensifies!

 Correlations are relationships that hold over the long run, but in the short run, anything can happen especially in an environment of high volatility and fear.

WHAT HAPPENED YESTERDAY

As of Fri 28 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.62%, 98.39
USDJPY, -0.72%, $109.63
EURUSD, +1.06%, $1.0997
GBPUSD, -0.14%, $1.2888
USDCAD, +0.43%, $1.3389
AUDUSD, +0.57%, $0.6581
NZDUSD, +0.25%, $0.6310

STOCK INDICES

S&P500, -4.42%, 2,978.76
Dow Jones, -4.42%, 25,766.64
Nasdaq, -4.61%, 8,566.48
Nikkei Futures, -4.21%, 21,390.0

COMMODITIES

Gold Futures, +0.45%, 1,647.30
Brent Oil Futures, -4.51%, 51.02

SUMMARY:

It seems like Groundhog Day all over with the equity markets gyrating wildly and the currency markets remaining range-bound. The only thing of note was the EUR continuing its march higher to test above 1.10s as being one of the major currencies with the lowest interest rates, it has taken the place of JPY as the safe-haven currency. However, Eurozone will bear the brunt of the global recession that is to come, and in such a scenario in the longer term, fears of member countries wanting to pull out of the union will rise. For the shorter term, logic is on hold as the market remains in the grips of fear. 

The stock market extended its recent sell-off by more than 4% on Thursday in a volatile session, as the widening spread of the Covid-19 heightened pessimism among investors. The day was filled with numerous relief rallies but each and everyone fizzled out quickly. The S&P 500 closed at session lows with a 4.42% decline. The Dow Jones Industrial Average (-4.42%), Nasdaq Composite (-4.61%), and Russell 2000 (-3.5%) experienced similar price action.

Regarding Covid-19, the U.S. Centers for Disease Control and Prevention (CDC) acknowledged the first Covid-19 case of “unknown origin” in the U.S., which raised concerns about a community spread of the virus. California’s governor fueled concerns by saying 28 people have tested positive and another 8,400 people are being monitored because of their travel.

The impact on global supply chains or consumer spending remains uncertain, but Goldman Sachs warned there could be no U.S. earnings growth in 2020 if the virus becomes widespread. Microsoft (MSFT 158.18, -11.99, -7.1%), meanwhile, was the latest high-profile company to issue a quarterly revenue warning, specifically for its More Personal Computing segment.

Current and past Fed officials offered their views on the matter. In an opinion piece for The Wall Street Journal, former Fed Governor Kevin Warsh argued that the Fed and other central banks should cut rates due to the Covid-19, while Chicago Fed President Evans reiterated the Fed’s stance that it is still premature to provide guidance without more data.

MIXED MESSAGES, TEST DELAYS HAMPER U.S. COVID-19 RESPONSE

Trump on Wednesday assured Americans that the risk of Covid-19 transmission in the United States was “very low.” Despite an explosion of cases in China over the past two months, it was only this week that the Trump administration put in a request for $2.5 billion to aid in the response, an amount both Republicans and Democrats have said is too small. The CDC this week for the first time advised American businesses, schools, hospitals, and families to prepare for a domestic acceleration of the virus, which has infected more than 80,000 people worldwide and killed nearly 3,000.

IMPACT: Trump’s administration is considering invoking special powers through a law called the Defense Production Act to quickly expand the domestic manufacturing of protective masks and clothing to combat the Covid-19 in the United States. With no Covid-19 vaccine or proven anti-viral medicine available, states are planning to isolate sick people in their homes, both to slow community spread and reduce pressure on hospitals, according to the CDC. The law grants the president the power to expand industrial production of key materials or products for national security and other reasons. The biggest producers of face masks in the United States include 3M Corp and Honeywell International Inc.

TURKEY, WITH MORE DEAD TROOPS, SAYS IT WON’T STOP SYRIAN REFUGEES REACHING EUROPE

Turkey, faced with a possible new wave of Syrian migrants and dozens of more dead Turkish soldiers in Idlib, will no longer stop Syrian refugees from reaching Europe, a senior Turkish official said as President Tayyip Erdogan chaired an emergency meeting. Nearly a million civilians have been displaced in Idlib near the Turkish border since December as Russia-backed Syrian government forces seized territory from Turkey-backed Syrian rebels, marking the worst humanitarian crisis of the country’s nine-year war. “We have decided, effectively immediately, not to stop Syrian refugees from reaching Europe by land or sea,” said the official, who requested anonymity. “All refugees, including Syrians, are now welcome to cross into the European Union.” The burden of hosting refugees “is too heavy for any single country to carry,” the official said.

IMPACT: The threat to open the way for refugees to Europe would, if executed, reverse a pledge Turkey made to the European Union in 2016 and could quickly draw Western powers into the standoff over Idlib and stalled negotiations between Ankara and Moscow. Turkey hosts some 3.7 million Syrian refugees and has repeated it cannot handle more. Under a deal agreed in 2016, the European Union has provided billions of euros in aid in return for Ankara agreeing to stem the influx of migrants into Europe.

DEVELOPER CONFERENCES CANCELLED AS TECH COMPANIES RESPOND TO THE VIRUS

The U.S. Centers for Disease Control and Prevention on Wednesday reported a Covid-19 case of unknown origin in northern California, where some of the world’s biggest tech companies are based. It is potentially the first incident of the virus spreading within U.S. communities. California Governor Gavin Newsom said on Thursday that the state is monitoring more than 8,400 people for Covid-19 symptoms after arrival on commercial flights, but California lacks test kits and is being held back by federal testing rules.

IMPACT: Facebook Inc said on Thursday it would cancel its annual developer conference due to fears over the Covid-19, as growing concerns about the economic impact of the global outbreak drove Wall Street to tumble for a sixth straight day. Earlier this month, The Mobile World Congress (MWC), the annual telecoms industry gathering in Barcelona, was called off after a mass exodus by exhibitors due to fears over the Covid-19. AT&T Inc, Verizon Communications Inc and IBM earlier withdrew from the RSA cybersecurity conference, taking place this week in San Francisco, citing Covid-19 concerns.

DAY AHEAD

New Zealand said today that it would release provisional data on its trade with China in the four weeks to Feb. 23, in a special release prompted by heightened interest in the impact on businesses from the Covid-19 epidemic. Statistics New Zealand will release the data which will provide an initial snapshot of trade with China in those weeks compared with the same period last year. This data will include total trade value with China as well as key exports of meat, fish, dairy and forestry products.

As we’ve said before, good data representing pre-Covid-19 information will largely be ignored. However, negative news will increase fear. 

SENTIMENT

OVERALL SENTIMENT: Fear reigns as market participants seem to have a SELL button that is substantially larger than the Buy button. With only good news on the virus situation likely to calm the markets as leverage continues to be unwound, expect sentiment to remain fragile.

FX

MARKETS

TRADING TIP

Don’t stand in front of a rampaging mob

The temptation to go against a move that you don’t understand is high. In a big sell-off, the retracements will be quick and sudden. Every time that it bounces fiercely, you will tell yourself, “Ah, I knew it! I should have bought the dip!”

All the other times that it continues to free-fall, you might breathe a sigh of relief that you didn’t give in to the temptation, but that relief will be fleeting and soon forgotten in the midst of the wild gyrations. 

As such, every dip is an “I told you so!” moment when it proves to be a temporary dip. You will say, “Ah, if I bought it, I could have sold it here now!” Be honest with yourself. The likelihood of you buying every dip and rally is very low. 

Choose the weaker side and trade against that. If you have no clue which is the weaker side, the place to be is on the side-lines!

WHAT HAPPENED YESTERDAY

As of Thu 27 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, +0.18%, 99.14
USDJPY, +0.16%, $110.38
EURUSD, +0.05%, $1.0886
GBPUSD, -0.77%, $1.2906
USDCAD, +0.49%, $1.3345
AUDUSD, -0.85%, $0.6547
NZDUSD, -0.51%, $0.6288

STOCK INDICES

S&P500, -0.38%, 3,116.39
Dow Jones, -0.46%, 26,957.59
Nasdaq, +0.17%, 8,980.77
Nikkei Futures, -0.74%, 22,090.00

COMMODITIES

Gold Futures, -0.12%, 1,645.00
Brent Oil Futures, -3.86%, 52.83

SUMMARY:

The wild swings in the equity markets did not really spill over to the FX markets. Most currencies remained within recent ranges. EUR crept higher throughout the day and triggered stops to reach a high of 1.0908 before quickly pulling back to 1.0850s. It has since regained the bid tone and is starting the Asian session at the highs. AUD, however, traded heavy all day despite the strength of EUR, broke to new lows since 2009 and lingers at the lows still. The heaviness of AUD is likely to continue given the market is waking up to the fact that the economic consequences of Covid-19 will be significant. 

S&P 500 advanced as much as 1.7% on Wednesday, as investors tried to buy an oversold market, but pestering worries about the coronavirus left the benchmark index down 0.38% for the session. The Nasdaq Composite (+0.17%) eked out a slim gain, while the Dow Jones Industrial Average (-0.46%) and Russell 2000 (-1.2%) joined the S&P 500 in negative territory.

Early on, it looked like sellers were taking an off-day after the S&P 500 dropped 7.6% over the prior four sessions, but the market continued to be inundated with negative updates on the Covid-19. For instance, Germany’s health minister said Germany is at the beginning of an epidemic, and it was reported that 83 people in New York were being monitored for exposure to the virus.

U.S. Treasuries were less in focus today, but the continued gains in the bond market weren’t conducive for risk sentiment. The 2-yr yield declined five basis points to 1.15%, and the 10-yr yield declined two basis points to 1.31%. The U.S. Dollar Index increased 0.18% to 99.14.

COVID-19 SPREADS FASTER OUTSIDE CHINA

The number of new Covid-19 infections inside China – the source of the outbreak – was for the first time overtaken by fresh cases elsewhere on Wednesday, with Italy and Iran emerging as epicenters of the rapidly spreading illness. Asia reported hundreds of new cases, Brazil confirmed Latin America’s first infection and the new infections were also detected for the first time in Pakistan, Sweden, Norway, Greece, Romania, and Algeria.

Trump, seeking to calm markets and an increasingly worried public said in a live broadcast that the United States was “very, very ready” to face the virus threat and that Vice President Mike Pence would be in charge of the national response. It was one of just a handful of times that the president has appeared in the White House briefing room.

IMPACT: Wall Street reversed earlier gains on Wednesday and oil prices dropped to their lowest level in over a year, spooked in part by health officials saying dozens of people who had been in China were being monitored in suburbs of populous New York city – although no confirmed cases have been found. Risk assets are sensitive to the velocity of the spread outside of China, and will be driven by the narrative as such. Trump’s presser did not ease market fears as stock indices continue to drift lower in Asian hours.

IMF, WORLD BANK CONSIDER ‘VIRTUAL’’ SPRING MEETINGS AS VIRUS SPREADS

The institutions’ April 17-19 Spring Meetings are scheduled to bring some 10,000 government officials, journalists, business people and civil society representatives from across the globe to a tightly packed, two-block area of downtown Washington, DC, that houses their headquarters.

Options include scaling back the number of meetings, canceling external events and limiting the size of the country delegations that would travel to Washington. Another alternative is to hold “virtual” meetings by teleconference, and the institutions could still proceed with full-fledged meetings. One person familiar with the IMF’s planning discussions said: “Plenty of people here see wider merit in testing whether holding key meetings virtually could be made to work.”

IMPACT: The virus will ultimately speed up adoption of technology such as web conferencing, and drive organizations to have off-site work contingency plans in the future as part of their SOP. Companies like Zoom Video Communications (ZM) will benefit as they are purely a tech company with almost no supply chain drag, it is interesting to note that Zoom prices have remained bid in the face of the market selloff. 

SOUTH KOREA HOLDS INTEREST RATE DESPITE VIRUS FEARS

South Korea’s central bank kept its key interest rate unchanged (1.25%) on Thursday, defying expectations for a cut amid growing pressure to ease policy as the Covid-19 hits demand in the export-reliant economy. 

IMPACT: South Korean Won strengthened on the back of surprise no policy move, but gave it all back on bad news of the virus. (1. The US urges reconsidering travel to South Korea 2. South Korea confirms 334 more Covid-19 cases, a total of 1595 cases 3. The U.S. decided to indefinitely postpone upcoming combined military exercises over Covid-19 concerns) 

DAY AHEAD

Canada will report GDP numbers for the fourth quarter on Friday when trade tensions and industrial strikes are expected to have ground growth to a near halt. With economic conditions not likely to have improved in the first quarter, the data will be watched carefully by policymakers at the Bank of Canada, who meet next week. In the meantime, the Canadian dollar has stumbled near 4-month lows versus its US counterpart, weighed by weaker oil prices.

SENTIMENT

OVERALL SENTIMENT: Sentiment was clearly still fragile when the rally of more than 2% off the lows in US equity indices lost steam as the day progressed. Trump’s press conference seems measured, advising caution and reiterating that the US is prepared for even the worst-case scenario while being nowhere close to sounding panicky and that should soothe the market a little. However, the central issue remains i.e. the spread of Covid-19 will continue.

FX

MARKETS

TRADING TIP

Bet on the horse you don’t believe in…

Imagine you’re at the horse-racing course, and a race is about to start.  Your friend who is an expert at punting on horses (if there is ever such a thing), tells you that the number 8 horse is the one least likely to win, is young and has never won a race before. Chances of it winning is maybe only once if it ran a hundred races. You look up at the board and you see the pay-out for it winning is 500 to 1. What would you do?

Seems like good odds? Much like the scenario above, there are instances when you should bet on low probability outcomes if the pay-out for such outcomes are skewed in your favour. Trading is not about buying the best stock in the market regardless of price. Price, how much higher it can go and how low it might go if you are wrong are key considerations. The reward is relative to the risk you are taking matters!

Sometimes, the best trades are betting on the favourites, but only if the pay-out makes sense. If you are risking too much just to make a little, no matter how certain you are of the outcome, it may not be worth making the bet. If that is the case, then it’s okay to just let it go. You don’t need to be trading all the time. Trade only when the price is right!

Sometimes, the best trades are on the outcomes that you think have very little chance of happening. Markets tend to underestimate the probability of such outcomes and as a result, the price of getting into such trades is typically low. 

Look out for trades like that as the key to being extremely profitable is having asymmetric reward vs risk profiles in your portfolio. When you lose, you suffer minimal losses, but when you win, you win big. Rinse and repeat!

WHAT HAPPENED YESTERDAY

As of Wed 26 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.37%, 99.00
USDJPY, -0.38%, $110.29
EURUSD, +0.23%, $1.0879
GBPUSD, +0.57%, $1.3003
USDCAD, -0.10%, $1.3281
AUDUSD, +0.01%, $0.6605
NZDUSD, -0.27%, $0.6322

STOCK INDICES

S&P500, -3.03%, 3,128.21
Dow Jones, -3.15%, 27,081.36
Nasdaq, -2.77%, 8,965.61
Nikkei Futures, -0.18%, 22,315.0

COMMODITIES

Gold Futures, -1.84%, 1,641.60
Brent Oil Futures, -3.55%, 54.30

SUMMARY:

FX market again became a side-show as global equity markets continued to slide. The breakdown in correlations is likely a sign of positions reducing and deleveraging by various market participants in the light of heightened uncertainty. Though equity indices sold off steadily throughout the day, Gold could not make any headway and in fact, was down almost 2% on the day. 

Stocks sold off again on Tuesday, as the global spread of Covid-19 continued to undermine growth expectations and exacerbate the flight for safety in Treasuries. The Nasdaq Composite (-2.77%) turned negative for the year while the S&P 500 (-3.03%), Dow Jones Industrial Average (-3.15%), and Russell 2000 (-3.5%) dropped at least 3.0%.

CDC officials warned that the spread of the COVID-19 in the U.S. appears inevitable, but the HHS said the immediate risk is low. NEC Director Kudlow tried to ease nerves by telling CNBC that the U.S. has contained the virus “pretty close to air-tight,” but the market didn’t care much for optimistic views.

Fed Vice Chair Clarida provided a pragmatic view, reiterating that it’s still too early to assess the growth impact from the COVID-19, or whether it will lead to a material change in its outlook, but the market didn’t care for pragmatism, either. Companies, after all, continued to provide warnings due to the virus, leading investors to believe the impact could be worse than expected.

Elsewhere, the rally in U.S. Treasuries persisted amid the underlying growth concerns. The 2-yr yield fell six basis points to 1.20%, and the 10-yr yield fell five basis points 1.33% after setting a record low at 1.31%. The U.S. Dollar Index fell 0.37% to 99.00. WTI crude fell back below $50 per barrel, closing the session down 2.7%, or $1.36, at $49.89/bbl.

U.S. BRACES FOR COVID-19 SPREAD 

The United States told Americans on Tuesday to begin preparing for COVID-19 to spread within the country as outbreaks in Iran, South Korea, and Italy escalated and fears that the epidemic would hurt global growth rattled markets. U.S. Health and Human Services Secretary Alex Azar on Tuesday asked a Senate sub-committee to approve $2.5 billion in funding to expand surveillance systems for the virus, help the development of vaccines and boost stockpiles of protective equipment.

IMPACT: While saying the immediate risk from COVID-19 in the United States remained low, a top CDC official, Dr. Anne Schuchat, said it was no longer a question of if the virus would become a global pandemic. “It’s a question of when and how many people will be infected.” The Dow and S&P 500 tumbled 3% on Tuesday in their fourth straight day of losses as investors struggled to gauge the virus’ economic impact. If cases in North America rise, we should see a deeper correction in risk assets. 

EU FORESEES HARD TALKS WITH UK ON FUTURE TIES

The European Union said on Tuesday talks on post-Brexit ties with Britain would kick off next Monday, but warned that the process would be “very hard” and could fail if London fails to secure the Irish border as previously agreed. With both sides talking tough ahead of the negotiations, Ireland warned that even a basic trade deal would be impossible by the end of this year if London does not honor border obligations under its exit deal.

IMPACT: British exports to the European Union could fall by as much as 14% if the two sides are unable to strike a free trade deal and could be 9% lower even if an agreement is reached, a United Nations study found. The imposition of tariffs under a no-deal scenario would crimp trade, with the effect amplified by so-called non-tariff measures (NTMs) such as quotas, licensing and regulatory measures protecting health, safety and the environment. Sterling volatility will remain elevated throughout this period and there is little edge in trying to speculate the eventual outcome.

U.S. AIRLINES, HOTELS EXTEND REBOOKING OPTIONS AS COVID-19 SPREADS

Delta Air Lines Inc said that reservations through March 2 on flights to Bologna, Milan, and Venice in northern Italy, where cases have climbed, are eligible for rescheduling. Air Canada has also added parts of Italy to its list of places eligible for rebookings. Hyatt Hotels said it would allow travellers from South Korea, Japan, and Italy to cancel or change their hotel bookings for free, updating a policy it has already rolled out for guests from mainland China, Hong Kong, Macau, and Taiwan.

Major airlines have also issued travel waivers, eliminating change fees, for flights to South Korea. So far U.S. airlines have only cancelled flights to China, a move that followed the U.S. State Department’s decision to elevate a travel advisory to the country to the same level as Afghanistan and Iraq.

IMPACT: American Airlines shares dropped 9.3% to $23.12 on Tuesday, below their price after the company emerged from Chapter 11 bankruptcy in 2013. The broader Dow Jones U.S. airline index lost 7%. Transport, Supply Chain dependent companies, and Consumerism will continue to bear the brunt of the damage as COVID-19 case counts increase.

DAY AHEAD

Australia’s capital expenditure print due tomorrow should provide some indication as to what to expect from Q4 GDP numbers due next week. It’s likely capital spending will have risen for the first time in a year in the December quarter, but given the new headwinds – the COVID-19 outbreak and the bushfires – facing the Australian economy in 2020, the data may not matter much for investors as panic grips the markets.

Any negative surprises in the numbers would likely raise fresh doubts about the robustness of the Australian economy, which is struggling to regain momentum as growth in China – Australia’s biggest trading partner – goes into low gear. They would also push up market expectations of interest rate cuts by the RBA. Investors are currently not pricing a full 25-basis point rate reduction before August, but weak data might change that, bringing the timing forward and dragging the Aussie lower.

The primary driver of markets will again be statistics on the spread of COVID-19. Data points that are considered information about the economy before the start of the COVID-19 outbreak will largely be ignored especially if they are on the stronger side (unless they are extreme outliers) as the fundamental outlook has changed substantially. 

SENTIMENT

OVERALL SENTIMENT: 

Sentiment continues to sour. The COVID-19 will continue to spread. Though the market may get desensitized to an increasing number of cases in time, infections occurring in new countries weaken confidence further. The economic consequences are yet to be fully appreciated. 

FX

MARKETS

TRADING TIP

Keep it Simple!

It is a mantra that should be remembered if one is to not only survive but thrive in volatile markets. In times of extreme volatility and heightened uncertainty, risk positions should be kept simple. These are not times, to try to be cute and structure complicated trades that depend on many variables to perform. 

Keep doing what works, and get out of those which don’t, and avoid trades you don’t understand. There will be many opportunities, and now is not the time to try to be involved in everything. 

Keep to your core competencies (eg. keep your trades to the markets you are familiar with), and keep it simple!

WHAT HAPPENED YESTERDAY

As of Tue 25 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.13%, 99.29
USDJPY, -0.63%, $110.86
EURUSD, +0.09%, $1.0848
GBPUSD, -0.21%, $1.2924
USDCAD, +0.25%, $1.3288
AUDUSD, +0.09%, $0.6611
NZDUSD, +0.35%, $0.6343

STOCK INDICES

S&P500, -3.35%, 3,225.89
Dow Jones, -3.56%, 27,960.80
Nasdaq, -3.71%, 9,221.28
Nikkei Futures, -1.96%, 22,355.0

COMMODITIES

Gold Futures, +0.69%, 1,656.10
Brent Oil Futures, -1.29%, 55.66

SUMMARY:

FX was relatively calm given the fierce sell-off in equity markets. USD started off strong due to safe-haven bids with a gap when the market opened in Australia. Gold went on a rampage to reach a high of 1689.4 before easing off to 1656.1 as profit-taking sales came in. USD/JPY started the session at 11.20s and steadily climbed higher throughout Asian hours (up to 111.60s) before finally trading like the safe-haven currency that JPY used to be, and falling back during NY hours. The FX moves continue to baffle traders as correlations that used to hold seems to be changing from day to day (Example: when stocks fall by 3-4% in a day, AUD would have fallen much more than 0.3% in the past). 

The stock market sold off more than 3% on Monday following a surge in Covid-19 cases outside China, including South Korea, Italy, and Iran. The Dow Jones Industrial Average (-3.56%), S&P 500 (-3.35%), and Russell 2000 (-3.0%) each turned negative for the year, while the Nasdaq Composite (-3.71%) gave up most of its monthly gains. 

Governments took swift action to help contain the outbreak, such as closing public spaces, but weakness in foreign equity markets reflected concerns about the possibility of a global pandemic. South Korea’s Kospi fell 3.9%, and Italy’s MIB fell 5.4%. China’s Shanghai Composite declined just 0.3% amid reports that the rate of new Covid-19 cases may have peaked in the region.

The World Health Organization (WHO) said that the drop in infections in China is “real” due to Beijing’s aggressive approach. It remained unclear, however, if the virus would continue to worsen in a way that further impedes economic activity that consequently hurts earnings prospects.

Technology and travel stocks, such as Advanced Micro Devices (AMD 49.12, -4.16, -7.8%) and American Airlines (AAL 25.45, -2.37, -8.5%), sold off on concerns that their businesses would be hurt by the Covid-19 situation. Many healthcare names like United Health (UNH 277.79, -23.64, -7.8%) were additionally pressured by Senator Bernie Sanders (I-VT) decisively winning the Nevada caucuses.

BATTLE AGAINST CORONAVIRUS TURNS TO ITALY

While health experts have expected limited outbreaks beyond China, the rapid acceleration of cases in Italy going from 3 on Friday to 220 on Monday is concerning, the World Health Organization (WHO) said in a statement. Just as China put cities on lockdown, Italian authorities sealed off the worst-affected towns, closed schools and halted the carnival in Venice, where there were two cases. Shops are shut, bars are closed and people speak to each other from a safe distance in Northern Italy. Italian health authorities were struggling to find out how the virus started. “If we cannot find ‘patient zero’ then it means the virus is even more ubiquitous than we thought,” said Luca Zaia, the regional governor of the wealthy Veneto region.

IMPACT: The surge of cases outside mainland China triggered sharp falls in global markets as investors fled to safe havens. European equities markets suffered their biggest slump since mid-2016, gold soared to a seven-year high and oil tumbled 4%.

GERMAN BUSINESS MORALE RISES, UNFAZED BY CORONAVIRUS FOR NOW

German business morale rose unexpectedly in February, a survey showed on Monday, easing recession fears in Europe’s largest economy and reflecting a slight improvement in its manufacturing sector, which has been struggling with falling exports. The Ifo institute said its business climate index rose to 96.1 from an upwardly revised 96.0 in January. The February reading was compared with a consensus forecast for a fall to 95.3. Ifo warned however that the survey did not fully reflect the possible economic fallout from the Covid-19, which could hurt growth if it becomes a pandemic. 

IMPACT: The full economic impact of the virus is not being accurately priced, especially for economies in the western hemisphere as the complacency is higher due to distance from the epicenter. However, this bubble is gradually being deflated with Italy taking center stage for a sudden surge in Covid-19 cases, given the extreme contagion effect of the virus, it should not be long before entire Europe will be battling this and business morale will have to be revised much lower. The knock-on effects from a freeze in global supply chains and transportation do not warrant business optimism in trade-sensitive Europe unless it’s based on blind optimism. 

COVID-19 UPDATE: HUBEI SEES RISE IN NEW COVID-19 CASES AS INFECTIONS SLOW IN OTHER PROVINCES

China reported a rise in new Covid-19 cases in Hubei province, the epicentre of the outbreak, on Tuesday while the rest of the country saw a fourth straight day of declines.

Hubei had 499 new confirmed cases on Feb. 24, the National Health Commission said, up from 398 a day earlier and driven mainly by new infections in the provincial capital of Wuhan. Mainland China in total had 508 new confirmed cases, up from 409 on Feb. 23, bringing the total number of confirmed cases in mainland China so far to 77,658.

Excluding the latest cases in Hubei, the rest of China had just nine new infections on Feb. 24, the lowest number of cases since Jan. 20 when the national health authority began publishing nationwide data on the Covid-19 infections.

IMPACT: More positive developments out of China will encourage other nations that the virus can be contained and boost morale, eventually affecting risk appetite. 

DAY AHEAD

The upcoming economic prints are unlikely to change this Dollar-friendly narrative. The last few weeks have seen market expectations for Fed rate cuts grow, with more than one and a half cuts now priced in by year-end, but the Dollar has only moved higher in the meantime. And the more concerns about the virus impact on foreign economies intensify, the more the Dollar is likely to shine since the US economy is better protected from a slowdown in China and US authorities have policy room to react to any shock, unlike Europe or Japan.

SENTIMENT

OVERALL SENTIMENT: Fear took hold of equity markets as the worsening of the Covid-19 situation in various countries over the weekend hit the newswires. Welcome to the new normal of trading Covid-19 headlines. Expect sentiment to remain fragile for some time. 

FX

MARKETS

TRADING TIP

Adapt or Die…

This is essentially what Charles Darwin was trying to say but with more words in his famous quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

For traders to succeed in the long-term, we must always be open to the possibility that what we used to know to be true may not be so anymore. Correlations between different asset classes are never constant and sometimes change when we least expect it. 

For example, if volatility increases dramatically, the sizes of trades will need to be reduced so that we can have wider stops to protect the trades from being taken out by random moves caused by unexpected headlines. 

Adapting to changes in market conditions is imperative if we want to survive and be around to take advantage of the opportunities that will inevitably appear once the dust settles. 

WHAT HAPPENED YESTERDAY

As of Mon 24 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, -0.60%, 99.26
USDJPY, -0.48%, $111.58
EURUSD, +0.56%, $1.0845
GBPUSD, +0.70%, $1.2971
USDCAD, -0.26%, $1.3224
AUDUSD, +0.18%, $0.6628
NZDUSD, +0.21%, $0.6343

STOCK INDICES

S&P500, -1.05%, 3,337.75
Dow Jones, -0.78%, 28,992.41
Nasdaq, -1.79%, 9,576.59
Nikkei Futures, -0.94%, 23,290.0

COMMODITIES

Gold Futures, +1.73%, 1,644.60
Brent Oil Futures, -1.37%, 58.50

SUMMARY:

After several sessions of USD strength, USD finally ceded some ground as short-term speculators trimmed positions into the weekend, with GBP and EUR leading the way. Gold, however, remained bid and continued to power higher.

Gold continued its relentless march higher on Monday open as bad news piled up over the weekend with the Covid-19 situation worsening in South Korea, Iran and Italy.

U.S. stocks sold off to end the week, while investors continued to buy less risky assets, amid festering concerns about the Covid-19 and valuation. The Nasdaq Composite led the retreat with a -1.79% decline, followed by the S&P 500 (-1.05%), and Dow Jones Industrial Average (-0.78%).

Reported cases of the Covid-19 continued to climb in China, but that wasn’t new information for the market – or investors who were buying yesterday’s dip. Arguably, the bigger story was the continued flight-to-safety in gold ($1644.60/ozt, +1.73%) and U.S. Treasuries (30-yr yield set a new all-time low at 1.89%).

The defensive positioning was attributed not only to Covid-19 fostering growth concerns but also to the record run in U.S. stocks despite the Covid-19. The latter bolstered calls that the market had gotten overextended and was due for a pullback. The Markit flash services PMI for February, which fell into contraction territory, didn’t help sentiment, either.

CHINA STILL IN A CRUCIAL STAGE OF COVID-19 BATTLE, SAYS XI

China’s measures to deal with the Covid-19 outbreak have been effective, but the battle is still at a crucial stage, President Xi Jinping was quoted as saying on Sunday. He said the outbreak will have a relatively big hit on the economy and society but the government will step up policy support to help achieve economic and social development targets for 2020. China will maintain a prudent monetary policy and roll out new policy steps in a timely way, he said, adding the government will also study and roll out phased tax cuts to help tide small firms over difficulties. 

IMPACT: Risk Assets extended losses on Monday while safe-haven gold soared as the spread of the Covid-19 outside China accelerated with infections jumping in South Korea, Italy and the Middle East.

SANDERS WIN BIG IN NEVADA DEMOCRATIC VOTE

Broad-based support across age, racial and ideological groups propelled Bernie Sanders to a dominant victory in Nevada’s Democratic caucuses, tightening his grip on the front-runner spot in the race to find a challenger to Trump. The race now begins to broaden across the country, with the next primary on Saturday in South Carolina, followed closely by the Super Tuesday contests in 14 states on March 3 that pick more than one-third of the pledged delegates who will help select a Democratic nominee.

IMPACT: Sanders’ triumph on Saturday in the first racially diverse state in the campaign suggested he was reaching a broader coalition of Democratic voters with his unapologetic message of social and economic justice, including his signature pledge to provide universal healthcare for all Americans. 

SOUTH KOREA RAISES ALERT TO THE HIGHEST LEVEL AS COVID-19 CASES JUMP

South Korea raised its disease alert to the highest level on Sunday after a surge in Covid-19 infections and two more deaths, while China state media warned the outbreak there had yet to reach a turning point despite some signs of easing. The escalation in the alert level allows the government to send extra resources to Daegu city and Cheongdo county, which were designated “special care zones” on Friday. South Korea’s Yonhap News Agency said it also enables the government to forcibly prevent public activities and order the temporary closure of schools. The winter break of schools was extended by 1 week till 9 March.

IMPACT: South Korea is an important player in the semiconductor supply chain. As factories get shuttered in an attempt to control the outbreak, there will be knock-on effects on global electronic companies. Samsung, whose revenue contributes a decent portion to Korea’s GDP, fell in reaction to the situation. The South Korean Won will also face selling pressure should the situation in South Korea deteriorate. 

DAY AHEAD

With not much on the economic calendar this week, the virus and its impact on economies globally will remain the primary driver of risk sentiment. Still, there are some important indicators worth keeping an eye on. Overall, there’s little to suggest that the dollar’s relentless rally is about to end, as the US economy is much better positioned than its rivals to weather any slowdown in China. That said, the more the dollar climbs, the greater the risk of verbal intervention by the White House.

SENTIMENT

OVERALL SENTIMENT: 

Risk sentiment continues to erode as fear rises on the “surprising” deterioration of the Covid-19 situation. Market participants are confused with the break in correlation as JPY (usually a safe haven currency) continues to trade weak despite the strength of Gold and the weakness of stock indices. 

FX

MARKETS

TRADING TIP

WHAT HAPPENED YESTERDAY

As of Fri 21 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, +0.18%, 99.88
USDJPY, +0.55%, $111.97
EURUSD, -0.17%, $1.0788
GBPUSD, -0.31%, $1.2881
USDCAD, +0.31%, $1.3261
AUDUSD, -0.96%, $0.6612
NZDUSD, -0.85%, $0.6333

STOCK INDICES

S&P500, -0.38%, 3,373.23
Dow Jones, -0.44%, 29,219.98
Nasdaq, -0.67%, 9,750.97
Nikkei Futures, +0.09%, 23,390.0

COMMODITIES

Gold (XAU/USD), +0.79%, 1,622.30
Brent Oil, +0.00%, 59.12

SUMMARY:

Asian markets started off with a wild ride when USD/SGD exploded after it broke 1.3950 to reach a high of 1.4080 in a matter of minutes before quickly retracing just as fast to 1.4020 ish. Although USD/SGD closed just about 0.5% on the day, the wild swings experienced were not typical of the usually sedated currency pair.

The rampage led to USD strength vs most of the currencies that matter. AUD and NZD bore the brunt of relentless USD buying, with both falling nearly 1% against the USD. Even when the GBP rallied almost 0.2% to 1.2920 on the better than expected Retail Sales data (+0.8% YoY vs exp 0.7%), the spike was quickly met with sellers that pushed it to a low of 1.2849. As the old saying goes, that which will not rally on good news, is weak. Amidst all the USD buying, Gold remained strangely bid.

The S&P 500 took a precipitous 1.3% decline in a span of a short time during Thursday’s NY late morning session as stocks pulled back from record highs, but opportunistic investors stepped in to buy the intraday dip. The brief sell-off set off fears and commentary of a “freak sell-off” among the speculative community. The benchmark index closed lower by just 0.4%, as some dip-buying soothed the market. The Dow Jones Industrial Average (-0.5%) and Nasdaq Composite (-0.7%) also closed off the lows.

The 2-yr yield declined three basis points to 1.39%, and the 10-yr yield declined five basis points to 1.53%. The U.S. Dollar Index increased 0.2% to 99.87. WTI crude rose 0.8%, or $0.45, to $53.77/bbl.

YEN’S SAFE HAVEN STATUS BEING QUESTIONED

The Yen’s status as a safe haven is coming under pressure as uneasiness grows about the rising number of coronavirus cases in Japan, against the backdrop of a stuttering domestic economy. Analysts were quick to pin the move to large portfolio shifts out of yen-denominated assets – most likely by Japan’s giant government pension funds – amid worries about its economy and the spread of the coronavirus.

There are already fears it will cast a shadow over the Olympic Games in Tokyo, due to begin late in July and bring a hoped-for boost to the national economy and morale. However, should it start to spread through Japan’s population, the fallout would almost certainly be enough to tip the world’s third largest economy, which shrank unexpectedly hard last quarter, into recession. Some 3 trillion yen ($27 billion) in net foreign bond purchases by Japanese investors in the first two weeks of February seems to underscore the lack of confidence in domestic investments.

IMPACT: The Yen’s slide is unusual because the exchange rate with the dollar has been unraveling from its close correlation to the price of Gold and U.S. Treasury yields – a development that should be watched. The move lower in global interest rates may have undermined the Yen’s attractiveness as a “funding currency,” or one cheap to borrow for use in buying riskier investments.

BLOOMBERG FLOPS ON DEBATE STAGE

After spending more than $300 million of his fortune on a massive ad campaign that boosted his poll numbers and landed him on the debate stage, he was torched from every angle.

Bloomberg was forced to defend, among other things, his massive wealth, New York’s “stop-and-frisk” policing programme and the treatment of women at his media company. He was even boo-ed at one point by the Democrat-friendly crowd in Las Vegas. At times he seemed distant and disinterested, speaking in bland technocratic assertions. His best moments came when he was talking about building his company and positioning himself as an ardent defender of capitalism. But those moments were few.

IMPACT: Bloomberg was woefully unprepared to defend or explain his record, which includes the ineffective and racist stop-and-frisk policy that terrorised New York’s communities of color, and decades of complaints of a sexist and hostile work environment for women at his company. With his money unable to bail him out, Bloomberg offered little more than the haughty, eye-rolling outrage of a man unaccustomed to answering to anybody about anything.

CHINA CUTS RATES

The PBoC cut the 1Y Loan Prime Rate by 10 basis points to 4.05% as expected, following cuts of 10 basis points in the 7D reverse repo and 1Y MLF rates. What is unexpected is that the central bank cut the 5Y Loan Prime Rate by only 5 basis points to 4.75%, not by 10 basis points.

IMPACT: USDCNY rose on the back of today’s rate decision. The objective of interest-rate cuts at this time is to help corporates and individuals with their interest service costs during the Covid-19 epidemic. There is also a rough consensus that this epidemic will end sometime in 2020. So cutting the 5Y loan rate to a lesser extent is logical as the rate-cut needs for longer-term loans should not be mixed with critical short-term cash-flow needs. Moreover, there is history in China that when money is too cheap, it increasingly flows into speculative assets, e.g. during 2009 and 2010. This also explains why the central bank is cautious when cutting the 5Y Loan Prime Rate.

DAY AHEAD

The flash PMI readings by IHS Markit (UK, Germany, EU, US) later today will be the highlight, amid doubts about the green shoots of recovery in the euro area. Eurozone manufacturing PMI has been steadily recovering since October and picked up some speed in January. However, the rebound could be cut short by the virus outbreak and so PMIs for both the manufacturing and services sectors will be very important for detecting any shift in the outlook for the Eurozone economy.

How the market trade into the weekend will also be telling. Given that many of the recent swings in the market have confused market participants, a reduction of risk positions into the weekend may not be surprising.

SENTIMENT

OVERALL SENTIMENT: 

As expected, risk sentiment weakened a little as markets do not like uncertainty and confusion. With many of the recent moves in the FX markets remaining unexplained, and the sharp (though brief) selloff in the US equity indices last night adding to the jitters, expect many to be in the mood to reduce risk as we head into the weekend.

FX

STOCK INDICES

TRADING TIP

WHAT HAPPENED YESTERDAY

As of Thu 20 Feb, Singapore Time zone UTC+8

FX

U.S. Dollar Index, +0.15%, 99.59 
USDJPY, +1.20%, $111.19
EURUSD, +0.16%, $1.0810 
GBPUSD, -0.56%, $1.2926 
USDCAD, -0.29%, $1.3219
AUDUSD, -0.07%, $0.6681 
NZDUSD, -0.03%, $0.6389 

STOCK INDICES

S&P500, +0.47%, 3,386.15 
Dow Jones, +0.59%, 29,348.03 
Nasdaq, +0.87%, 9,817.18 
Nikkei Futures, +1.98%, 23,660.0 

COMMODITIES

Gold (XAU/USD), +0.60%, 1,610.44
Brent Oil, +2.77%, 59.35

SUMMARY:

Volatility returned in a big way in USD/JPY. Complacent longs of JPY (ie short USD/JPY, EUR/JPY) all got a rude shock when USD/JPY exploded breaking through key resistance at 110.30-35 level and did not look back. It marched relentlessly to touch a high of 111.58 before easing off to around 111.20. No one could quite explain the explosive move, with some reasons given ranging from good US data (housing and PPI) to the alarming increase in the infection cases on the Diamond Princess moored off the coast of Yokohama. However, whatever the reason, the price action cannot be ignored. USD is strong.

The S&P 500 (+0.47%) and Nasdaq Composite (+0.9%) closed at fresh record highs on Wednesday, as investors remained optimistic about the global economic outlook despite the coronavirus. In the U.S., building permits climbed to a near 13-year high in January, while China signaled further support for businesses affected by the coronavirus. In addition, the FOMC minutes from the January meeting didn’t alter the market’s favourable outlook for monetary policy, which is to say that policy could be adjusted if the coronavirus situation doesn’t improve.

U.S. Treasuries traded within a narrow range and closed slightly lower. The 2-yr yield increased two basis points to 1.42%, and the 10-yr yield increased one basis point to 1.57%. The U.S. Dollar Index advanced 0.15% to 99.59.

WEAK AUSSIE WAGE GROWTH

Australia’s annual wage price index rose a tepid 2.2% in the final quarter of last year with pay rewards in the public sector slowing to the weakest pace on record, according to data released on Wednesday. The Reserve Bank of Australia (RBA) is predicting this pedestrian pace of wage growth to extend through mid-2022 as the jobless rate is not seen dipping materially during that time.

Minutes of the RBA’s February policy meeting out this week showed its committee thought that easing policy further might accelerate the process, but judged the risks of ever-lower low rates outweighed the benefits. The RBA has estimated the unemployment rate needs to fall below 4.5% from 5.1% currently for wages to grow at 3% or more.

IMPACT: Tepid Wage Growth coupled with bushfire damages and unaccounted for coronavirus impact, it is likely that the Reserve Bank will need to cut rates again by mid-year, with a second cut not out of the question, the Australian Dollar finished lower as a result.

UK INFLATION HITS HIGHS

UK inflation in January rose to a six-month high as petrol and house prices rose, official figures show. The Consumer Prices Index (CPI) stood at 1.8% last month, up from 1.3% in December, the Office for National Statistics said. However, some analysts said that the new figures were unlikely to “move the dial” on the central bank’s next decision on interest rates in March.

Fuel prices were up 4.7% compared with a year earlier, marking the biggest rise since November 2018. Energy regulator Ofgem’s cap on energy bills meant that the average household could not be charged more than £1,137 annually for their gas and electricity.

IMPACT: For the MPC, the fact that inflation is in line with its projections provides another reason not to cut interest rates in the near-term.” The rate currently stands at 0.75%. The MPC is next due to meet on 26 March. The inflation print initially pushed Sterling above key $1.30 level, but the pair finished -0.56% lower at $1.2926 to end the day.

CANADIAN INFLATION RISES ON BACK OF HIGHER GASOLINE

Canada’s annual inflation rate rose to 2.4% in January on higher gasoline prices, Statistics Canada said on Wednesday, with some analysts suggesting the data may pose a challenge for the Bank of Canada should it wish to ease rates. Analysts in a poll had forecast a rate of 2.3%, up from 2.2% in December. Excluding gasoline prices, the annual inflation rate rose 2.0% in January.

IMPACT: The Bank of Canada aims to keep inflation at 2%. Money markets see about a 10% chance of a rate cut in March, down from about 16% seen before the data release. It gives the bank a bit of a challenge if they want to cut rates. It’s not a straightforward case like in the U.S. when their measure of core inflation was stuck well below 2%.

DAY AHEAD

Later today, the US Philly Fed manufacturing index will provide another glimpse into the state of the manufacturing sector in February, and tomorrow the flash PMIs and existing home sales will wrap up the week. Although the IHS Markit PMIs do not carry the same weight as the ISM PMIs, they could nevertheless move the Dollar, especially if there is a global trend in the PMIs of worsening economic activity in February as a result of the coronavirus.

SENTIMENT

OVERALL SENTIMENT: 

Stocks continue to march relentlessly higher, but Gold remains strong. Speculators are all confused about what the drivers of the markets are. Expectations of more liquidity from central banks should the negative economic impact of Covid-19 start to take hold supports the market but price action in currency markets are giving mixed signals.

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WHAT HAPPENED YESTERDAY

As of Wed 19 Feb, Singapore Time zone UTC+8

FX MOVES

U.S. Dollar Index, +0.45%%, 99.45 
USDJPY, +0.02%, $109.92
EURUSD, -0.38%, $1.0795 
GBPUSD, -0.08%, $1.2999 
USDCAD, +0.15%, $1.3254 
AUDUSD, -0.03%, $0.6694
NZDUSD, -0.67%, $0.6393 

MARKET MOVES

S&P500, -0.29%, 3,370.29 
Dow Jones, -0.56%, 29,232.19
Nasdaq, +0.02%, 9,732.74 
Nikkei Futures, -0.99%, 23,308.0 

COMMODITIES

Gold (XAU/USD), +1.05%, 1,600.91

SUMMARY:

USD gained on the day as EUR continued its dribble lower. Though a weaker than expected ZEW did not have much of an immediate impact, the weak sentiment did not do any favours for the already heavy EUR. Gold gained more than 1% without any significant headlines on a day when USD was performing well is yet another sign that the risk sentiment is weakening.

The S&P 500 declined as much as 0.7% on Tuesday after Apple (AAPL 319.00, -5.95, -1.8%) issued a revenue warning due to the coronavirus. The market resiliently cut its losses during the afternoon, though, leaving the S&P 500 down 0.29% for the session.

The 2-yr yield declined 2 basis points to 1.40%, and the 10-yr yield declined 3 basis points to 1.56%. The U.S. Dollar Index rose 0.45% to 99.45. WTI crude inched up 0.1% (+$0.05) to $52.10/bbl, recouping its intraday losses.

DEMOCRATIC PRESIDENTIAL HOPEFUL BLOOMBERG UNVEILS PLAN TO REIN IN WALL STREET

Bloomberg on Tuesday outlined a sweeping financial services policy proposal to rein in Wall Street trading, boost consumer protections, increase Americans’ access to banking services, and a crackdown on financial crime.

Among the most eye-catching proposals is a tax of 0.1% on transactions in stocks, bonds and payments on derivative contracts, bolstering the “Volcker Rule” ban on proprietary trading, and setting a trading speed limit – all of which take aim at Wall Street clients of Bloomberg Inc’s trading terminal.

Bloomberg, a latecomer to the race who has so far spent $188 million of his own money on the campaign, will step onto the Democratic debate stage for the first time later today after meeting the 10% polling threshold set by the Democratic Party, by coming in second behind Bernie Sanders with 19%. Sanders was well ahead of the field with 31%.

IMPACT: Bloomberg’s foray into the presidential race adds a new dynamic that may induce more volatility as we approach the November elections. Political polarization in the US is at an all time high.

CANADIAN MANUFACTURING SALES

New numbers from Statistics Canada show Canadian manufacturing sales fell for 4 months in a row to close out 2019, as the industry’s sales slipped to $56.4 billion in December. That was down 0.7% from November’s level (consensus +0.8%), which was itself down a full percentage point from the previous month’s level. The motor vehicle assembly and aerospace industries were especially hard hit during the month, Statistics Canada noted. While the impact of the November rail strike may have only been temporary, it exacerbated weaknesses that were already there.

IMPACT: Rail blockades have brought Canada’s manufacturing industry to a virtual standstill, and the industry will start seeing plant closures and temporary layoffs soon if it continues, the group that represents the industry says. In British Columbia, some Indigenous protestors and sympathizers have shut down a key rail line in Northern B.C. because they oppose the construction of the Coastal GasLink pipeline on the grounds that it would run through the hereditary land of the Wet’suwet’en people.

Those actions have broken the supply chains for manufacturers, who rely on rail service to bring in parts and components but also to ship out finished products to customers. The group says that every day the rail stoppages continue, $425 million worth of manufactured goods are sitting idle.

RBA MINUTES FLAG CORONAVIRUS UNCERTAINTY

The minutes said that the COVID-19 presented a ‘material risk’ to China’s economy and therefore to Australia’s, but that it was too early to judge its impact. The RBA said it was prepared to ease policy further if needed but that the impact of such a move needed to be balanced against the effect of still-lower returns on savers. Consumption remained a key uncertainty for the central bank, with labour market developments flagged again as a key metric. The catastrophic bushfires which have plagued Australia were expected to be an economic drag through the current quarter, with recovery expected in full by year-end.

IMPACT: Aussie drifted lower after the minutes’ release, but there was really nothing new here for investors who will now await more hard data. Market focus will now turn to official Australian labor market data for January due for release on Thursday. This series has held up extremely well in terms of headline job creation, but December’s impressive rise masked the uncomfortable fact that full-time positions fell. The market is looking for a headline gain of 10,000 jobs, on average, but expect close attention to be paid to the full-time/part-time split this time around.

DAY AHEAD

UK January inflation numbers will be the focus today before attention moves to the latest retail sales data tomorrow. Retail sales in the UK have not grown since July of last year as households turned more cautious amidst the political turmoil generated by Brexit. A bounce in retail sales in January would suggest the decisive election outcome in December went some way in restoring confidence among consumers.

In the US, we are not as likely to see much of a market response to the Federal Reserve’s minutes of their January meeting due later today. Following Chairman Powell’s testimony in Congress last week, the minutes will be seen as somewhat out-of-date and will probably be ignored by traders.

SENTIMENT

OVERALL SENTIMENT: 

Apple’s revenue warning triggered worries that the economic impact, as we have been repeatedly saying, could be significant. The strength of Gold on a day when USD is gaining could be a sign that the canary is singing its last song for risk sentiment.

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