Investors Took an Untimely Ride on the Covid19 Roller Coaster

Markets

The Bad

The S&P gave up nearly 100 points on the day as the two -day stock market rally petered out. US equities came off pretty hard in the US afternoon session despite substantial gains in Europe and Asia. US stocks had been higher for most of the course on good volumes with a notable increase in Hedge Fund participation, heavily skewed to the buy-side covering shorts in banks, industrial & airlines. But markets came under pressure in late afternoon trading, coinciding with a sharp slide in oil prices, which ended the US session almost 10% lower.

Sure the oil market slide got the bus rolling downhill. But with investors focused on Covid19 curves, so when New York, the epicenter of the US outbreak, announced 731 deaths overnight, its greatest single-day count and suggesting there could be a “lag” in reporting. The equity market rally bus hit a brick wall—leaving investors to execute their much-practiced version of a position cut and run. All of which left investors scratching their heads again, trying to balance out the positive government’s fiscal response in light of what the economic damage will be to a possible extended lockdown scenario.

The Confusion

Trying to factor in the mix of epidemiology, psychology, and politics is troubling. And while we know, economic data is missing or poor quality, but if the Covid19 data proves to be unreliable, then we will be in a world of hurt afloat in a sea of red in a rudderless ship, especially with investors trading on sentiment rather than the economics for now. So with a question about the reliability getting priced into the equation, this could gnawingly remain front in center on investors’ minds over the short term,  so it’s likely to be a wobbly open in Asia today.

The Good

But assuming the reporting lag was a one-off event, the buy-in yesterday suggests there some big funds looking to put money to work as arguably there a ton of cash on the sidelines. And with thoughts that we’re probably closer to peak Covid19 than not, the bids will probably come back provided the NY states data proves reliable from here on out. The plunge could be limited.

Most Covid19 curve watchers thought the forecast as far back as mid-March was that cases in NY were set to peak in mid to end -April. So investors were taken by surprise this week as the earlier than expected leveling of the case count data is being consumed more readily than a hard-to-evaluate economic forecast.

But there’s still a series of good news stories around the world, suggesting staying at home is the one practice that flattens the curve faster than people understand. In Europe, Austria and Denmark announced timelines for ending their lockdowns. Spain and Italy, which represent well over half the fatalities on the continent, have reported signs of improvement.

Oil markets 

Oil prices plummeted overnight after The US Energy Information Administration lowered its 2020 forecast for West Texas Intermediate and Brent crude prices sending oil traders into a frantic selling tizzy. The stark reality is setting in that the proposed production cut deal is unlikely to be anywhere big enough to offset the unparalleled demand devastation.

The current figures being discussed – OPEC+ at 10Mbd plus 5Mbd from other producers where the US position appears to be that shale production is already falling, and that is how it will contribute with possibly offering up adding storage space – is probably not enough to save 2Q over-supply.

So now the challenge remains to the extent producers are willing to cut or even logistically how fast they can cap the wells, as 2Q looks over-supplied by 30mb/d on an 18mb/d demand decline, suggest filling storage in 2Q remains likely unless producer can pull off a much deeper cut.

This view was echoed by Fatih Birol, head of the IEA “Even if there was 10m b/d of cuts, in our view we could still see a building of stocks of 15m b/d,” Mr. Birol said. “I see that there is a growing consensus that this [the G20] is the forum to address this problem.”

At this stage of the drama, all eyes and ears remain trained on both the US actually response and the outcome of OPEC+ virtually meeting. Fingers remain crossed over a plethora of cross-asset markets that the producers can formulate a response that puts a floor under oil price as the recent prices in the $20s reflect the dual demand and supply shock and is not sustainable for any of the primary producers.

With millions of jobs and the stability of the global economy at risk, someone needs to compromise, or it will leave the industry in tatters.

Gold markets

It’s been another secure day buying of gold, although we are about $25 off the overnight highs. But one has to believe market makers who were asked to reduce their short position trading risks as the volatility on EFP mushroomed again; has some play in a gold surge at yesterday Asia open when EFP peaked at 65.

Swiss refineries reopening this week, the production rate is low compared to actual physical demand due to manpower issues on the ground. Still, while this will gradually decrease this week as more return to work. Supply chains/logistics are always challenging, with commercial airlines grounded suggest that market makers will continue to hide in the pipes only entertaining client demand at a premium and undoubtedly little interest contributing to the ECN market unless it suits.

A bit troubling for price action this morning is that gold has been non-reactive to the slide in US equity markets even more so given the fact the DXY remains below 100.

Currency Markets 

The dollar suffered a sharp correction on Tuesday, starting at the European Open in a seemingly delayed reaction to Monday’s substantial US equity gains. Both DM and EM currencies have risen as risk-on sentiment has squeezed safe-haven dollar positioning. But some of these gains were pared as the US equity market turned tentatively sour.

But what is critical and suggest the USD liquidity strain is greately abating is that Traders will find it reassuring that expected correlations seem to work, i.e., the dollar strengthening during risk-off times but then weakening during recovery phases. This will give them much more confidence to sell the dollar when risk turns on. But in the meantime, we should expect the USD to turtle anytime soon as the greenback r is effectively the ultimate safe haven, and continues to trade as such at the moment.

The Ringgit

The Ringgit remained held hostage and tethered to the oil price yo-yo as all ears and eyes remain trained on this week’s OPEC+ meeting. But the outlook remains slightly positive nudged along by the government’s stimulus efforts and signs that the Covid19 crisis is abating in some hot spots around the world.

But more important in this view is that China is coming back to life, so there should be a decent export market awaiting the Malaysian industry when the people emerging from the MCO.

The Yuan

Rich countries that competed over commodities and shipping lines will now fight for control o that rich countries that competed over commodities, and shipping lines will now battle for control of cloud computing and data processing.

China, South Korea, and Japan are on the cusp of transition, making their capital market high ports of entry. And as the supply chains geographically concentrate, the more populated markets in Asia where the too big to fail trade continue to resonate. Admittedly I’m way too early on this trade, but in my view, proximity becomes the next competitive advantage.

But to take this proximity view a step further and in light of the extreme USD dollar funding pressure of late. With China now the largest trading partner for most Asian economies, RMB becomes the natural choice when thinking about alternatives for businesses that have struggled to source dollars as this crisis unfolded.

China’s policy thrust on RMB internationalization has been in play since the big push on Belt and Road initiatives. But with globalization giving way to internalization, there could be a more significant role for the RMB in settling corporate invoicing in Asia. This would be a  welcome respite leaving corporates free from dealing with the arduous and unpredictable task of hedging USD risk. Even more so as proximity trading partners will be the key input to tide the local economies over as they initially see the virus pass.

Equities Take a Stroll Through Wonderland, Awaiting “Herd Immunity.”

Markets

US equities were stronger Thursday, S&P closing 2.3% higher. Smaller gains in Europe, mixed in Asia. US 10Y treasury yields up 2bps to 0.61%. Oil prices lifted 22.1% after the US president indicated that he expected Russia and Saudi Arabia would agree to reduce production by “approximately 10 million barrels, and maybe substantially more”. Price action has been choppy, though, as Russia denied talks had taken place only for Saudi officials to express willingness to reduce production if others did as well. Separately, the number of confirmed cases of coronavirus has surpassed 1 million globally, having doubled in the past week.

US initial claims rise more than 3mn for another week, a spike in continuing claims suggests the labor market has come to a full stop Initial claims jobless claims for the week ended March 28 were 6.6mn, up 3.3mn from the previous week.

Since markets have seemingly become immune to the rise in COVID 19 case counts, I’m not sure where the more important story lies today. Is oil the talk of the town, or is it the thought-provoking ( non) price action across a breadth of US asset classes in the aftermath of the ghastly jobless claims number. The optimistic read here is that the market is already toggled for horrendous economic numbers. In other words, a bleak picture is already in the price.

But the process of risk normalization will continue to be chaotic, and we should expect it to stay on a downward, albeit choppy, trend for the stock markets. After all, the world is expected to extend lockdowns.

Even if the market has seemingly hit a trough, equities rarely bounce back to their previous highs immediately. A medical breakthrough could cause that, but for investors to get back on board the rally bus, they will need to see falling case numbers, alongside an end in sight to mobility restrictions.

We are entering a climate with lower or no dividends, fewer financial options, but most importantly, fewer jobs, lower output, and probably a lot fewer companies around the word. Many small and large-sized businesses will not survive this storm.

I’m not sure what to say about the speed with which the labor market is being hit. Jobless claims of 10M in May would be eye-popping. But 6M was incomprehensible a month ago. It came that quickly one day there the next day gone.

I’m not so much a bear as a realist and not buying into the notion that this is a temporary dip followed by a huge rebound. Voluminous job losses and bankruptcies could lead to permanent wealth deviation. If and when things return to normal, restaurants and hotels (for example) will hire back in a gradual, incremental, and cautious way. And Wave 2 fears will lurk around every previous and cranny until we either achieve “herd immunity” or a health care solution is discovered.

Thanks to the volatility suppressant nature of the unprecedented peacetime fiscal and monetary stimulus. Market makers feel comfortable replenishing inventories of their favorite COVID 19 risk immune stocks on a dip, and now they can gingerly add oil stocks back to their laundry lists despite being hampered by a wet blanket. So for today anyway, all is good in the Wonderland scenario.

In the meantime, our energies should be less focused on the yield curve and currency markets, and more focused on the roll out the proper test, track, and trace technology in the major economies.

Oil markets

Based on my dire macro views from above, I don’t think WTI prices have that much farther to climb, and I’m sticking to my guns that WTI $25 will be the new normal over the short term until a compliance deal gets sorted out. Even then, given the worrisome logistics of shutting in 20- million barrels of oil per day needed to balance the markets and where the cure might be worse than the symptoms itself, adjusting the oil markets to any semblance of balance is next to impossible.

At this stage, probably the best we can count on is graduated, and globally coordinated production curtailment that will provide sufficient wiggle room before its game over when storage capacity overflows, and oil becomes cheaper than the tanks it’s physically stored. And in this scenario, we could see WTI $30 be then new short term benchmarks.

Gold markets

Gold rebounds as data show US jobless surge and as bullion bullishly ignored the equity rally and firm USD.

Gold continued to reverse recent losses, jumping in active trading. After steadying in Asia, gold began to move higher in Europe with the gains then accelerating in US action. Initially, the broader financial markets struggled for direction with no clear indication of risk sentiment. The initial move in gold was likely triggered by rising oil prices, which points to less deflation and improves gold outlook.

But the short term game-changer for gold came with the release of the US jobless claims. In addition to being a new record weekly rise, the data was above the highest expectations.

The fact that gold moved higher despite stronger equities and a firmer US dollar suggests there could b a bit more upside to come. But with near term positioning, a bit stretched, it’s difficult to gauge if there still enough meat on the bone to whet investors appetite for bullion on a Friday after a roller-coaster week.

My view is to reduce into the weekend as I’m not a fan of when correlations break positively or negatively for gold as the misalignment never seems to stick over time. You can tell your self this time is different until you turn blue in the face, but you’re probably wrong.

Currency markets

The Euro

The Euro is unlikely to get much headroom with the dollar still in demand and Europe in lockdown. While there are nascent signs that Chinese activity is returning to normal levels, much of the west remains in lockdown. As a result, markets have come under severe pressure as the virus has spread trigger dollar safe-haven flows.

But there is an opportunity here. With the cost of hedging dollars now significantly reduced and with the virus showing signs of slowing Europe compared to the US. Its the coronavirus divergence and not the yield curve convergence trade that opens up a panacea for short dollar positioning. Currencies of countries that will see the virus pass quicker should be in demand as those nations will see a faster economic recovery.

The Yen 

Not sure how much is left to do from the GPIF US bond purchases from a week ago assuming we are nearing the end. US funding pressure has recanted, and US yields are low enough to send the USDJPY toppling on the next sigs of equity market weakness. There is less exporter selling demand for general hedging purposes. Its likely offset by fewer importer dollar demand with oil prices in the $ ’20s.Although there has been a bounce in the USDJPY with risk sentiment, USDJPY and S&P 500 is not the truth bearer. Instead, its US rates that are the truth stayer so we could see USDJPY fall under pressure on the first sings of equity market weakness what will undoubtedly happen sooner or later. If you are bearish equities, now might be a good time to get short USDJPY.

The Ringgit 

A more positive risk sentiment, USD dollar funding easing, and the prospect of higher oil prices should see the Ringgit trade on a more friendly not today. A rise in oil prices sheds a lot of unwelcome baggage that has been hobbling the KLCI. And while the bounce in oil does not signal an all in green light for the Ringgit, we’re in a much better position today than we were mired in midweek, which is a good thing for local sentiment.

Asia Open: US Stocks Plummet Overnight, Another Day in the Dumps?

Markets 

US equities were weaker Wednesday, S&P500 down 4.4%, smaller losses seen through Europe and most of Asia. US 10Y treasury yields fell another 6bps to 0.61%. The tipping point came President Trump warned Americans to brace for an unprecedented crisis. At the same time, Boston Fed President Rosengren confirmed the sum of the market fears by suggesting the US would see two consecutive quarters of negative growth and that unemployment will likely “rise dramatically.”

Let’s face is it could have been worse if not for the nearly unprecedented peacetime fiscal and monetary stimulus on a global level with the possibility of another US budgetary package.

With the global economy in freefall, markets have gone back to risk-off mode overnight as investors are struggling to look through President Trump’s ominous forecast suggesting Americans could keep dying into June. Now the markets dispute to come up with some alphabet letters to analogize a potential economic recovery. Still, it’s going to be anything but a “V” shape recovery. That’s for sure.

Sentiment remains exceptionally fragile as investors are a flat-out bundle of nerves fretting over the potential impact the coronavirus will have in the US markets and the economy.

Economists continue to downgrade the macro forecast, while stock pickers are focusing on balance sheets and earning statements in the wake of 5 UK based lenders’ decision to withhold 2019 dividends. And also they are looking at other sectors where shareholder returns look questionable, But for many market observers, all roads lead lower.

Similar to UK lender bowing to pressure from the BoE’s Prudential Regulation Authority, the UK’s top financial supervisor. The RBNZ ordered New Zealand banks on Thursday to stop paying dividends or redeeming capital notes, amid widespread economic uncertainty caused by the coronavirus pandemic.

EPS

Before the virus, the bottom-up earnings estimate was $161. In other words, a sliver down from 2019. Now the bottom-up street consensus for EPS is -4% Q1 and -9% Q2. Suggesting that it will take an inconceivable bounce required in H2 to get the EPS aggregate up, especially when most companies have suspended earnings guidance, so there’s nothing for the street to work with.

Yet looking back to previous downturns, P/E has typically overshot downward. And simply put, it’s beyond belief that the only influence the virus and sudden economic stop has had is a 4% EPS loss, and an unwind of last year’s multiple expansion, from 21 times back to an average 16

Simply plugging in a 14 X variable that better reflects the average downtown and a more logical 7% EPS loss, which is the average for a downturn, you get 14x $151 to give 2114. That would represent a lower low than the SPX 2194 on March 19 and is pointing to another 14.5 % down move from here.

Overall, this will continue to be a short-term trader’s market as trying to take a longer-term view in this means you will probably need to run wide stops. But there is still two-way business going on, especially now that systematic selling has ended, and the market is ‘cleaner.’ Even then I’m not sure where the volumes will come from with institutional traders getting position limits cut by risk management to protect the banks against any massive trading losses

Oil markets

Oil prices are higher on news that President Trump will hold a round table discussion with the country’s top oil executives. Presumably, to discuss possible coordinated production curtailment measures in an attempt to buy some time for the struggling US shale industry as the nation’s logistical storage capacity is getting overwhelmed and is nearing total saturation levels.

President Trump’s acknowledging of the problems in the oil patch is critical, and he also revealed he had spoken with the feuding Vladimir Putin and Mohammed bin Salman on the subject. However, there is, as of yet, no obvious move or reconciliation between the producers.

But the threat of intervention or some type of coordinated global compliance agreement put a plank under prices as opposed to what many oil traders had expected this week, which was for oil prices to walk the plank.

Interestingly enough, Russia’s central bank has already need to adjust its policy due to the lack of petrol dollars per barrel. Not only have they stopped buying gold in the open markets, but they had to sell RUB16 bn of FX to settle March 31. While $200 million is small by central bank standards, but it does suggest a shortage of US dollars in their coffers, and the markets expect that reserve replenishing necessity to increase in April, especially oil prices remain low. But is this dire enough to motivate Russia to pull up a chair at the negotiation table with Opec or the US DoE?

At the same time, there’s again more chatter on the street that refiners in the US and Europe are reluctant to buy Saudi Arabia’s crude, despite the steep discounts being offered as part of Saudi efforts to pressure Russia and other global producers. The suggestion here is that this could cause Saudi to rethink + 12 mn barrel per day in April.

Right now, all we have to go in is lip services and hope that something can be salvaged from these talks. But if nothing comes out of these discussions, oil prices most certainly head for the floor. So, despite the bump in prices in New York, oil traders are still bracing for the storage tanks to fill, and the curve to flatten as oil producers will then have to dump what they pump. And to say they might have to give it way might not be that far of a stretch.

Gold 

Over the medium-term, gold should be a safe bet. The sizable fiscal and monetary stimulus that has been announced should be the main factor supporting gold from here, as reasonably aggressive fiat money printing seems to be here to stay. The only concern is the deflationary effect from deeper dive on oil prices, which is harmful to gold prices, especially if oil prices remain lower for longer.

Currency Markets

Despite quarter-end/month-end behind us, and with USD funding stress is decreasing, the USD’s safe-haven appeal so far continues to overwhelm the potentially negative impact of looser US monetary and fiscal policy.

While the China canary in the coalmine trade based on buying currencies of countries who took swift containment measures and that should see their economies return to normal quicker, fell flat on its face yesterday as the market went into “risk-off” mode as economic data was week across Asia and the rest of the world outside of China

The Malaysian Ringgit is trading off overnight lows as oil prices are stabilizing a few dollars above recent lows. Foreign investors are nervous wrecks watching the US economy freefall inflows to risky assets like the Ringgit will dry up as the reality sets in we could be in global lockdown mode longer than anyone had expected even last week. Indeed, the global outlook is dire. The Ringgit will trade defensively in this hazardous environment.

Saudis Flood Oil Markets & Equities Get Wwapped In a Sea of Red

Markets

There so many stories most days on how negative US Q1 GDP is likely to be and how high the jobless rate will be. However, it’s starting to feel like a game of who can come up with the biggest numbers. Undoubtedly this is weighing on sentiment as investors now question themselves whether they have done enough to factor in the freefall in growth likely to be seen in Q2.

Out of the gates, stock markets are reacting to what now seems to be a likely increase in the duration and breadth of coronavirus lockdowns in the US and elsewhere, which is pointing to a potentially deeper and longer-term hit to economic activity than was anticipated even a week ago. It’s merely a case of unprecedented economic devastation that’s hitting the screens this morning where scenes from New York City in full stop are providing the horrific optics.

US President Trump signaled social distancing in the US would remain in place until April 30. The demand shock for oil and for the global economy more broadly will be more significant if mobility and social interaction restrictions stay in place beyond April.

As such, it’s equally challenging to overlook the oil markets this morning as Saudi Arabia is making good on their oil war threats and have already started flooding the market awash with oil as tankers filled to the brim set out from King Abdul Aziz port this morning.

This shock is hugely detrimental for oil prices and perhaps a tipping point for the industry as a whole. The incredible deterioration in oil demand is swamping storage infrastructures to the point that now traders are even questioning whether policy coordination by OPEC+ and also with the US +Canadian oil producers in the mix, can save the day as now anything short of a 20-25 million barrel per day cut my only provide transitory relief as world economies come to a sudden stop.

Suggesting we’re going to be tethered to the risk yo-yo, if not anvil, for some time to come

Economic forecasts 

The problem with making economic forecasts on either side of the spectrum, it depends very much on the spread of the Virus – and even the scientists aren’t sure about that. The real question for investors isn’t how shockingly bad Q1 is going to be, sadly that’s a given; it’s how long the weakness will persist and, as a consequence, how much permanent damage will be done.

As the world comes to crashing stop, not to mention the globe was dealing with stagnancy as it was. The economic devastation as a result of the Virus should be gauged by its prolongation, not the depth of it.

But with so much uncertainly on both sides of the ledger, it is challenging to see how any pension fund is going to make a significant scale asset allocations decisions when there is still so much uncertainty over the outlook. At best, short-termism is likely to continue to dominate the duty list for now. But let us keep fingers crossed that a vaccine is on the way.

Although it doesn’t necessarily feel all that much better, things do seem to be improving. (trying to keep an open mind)

With the introduction of the CPFF, the stress on commercial paper is beginning to decrease. Cross-currency markets are normalizing following the considerable uptake in FX swap lines. As a result, LIBOR has found some stability over the last two days.

VIX back to 50 – we aren’t quite there yet after stocks moved lower midday NY, but the VIX is flirting with 50bps a level that many in the market consider a critical inflection point for risk assessment.

And now that Year-end Japan has passed – it felt like Japan was keeping some pressure on short-end USD funding markets yesterday, most notably by the reaction to the Tokyo fix yesterday. It’s messaged FX prop, trader, to come out of their self imposed 24 hours of hibernation and have immediately taken it upon themselves to sell the US dollar.

Oil markets

The Global economy is experiencing unprecedented disruptions, and while the full effects of these disruptions are not yet evident, it is clear that the economy is experiencing the most abrupt and severe contraction since the Great Depression This is setting the stage for unparalleled Oil demand destruction which is getting exacerbated by Saudi unleashing a torrent of supply to the world right out of the gates this month making good on their oil war promises.

This is yet another signal that Saudi is digging in. The risk remains skewed to the downside for oil until this changes, and/or COVID-19 news flow turns positive.

Ignoring President Trump’s persuasions, Saudi Aramco is expected to offer up oil to any takers at the deepest discounts in decades as the state producer readies to ramp up exports intent on flooding the world with oil when there’s nary a demand.

Gold markets

Gold weakened in late European trading and remained on the defensive throughout US action, falling back below USD1,600/oz. But the fact that gold is not bouncing back as risk tanks suggest that the negative correlation to oil price is taking precedent.

Ignoring the sharp decline in US consumer confidence, with oil prices under pressure, the deflationary impact of low oil, which is harmful to gold, is taking president. Not to mention with oil prices sliding, the drop in foreign exchange petrodollars per barrel could curtail more oil-exporting central banks to cut bullion buys.

Currency Markets

The Federal Reserve has been quarterbacking the supply of US dollars around the world via USD FX Swap facilities. Now they opened up the door even broader US dollar selling overnight by offering up a temporary repo facility with foreign central banks that will start on April 6 and last for six months. This should be another element in easing dollar funding stress, including for countries that so far have not had access to swap lines.

In Asia, this repo facility will be most welcome and should be put to immediate use by Indonesia and Malaysia, who have the smallest reserve adequacy. This could be a potential turning point for the ability of central banks in these countries to address the dollar shortage in their markets.

G-10 View 

The lower implied FX volatility across G10 is especially pronounced in AUD, NZD, and GBP – currencies that have outperformed lately is encouraging. , But the disorderly decline in oil prices is challenging this benign dynamic of lower implied FX volatility and broad-based USD weakness. We missed a pretty chunky dollar sell-off from some extreme levels overnight and if you were unfortunate not to get any USD selling orders triggered, it’s going to be a bit more challenging with oil prices going into the tank today as lower oil prices( commodities) are not necessarily bad for the US dollar versus a laundry list of currencies, Commonwealth currencies notwithstanding.

The Malaysian Ringgit

However, for the Ringgit, it’s near term; fortunes appear to be tied to broader risk sentiment and the plight of the oil market. Of course, a drop on petrodollar per barrel hurts the government coffers at a time when leadership has little option but to abandon fiscal prudence. But with the US dollar trading broadly weaker across the spectrum and factoring in access to more USD via a unique Fed repo market, which could be viewed by traders as a possible game-changer, the Ringgit could trade more favorably.

Month-end addendum 

I fielded so many client questions about month-end rebalancing overnight, so I’ve added a couple of paragraphs to help demystify the process.

The simplest month-end model is: If US equities are down more than 2.5% in a month (they are down about 11% this month), foreign owners of US equities need to buy USD to reduce their FX hedges. If you are long a billion SPX and short a billion USD against it as a hedge, and your SPX is now worth $890m, you need to buy $110m to get back in balance. Hence the term, month-end rebalancing.

The reason why I was worried about this particular month that could have been lethal is that the March 2020 equity move is one of the largest in my trading careers spanning four decades Also, half the risk-takers that might normally provide liquidity offset to yesterday’s moves we’re hiding in the pipes sending everything to the eFX machine which were just churning and burning through what little liquidity was available.

I particularly like GBP as its especially loyal to the simple month-end model. And given the comparative lack of liquidity in Cable compared to the Euro per se, it tends to exhibit some wickedly outsized moves under these conditions.

Not so Cynical Today

I must be getting used to lockdown as I don’t feel nearly as cynical today.

US stocks are trading strikingly higher Monday as markets yaw towards month- and quarter-end. Investors are busily assessing progress on containing the virus and the torrent of stimulus all amid the prospects of buying an economic trajectory that is poised to drop sharply in 2Q20.

Stock market price action suggests that investors are comfortable with the “whatever it takes, whatever is necessary” policymakers’ response so far into a deep economic recession.

At a minimum, the massive monetary and fiscal stimulus gives investors some breathing room with fingers crossed for a health care solution. While at the same time, they are pilling into those equal opportunities bidding up shares of health care companies as they report progress on products that could help with the coronavirus outbreak.

The S&P 500 climbed more than 3 percent, adding to a strong showing last week, bolstered by the Fed all in an and Washington 2 trillion spending spree.

Indeed, the outlook would be much worse; was it not for timely and aggressive monetary and fiscal policy easing. While policy injections will buffer the impact of virus shock on economies, “It’s only when the tide goes out that you learn who has been swimming naked.” as risks may be shifting towards a more negative economic outcome.

But with trepidation everywhere, the market still managed to lift staring down the reality of a deep recession while counting on it being a brief one. Still, with investors on the apex of transitioning from the policy response phase to a more data-dependent chapter, the risk here is that the data is going to be a lot less assuredly favorable than the stimulus broadcasts in times of crisis. Still, any positive surprises will be welcomed with open arms.

And while there is a recognition that the coronavirus-linked economic disruption could last some time. However, economies adapt, and technology has ensured us of that while promoting localization.

And at the same time, the focus is starting to shift from the size of fiscal packages to the speed with which they can be implemented. This is positive in its own right as it suggests investors are already getting their shopping list ready for the bounce back when government policy tries to raise GDP.

Party Pooper section ( to remind me not to chase this market higher just yet)

I know equity markets are forward-looking, but at the moment, there isn’t very much to look forward to. It is difficult to see how any pension fund or even mom and pop are going to make a proportionately significant scale asset allocations decisions when there is still so much uncertainty over the outlook. At best, short-termism is likely to continue to dominate the duty list for now. But let us keep fingers crossed that a vaccine is on the way.

Oil Markets 

Given the harmful industry-wide effect that the unmatched oil price decline is having, especially on The US Shale Industry, President Trump called President Putin to discuss oil. Presumably, in an attempt to get Russia to pull up a chair to the negotiating table with Saudi Arabia or maybe even loosening sanction on Russia, as desperate times call for drastic solutions in turning around this wayward tanker.

Any sign of Russia/Saudi making nice will be positive for oil. But at this stage, the market is not entirely buying into it. But it is an evolving story, and oil prices have recovered above WTI $20 after a chaotic session as risk sentiment has revived more broadly with investors busily assessing progress on containing the virus.

But it does seem that Trump has hit a chord as the US Energy Department said energy chiefs from Russia and the US are set to discuss volatility in the oil market.

Running narrative

In 4 weeks, we’ve gone from the physical end was near, to now the physical end is here as oil traders understandably focus on the closing of developed markets in response to the COVID-19 crisis and the unprecedented demand hit to oil – exacerbated by a rising supply side.

The adverse price action was possibly compounded by the expectation of a messy Brent expiry given industry conditions and the heightened level of volatility across all asset at this tricky quarter-end due to US dollar funding pressures.

Trump flexes

While Trump is keen to flex his diplomatic influence, the thought here is that Russia is unlikely to change its stance based on US pressure alone. Whereas Saudi Arabia is more susceptible to change, given the extent to which it relies on the US for military support.

Even if Trump managed to broker an OPEC+ deal in some form, the damage is done, and investors will remain cautious about continued cooperation. So, any truce could be heavily discounted, notwithstanding that at this stage; it appears unlikely that we see significant large-scale cuts come back to the fore.

Also, excess supply was brewing even before the Saudi – Russia falling out & long before the collapse in oil demand. Indeed, this the most significant mismatch between supply and demand in modern history, suggesting that these aggravating factors will limit any price recovery even with a truce.

Gold markets 

Russia Central Bank will stop buying gold tomorrow as petrodollar shortages are weighing on reserves.

Gold prices have remained volatile but are set for its six consecutive quarterly lift with bullion prices during the quarter up ~7% so far.

While USD, yields, and a better equity market performance impacted gold, the slide in oil is also influencing bullion demand. The drop in WTI below $ 20bbl has deflationary implications.

While oil declines are partly due to a price war between Russia and Saudi Arabia, the deflationary impact of lower oil demand is negative for gold.

Also hurting gold, Russia’s central bank announced that it would stop buying gold starting April 1 but did not explain the reasons for its decision. However, it’s not catching institutional traders by surprise as lower oil prices mean fewer petrodollars per barrel for the central bank to buy gold; hence they have been conspicuously absent this year as oil prices have tanked.

If oil prices remain depressed, there will probably be a similar curtailment of bullion purchases across other oil-exporting central banks. These petrol central bankers have been the cornerstone for the market in the last couple of years and should more withdraw from the gold market for an extended period; gold’s upside may be limited.

But the real problem comes for gold if these central banks need to start selling gold in distressed fashion to support their economies if oil prices continue to languish.

Currency markets

It was another squishy USD funding squeeze across the quarter-end curve, and not wholly unexpected but less loud than what it could have been thanks to the Fed Swap lines. But the residual month-end knock-on effect should keep the dollar in demand for a bit.

The most boisterous and most vocal G-10 interbank currency trader the world knows is extremely quiet these days, suggesting to me that I’m not along this month end as many are deferring risk-taking activities while oppressive USD funding costs are still stretched.

(Beyond the month-end)

Singapore Dollar

The Singapore dollar reaction to MAS’s latest maneuvers suggests FX policy is now a mere compliment, with the focus squarely on very aggressive fiscal support and supplying liquidity to ensure the market plumbing doesn’t clog.

With MAS keeping the markets flush, and SGD triple-A bond spreads to US Treasuries at historically wide extremes. With the bulk of SGD FX deprecation premiums likely behind us and Singapore having the luxury of financing their fiscal deficit directly out of government coffers and no need to issue debt, SGD bonds could be in demand.

As bond flow pick up, I would expect the Singapore dollar to benefit even more so from the coronavirus divergence FX trade takes hold, which should help those countries currencies that took proactive and extreme containment measures and see the virus pass quicker.

The Malaysian Ringgit

Local risk sentiment should trade more favorable today, with both US equity markets in oil prices moving higher in lockstep during the US session. But month-end US dollar demand could keep risk-takers sidelined until later in the week.

Entering the Covid19 Rabbit Hole

For a while last week, it felt like a stroll through Wonderland with the Federal Reserve Board “all in” and world leaders dropping nearly $5 trillion fiscal stimuli in the markets lap. All amid sugar-coated promises, this would be the deepest yet shortest recession in modern-day financial history. But with Coronavirus cases in the US rising exponentially with lethality projection rates soaring and secondary cluster fears gripping Asia and Europe causing county-wide lockdowns, it certainly feels we’re nudging ever so closer to falling down the Covid19 Rabbit Hole with reports that the US death counts could reach 200,000

Global cases increased by 26% since Friday (now 713,000), led by the US 136,888 total cases (48% growth). Less well known is where the virus building now:

  • Turkey 147%, Portugal 43%, Belgium 47% all had significant growth over the weekend
  • Australia, New Zealand, Canada >60% growth over the past three days
  • Chile, Argentina >75% growth

Now policy responses read like a playbook: cut rates to zero, purchase a more comprehensive array of assets than ever before, pump fiscal spending with little regard to debt sustainability. Suggesting we are nearing policy fatigue where it becomes less effective, and as the surprise element diminishes, no one cares.

So, while policy responses in the US and Europe have been spectacular, allowing for markets to rebound last week. But the coronavirus keeps spreading globally, deepening fears of the economic and financial impact across countries. More market turmoil likely lies ahead.

If you’ve spent any time ocean fishing, you’re probably aware of the term “sucker hole, “a colloquial term referring to a short spate of good weaker that “suckers” sailor into leaving port just in time for a storm to resume at full force. Well, that’s what last week’s market felt like as now we are about to enter a vortex of bad earnings, bad economic data, and bankruptcies. Indeed, last week’s animal spirits will be severely tested.

Oil and copper did not rally; the Vix isn’t pulling back despite the S&P 500 10% higher last week.

With no visibility on the end of lockdown,the world is becoming increasingly branched, with business people wanting a quick reopen thinking the solution to a problem produces a worse net result than the problem itself. And scientists pleading for caution as we don’t want to overrun the hospitals and potentially deal with multiple rolling lockdowns. And possibly triggering the ultimate policy destabilizing moment that no one wants to see as the President (emphasizing business priorities) and Governors (highlighting science priorities) lock horns. Fortunately, the President says he is extending virus guideline to April 30.

Oil prices 

The primary narrative 

The spread of Covid-19 and the impact on oil demand will continue to pressure oil prices. And the virus headcount numbers out of New York City are providing those especially poor optics this morning.

Oil prices have softened in the aftermath of the US package hoopla and suggesting the direction of travel skews lower as markets anticipate a 2Q that will inevitably see a large build in inventories as demand echoes the shutting down of major global economies.

Storage facilities 

There is a relatively wide range of estimates on how much global crude storage capacity remains and on how quickly that capacity is filling.

However, when the storage capacity is filled, we should probably expect a response from Saudi Arabia, Russia, and other essential oil producers. On the other, the longer their response takes, the higher the risk of another steep decline in oil prices.

While WTI seems settled in the low 20$ as a baseline for now, however, it’s tough to rule out a drop into the teens or lower if Saudi Arabia and Russia stay the course.

Only then would the cash cost accelerate shut-ins and ultimately lead to a price rebound, but it would make for a horrible year for a good chunk of the world who are oil price takers.

Supply 

On the supply side, which I think is less relevant today but a factor none the less. US Oil companies seem to be reacting more quickly this time than they did in the previous downturn. Energy firms cut the most oil rigs since April 2015, removing platforms for a second week in a row as a coronavirus-related slump in fuel demand has forced massive reduction in investment by oil and gas companies.

Drillers cut 40 oil rigs in the week to March 27, bringing down the total count to 624, the lowest since March 2017, energy services firm Baker Hughes Co. said in its weekly report.

False hope

Is there light at the end of the tunnel as several sources are reporting that refiners in the US and Europe are not buying Saudi Arabia’s crude, despite the steep discounts being offered as part of Saudi efforts to pressure Russia and other global producers.

Excess supply was brewing even before the Saudi – Russia falling out & long before the collapse in oil demand. Indeed, this the most significant mismatch between supply and demand in modern history, suggesting that these aggravating factors will l limit any price recovery even with a truce.

Gold Markets 

A shift back to ‘risk-off’ sentiment did little to support gold as the thought of distressed sales is still too fresh in trader minds. So, the market remained in tight ranges on Friday were all three sessions bore witness to profit-taking after steep gains last week. But US weakness helped to temper profit taking price declines.

But gold should shine through as risk sentiment weakens this time around. For the most part, the immediate need for equity margin call selling has already been done, suggesting there is no apparent reason to sell gold in this environment other than to book profits.

In both 2008 and 2020, gold has briefly been caught in the mix, where good trades were being liquidated in distressed markets. But last week there were clear signs the market is warming up the idea of central banks monetizing debt and leaving considerable excess liquidity in the banking system. But the key differentiator in 2020 is that QE is financing helicopter drop into households around the world. And interestingly enough, QE is even being discussed in ASEAN markets even when interest rates are far from zero, which could be the harbinger for a new form of debt monetization policy around the globe.

Currency markets

GFXC Issues Statement on FX Market Conditions

The Global FX committee (made up of banks and other stakeholders) has issued a statement (unprecedented as far as I can tell). Effectively it just says – “be careful this is going to be a big and busy month end” in slightly more technical language.

GFXC Issues Statement on FX Market Conditions

Dollar liquidity 

The dollar liquidity crisis appears over. It has taken more than $30 trillion in annualized bond purchases from the Fed, among others, but the dollar crunch now appears under control. US real yields have dropped almost 100bps in a few days, and cross-currency basis has normalized. So, with policy rates converging to zero, traders are now looking to take the Asia “virus divergence” trade global. In other words, bet on those economies that will see the virus pass quicker and return to some type of economic normalcy.

Markets may be able to look through some pretty horrible economic data—like the non-reaction to the historic spike in US jobless claims last week—but will likely be sensitive to the news on the duration of shutdowns and any signs of second-round effects extending travel alerts and lockdown measure.

Last week the Dollar pulled back as risk assets rebounded, but our best guess, as that all most of us are flying on, is that the epic USD rally is not quite over. But moth end flow will complicate matters, but with US equities in the tank, it’s unlikely we will see USD demand from rebalancing flows kick in today.

The Ringgit

The Ringgit will remain defensive due to secondary cluster fears, the negative economic effect of the MCO, and the prospect of lower oil prices, which reduces the supply of petrodollars, which is a crucial stabilizer for the Ringgit.

When US CARES, Markets Listen.

The S&P500 rose 6.2%, with smaller gains in Europe and modest declines seen through most of Asia. Oil prices rose 19%, gold up 1%, and US 10Y treasury yields fell 4bps to 0.83%.

Given this all happened after 2 percent of the US labor force filed for unemployment insurance last week, it has left more than a few economists and traders alike a tad confounded; still, perhaps that is the fundamental nature of this shock. The market seems happy that the number came in on the whisper, the rise in jobless claims could have been ‘worse,’ after all.

The fundamental problem isn’t the size of the print; instead, it’s how long this shock persists. Indeed, the biggest concern for the economy isn’t the immediate impact of things like jobless claims rather the longer-term effects. If the US economy moves into a protracted recession, then the business and human costs are likely to be much higher than the impact of the virus itself.

US jobless claims numbers honestly shouldn’t come as a surprise – this is not a recession pattern of job cuts where 10% is trimmed in a revolving design until businesses bottom out. Instead, this is one day fine, next day everyone is gone. And to which a large degree will be reversed when the virus passes. With that in mind, the market is running with the assumption that while this tumult will be the deepest recession in modern-day financial history, it will also be the shortest.

Even although I’m short the SPX near current levels right now and another order in to sell higher, I honestly hope bullish is the case and will be more than happy to cut and run with the market for humanity’s sake if nothing else. But since it’s impossible to gauge the ultimate economic impact or the duration of the Covid-19 pandemic for weeks, possibly months, and until that point, the sustainability of any rally in stocks is questionable, and  I remain relatively risk-neutral short SPX and short US dollar hedged.

The question is, will the next 500-point move be higher or lower? For me, a break of 2700 says more topside to comes were as a move below 2500 means lower, so choose your position carefully.

Anyone running multi-asset portfolios knows the quick returns are probably to be made in equities right now if you can catch the moves. However, why is this happening, and why is the US outperforming Europe? It boils down to Technology. The US has it, Europe doesn’t.

Couple that with “buy what worked before” mentality and funds are averaging in again on tech stocks that shouldn’t much be affected by the virus. Especially Microsoft and others that primarily focus on cloud computing, which does resonate now with the world working from home

Overall, there has been a general shift to neutrality from the perfect bear market conditions late last week, which is a good thing.

The Good

Jobless claims were horrible, and there’s no way to sugar coat that, but the market never lives in the present. The Fed’s bazookas appear to be filtering through, and that’s a massive positive the market is running with

By their policy design, the US dollar is starting to back off its rush, and most importantly, Signposts targeted by Fed policies have begun to show signs of less stress.

So, while the jobless claims were gloomy, investors like what they see as the Fed bazookas shots appear to be hitting their targets.

The strength of the US dollar was a massive problem. So, the Fed expanded swap lines to other central banks and then fortified them further. While there’s usually a lag effect but judging from moves in the US dollar over the past few days, the “dash for dollar” dollar funding is at least lessening.

There are widening influences suggesting that the high-water mark for panic in financial markets has passed. A less inverted VIX curve, narrower US high-yield credit spreads for the energy and airline sectors, and lower implied FX volatility reflects the substantial policy action led by the Fed.

And with the final piece of the policy puzzle about to be bridge ended, The US CARES Act, it will provide a much-needed social safety net for the millions lining up at the unemployment window. It will significantly assist in ameliorating Main streets biggest concerns as investors always favor humanity when it comes to risk.

The Bad

The S&P 500 is up 6.2%, or just over 150 points. I don’t think it’s wise to chase this -primarily because the worst of the virus has yet to hit and with only half of US states and a third of the US population are in lockdown. There’s no reason to believe the US population should be less immune to the virus than everywhere else in the world. Not to mention the notion that the world is quickly returning to work seems to be more a flight of fancy. Thousands of businesses and jobs will be lost regardless of government handouts.

However, why is this happening, and why is the US outperforming Europe? Tech. The US has it, Europe doesn’t.

The Ugly 

The latest coronavirus cases numbers from New York look ugly. It has 37,258 cases, up from 30,811 on Wednesday. That’s easily the most significant daily increase so far and keeps the growth rate in the 20% range.

Oil market 

The oil market was smacked with the ugly stick overnight after the IEA executive director Fatih Birol said demand could drop as much as 20 million barrels a day. Sending many Oil quant traders into an “oh dear” state as a 7-10 million barrels per day hit was the running assumption for many.

Although the US CARES Act relief ally ensued as the Main street parachute package, particularly the unemployment benefits, will likely delay oil products storage facilities cresting by another 2-4 months all things being equal

Still, over the short term, the spread of Covid-19 and the impact on oil demand will continue to pressure oil prices. And the virus headcount numbers out of New York City are providing those specifically poor optics.

There is a relatively wide range of estimates on how much global crude storage capacity remains and on how quickly that capacity is filling. However, when the storage capacity is filled, we should probably expect a response from Saudi Arabia, Russia, and other essential oil producers. On the other, the longer their response takes, the higher the risk of another steep decline in oil prices.

While WTI seems settled in the low 20$ as a baseline for now, however, it’s tough to rule out a drop into the teens or lower if Saudi Arabia and Russia stay the course.

Only then would the cash cost accelerate shut-ins and ultimately lead to a price rebound, but it would make for a horrible year for a good chunk of the world who are oil price takers.

Gold markets 

Gold performed in European trading, rallying notably in the lead up to the US opening and throughout most of US trading. Gold got a nice boost from a weaker USD, notably against the EUR.

Gold was a prime beneficially from the surge in US unemployment numbers, which argues for continued stimulus and monetary accommodation.

Currency Markets 

The USD demand on the back of funding issues has eased further in the past 24 hours. Accordingly, the USD has now started to slip back lower.

Congress expected to pass the US CARES act has accelerated USD selling, where the hard-hit AUD-GBP and EUR were prime beneficiaries.

The Euro

The EUR gained as the ECB formally scrapped its self-imposed limits on its bond-buying program. The ECB announced that issue limits “should not apply” to the new QE strategy.

The Pound

A downgrade also aided the GBP moonshot after the Covid19 lethality forecasts were revised down significantly by the Imperial Colleges, which in turn implies the virus is less dangerous in the UK.

The Aussie

The AUD gained on two fronts, its high beta to risk was evident overnight on the back of the US stimulus package. And the A$ benefited greatly from the drop in cross-currency basis swaps costs thanks to the Fed emergency Swap facilities.

Also, the drop in volatility leaves the long USD position at risk into month-end; as such, there’s been a considerable unwinding of long USD risk across the board overnight.

The Malaysian Ringgit

The drop in USD funding pressure is an absolute boon for the Malaysian Ringgit is the das for US dollars in Malaysia was even more intense than that for region peers. The fall in oil prices provided Malaysia with fewer petrodollars per barrel, and these oil dollars are usually considered a stabilizer for the Ringgit.

Factor in a generally better tone in the global risk markets, and the Ringgit will open stronger today.

 

Risk Rolls On as The Global Economy Prepares to Hit a Brick Wall.

Markets

It was another day of gains across Global equity marketsIn the US, the S&P500 gained a further 1.2% Wednesday with more substantial lifts through Europe and Asia after US leaders stopped tunelessly caterwauling to lay the foundations for the $2tn US stimulus package to be rubber-stamped some time in the Asia time zone. The full text of the bill has yet to be released. Still, the fine print is expected to include a massive expansion of unemployment insurance, loan facilities for small and large businesses, and additional healthcare resources. The Main Street parachute was initially received well by the markets, so hopefully, it will provide a sufficient safety net for the millions that are lining up at the unemployment window this week. With Senate Majority leader Mitch McConnell referring to the package as a “wartime level of investment into our nation.”

Wartime language is convenient for politicians, but wartime maximizes production. Lockdowns minimize production. A lockdown is the ultimate in demand shock. The risk is that companies fail as a result of this, creating a double demand drop. With the stimulus package stamped, the balance of risks must certainly shift back to the evolution of the pandemic. The question now is not how low Q2 GDP will be, but how long the global ‘lockdown’ will last.

Downside and Upside

On the downside, an increase in new cases in China and other countries that are returning to work is the main risk to monitor. But on the upside, (1) the adoption of large-scale testing for the virus and antibodies and (2) finding an effective medicine. And when combined, the risks are more balanced now, with the adoption of large-scale testing that should enable a partial return of economic activity once the epidemiological curve has been flattened. Ultimately all roads lead back to the fact investors need conclusive evidence of coronavirus infection curves flattening, bringing an end to lockdowns insight before pressing that buy button with some conviction.

Sure, the US Congress has agreed on a stimulus package worth more than $2 trillion, supporting oil prices and broader markets. While this is good news, but since it’s impossible to gauge the ultimate economic impact of the Covid-19 pandemic for weeks, possibly months, and until that point, the sustainability of any rally in oil or equity markets is questionable. And suggests the current high level of volatility will likely extend.

Government handouts ameliorate the US economy hitting a brick wall.

Any economy hitting a brick wall can be mitigated by unemployment benefits and other social transfers over short periods. Staying on that policy hamster wheel creates policy fatigue and opens so many different cans of worms that the markets hate. As I alluded to in one of yesterday’s notes, the market has a short memory and a short fuse. All the stimulus chatter will fade if the Covid 19 headcount curve goes vertical. The reality is the “Big Bazooka” sway is impossible to sustain, and not to mention the surprise effects greatly diminish. Ultimately policy is harder to maintain the more protracted virus outbreaks continue.

Quant side of things

From a quant side of the equation, it does appear systematic wanton selling has stopped removing one pillar of pressure from the market. Institutions have started to step in and put money to work, but flow dynamics suggest they continue to buy safety and names they already hold, essentially averaging in. This is not an actual risk-on behavior. But with little else working across a plethora of growth asset classes, anyone running multi-asset portfolios knows the quick returns are probably to be made in equities right now if you can catch the moves.

Investors wait for US jobless claims.

How will the markets survive the US initial claims going ballistic is probably on everyone’s minds this morning?

The problem is new jobless claims will measure the extent of US policy failure, and with the Congress dilly-dallying, it will not help the matters.

Now market participants are bracing themselves for a horrific peek into their future this week when US initial jobless claims are released. The high-frequency data will confirm we’re in a horrible vortex of the fastest and most substantial rise in the US unemployment in modern financial history.

In many ways, initial jobless claims will be the signpost that matters the most in the coming weeks as it will be a near real-time measure of whether fiscal policy worked.

Oil markets

Oil markets received a lift from the US stimulus chatter, but for the most part, activity remains rudderless awash in a sea of Oil.

Price action suggests that gauging the ultimate economic impact of the Covid-19 pandemic is a challenge but does skew lower. Still, one thing that will keep the canary in the product refineries chirping is that the demand collapse will accelerate product storage facility saturation, which could happen over the next few weeks. And at that tipping point, the producer surplus will become a massive logistical headache for oil storage consideration, which then opens up the trap door for oil prices to plummet below cash costs.

On US shale production sensitivity could react more quickly this time than they did in the previous downturns due to CAPEX concerns as with a few exceptions, the sector is now implying 2020 cash neutrality ~$45/bbl.

In addition to storage constraints, it remains challenging to call a floor in the oil price. I expect a high level of volatility as the market responds to news flow, both positive and negative. Still, we should probably continue to expect that an extended period of oil pricing in the $20s is possible with an occasional deep dive lower on storage constraints and inventory builds. Ultimately Oil prices will need some help from another compliance agreement to get out of the double whammy of negativity.

Gold markets 

Spreads are looking much better today after London Bullion Market Association alongside several banks asked the CME to allow gold bars in London to be used to settle futures contract deliveries. Physical gold could then remain in London with underlying ownership then transferred. Lower spreads are always welcome in any market, especially in gold, when physical is especially tight with refiners shut down around the world.

AS you can see, my relatively tight trading ranges over the 24 hours the market hated the EFP spread widening effect as participation fell off the cliff given the large execution cost market makers were forced to reluctantly pass on.

Gold markets like USD liquidity, and it is getting plenty of it, but seems to be getting held back possibly by oil prices and still the lingering crisis dynamics as its too early to rule out further distressed sales near term.

The considerable fall in the price of Oil is creating dollar shortages for oil-producing countries and emerging market (EM) economies alike. None more so than Russia as the massive Ruble decline in March matched by the oil price demise suggest Russia could shift from net buyer of gold to a possible net seller of gold to raise dollars. Even more so, if the US sanctions Russia to force them back to the bargaining table with Saudi Arabia,

Currency markets

Trader markets, so the Willey veterans play the weak hands.

In the meantime, traders are waiting for US claims, so I suspect more position jockeying today rather than a massive spec day, but eyes remain wide open for opportunities.

One such opportunity was USDMXN. The USDMXN is trading entirely in line with the risk on/off the sentiment of global markets. There has been more interest in selling USD overnight. The thought here is the amount of stimulus in the US will eventually benefit MXN.

The other good trade we hit on yesterday was the CNH. Traders had been talking about a possible deposit rate cut by the People’s Bank of China. So, CNH traded from 7.07-08 to just above 7.14 before the market reversed on the assumption 7.15 is a near term line in the sand for the PBoC.

The Malaysian Ringgit

Its an exciting dynamic that is evolving in Asia currency markets as inventors like the more draconian lockdown measures, which will see the virus pass quicker and life return to normal even faster. The improved Ringgit sentiment comes despite the Malaysian economy, which will pay the considerable upfront cost for extending the MCO. Still, with a robust policy backstop from the BNM and government support, the thought is the economy will return to standard form quicker.

The Waiting Game

Markets

The S&P surged 9.4% Tuesday, and media reports say the Dow Jones registered its best day since 1933, rising 11.4%. European and Asian equities rose as well. Oil slipped, and gold rose by 2.2%.

A final decision on a US fiscal stimulus package remains elusive; US Treasury Secretary Mnuchin said the deal is within striking distance with media reports suggesting an agreement could be made within hours. The size of the package under consideration remains consistent with recent media reporting at around $2tn (10% of US GDP).

US equities are rallying on expectations of a substantial bipartisan deal, which may be just a few hours away. But in “buy the rumor sell the news “fashion, the stock market could easily take another sharp leg lower once the good news is out, and investors conclude that it won’t be enough (yet) to address what’s going on in the real economy.

With that said, given the enormity of the package, it will most certainly be well initially well-received as it should be sufficient to avoid buttress “Main street” from falling into a  worst-case depression type scenarios, especially with the Fed prepared to monetize all the US government’s debt.

The reason why its critical to get this US Aid package wrapped up quickly and in a huge way is that in contrast to Europe, the US social and economic parachutes, and automatic fiscal stabilizers are much weaker. This means hundreds of thousands of US workers might get laid off every day congress dithers. But with no unemployment and health benefits, and in the absence of a quick and useful government safety net, the economic impact will be much worse in the US than in Europe.

E-minis have been surging all day long on the anticipation of the deal as the markets are still reveling in the Fed’s crisis response, which was nothing short of spectacular given that they are prepared to monetize infinite amounts of government debt.

Looking at flows overnight, it appears the Fed effectively addressed market plumbing issues while providing a whole range of liquidity backstops. And the proof is in the pudding as slowly, but surely liquidity is starting to return to futures markets which seemed to trough last week on Thursday when a lot of traders turned their algo and machines off.

Economic forecast 

Economic forecasts must now be made totally outside the grid of any historical experience. Given the rapid succession of downgrades, we should likely expect more pain over the short term, as the situation in New York and California continues to deteriorate. And with the entire population of India going into a government-enforced a 21-day nationwide curfew, it doesn’t suggest blue sky.

Big Fear 

But more worrisome is a University of Oxford Study that suggests far more people in the UK may have already been infected than scientists had previously estimated – maybe as much as half of the population, the majority with very mild symptoms or none at all. It calls for significant- scale antibody testing to establish what stage of the epidemic we are really in.

Lower Volatility 

The SPX move is consistent with the falling volatility (although the Vix remains sticky around 60) and rising dispersion, which are the early signs of market stabilization, thanks to the Federal Reserve Board going all in. But in the medium-term, markets will remain choppy given the uncertainty of coronavirus spread and significant risk appetite restriction from recent high volatility and cross-asset correlation (or lack thereof at times)

Signs That Systematic Re-Balancing Is Slowing

When does risk sentiment turn on bright?

Everyone is looking for a canary in the coal mine. Still, ultimately for risks sentiment to turn back on bright, investors need conclusive evidence of coronavirus infection curves flattening, bringing an end to lockdowns insight.

Oil markets

Oil prices have clawed back some intraday losses on the anticipation of news from Washington, announcing new initiatives to try to protect the economy from the effects of Covid-19 and hopefully will providing massive support to Main Street.

But the canary in the coal mine is chirping from the product’s market with gasoline and jet cracks under significant pressure responding to the absence of demand amid rapidly rising physical inventories.

Gold markets

With futures dislocating from the spot, liquidity has been virtually non-existent, where EFP at 40 was paid overnight, indicating total surrender in a frenzied panic to cover physical gold commitment. I’ve never seen anything like this in 20+ years trading gold.

Of course, under these conditions, gold is getting floated by liquidity concerns to a degree. Still, the overriding demand factor is the anticipation of a tremendous fiscal stimulus downpour, which should cement gold’s longer-term bullish outlook.

Besides, gold is getting more headroom absence of margin selling and as USD ease somewhat. The pullback in the USD and little change in yields allowed gold to rally. The flash estimates of March PMIs show the negative impact the COVID-19 pandemic is having on economic activity and should ring in more policy easing globally.

So gold is glittering in a global monetary response to the Covid 1 9crisis goes well beyond the Fed as the world tuns on the monetary and fiscal taps to dampen the horrendous economic effect of Covid19.

Currency market 

It’s hard to imagine the US dollar doesn’t get pummeled eventually but probably best to keep an open mind as the USD buying continues every NY session.

But with dollar funding normalizing, Fed monetizing 10% of GDP, gold ripping, and market plumbing issues addressed, the dollar should remain on offer. But more importantly, with the global US dollar shortage getting resolved, the “Greenback” must inevitably give way to the Fed’s new policy regime.

But as far as timing when the comprehensive global growth ebullience sets in and triggers the ultimate USD dollar demise, it’s probably more of a science call predicted on when the virus peaks globally, and people start partaking in everyday activities again.

So, with the Eurozone still under the Covid19 cosh, it’s going to take some more convincing than an infinite Fed policy backstop for G-10 currency traders to chase the EURUSD higher.

However, high-beta currencies to US equities continue to outperform like the Australian dollar and the Korean Won.

The Malaysian Ringgit 

Despite a slightly weaker US dollar tone globally, the Ringgit is still struggling from the political malaise, oil price volatility, and the domestic MRO, which continues to hobble any semblance of an economic recovery. While in the background, Malaysia’s bond investors are starting to fret as MGS are on the FTSE World Government Bond Index watch list, and the upcoming interim review is this month.

The Singapore Dollar

While an easing in US dollar funding conditions has provided some relief to the Singapore dollar given the city-states proactive containment measures and will see the virus pass quicker likely to be rewarded with more robust asset markets sooner than regional peers

 

The Fed Is Not The Problem. 

“If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.” Milton Friedman

Markets

Investors were chapfallen by the massive Fed action that has not led to more of a market rebound, with equities struggling to bounce and the US dollar hardy worse for wear.

It certainly isn’t a problem of insufficient Fed action as this move trumpets in unlimited government spending financed by unlimited Fed purchases arriving faster than anyone could have imagined. The Fed unleashed it’s all in howitzer to fund an array of programs, including Fed backing for purchases of corporate bonds and direct loans to companies and promises that it will soon roll out a plan to get credit to small- and medium-sized businesses.

This deluge is as much liquidity support as markets could wish for as the Fed plans to add a $625 billion balance sheet this week. That equals a staggering annual pace of $32 trillion per year.

Sure, it’s a titanic task to amplify the historical significance of today and not necessarily in a good way.

The basic tenants of how a government influences the economic decision-making process in a capitalist society have been discarded as Asian investors awake to the most significant monetary experiment in the history of financial markets.

And the famous quote by Milton Friedman does resonate this morning, “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.”

Congress failure to launch is the problem.

However, Nancy Pelosi is reportedly open to a 2.5 trillion deal that is being hashed out between Schumer and Mnuchin.

Fortunately, we are close to a Presidential election, so it doesn’t seem likely that opposition from the Democrats will last for long.

And while congress dawdles, it also means that once a deal is signed, the market reaction will likely be a strong one, even if it will most probably take several attempts to arrive at the necessary size of at least several trillion dollars.

But the problem is not the Fed; the problem is politics.

Millions of workers are in the process of being laid off. Hence, as the days roll by without a political deal to backstop the economy, it will end up being a very costly misstep for every shape and size of business and, more importantly, the hard-working folks across the heartland.

The US Senate should be drawing on the experience of its failure to act fast in the 2008 crisis. Instead, it has yet again failed to act responsibly in the 2020 crisis. The proposed economic stimulus package is massive, but the longer the delay, the more colossal it will need to be to appease the markets, mainly when US initial claims are digested.

Unemployment is the key measure.

Unemployment will measure the extent of US policy failure, and now market participants are bracing themselves for a horrific peek into their future this week when US initial jobless claims are released. The high-frequency data will undoubtedly confirm we’re entering a vortex of the fastest and most substantial rise in the US unemployment in modern financial history.

In many ways, initial jobless claims will be the signpost that matters the most in the coming weeks as it will be a near real-time measure of whether fiscal policy worked.

No endpoint still 

Almost every economic and market outlook written – is now in the format of scenario analysis. But mostly it depends on how long lockdowns last. But frankly, the only reports that that matter is the ones coming from scientists where the longer containment time frame seems more likely. Suggesting that social distancing will be in place throughout most of 2020, where more draconian type lockdown rules could be relaxed and then fortified to ringfence virus hotspots flare or a second wave hits.

There’s probably so much more pain to come as when the notional growth devastation number totals are projected, and the tallies still may fall well short of the actual sum of all the losses to Global, European, and US GDP. So, stock market bulls and those who are typically the perma bids like pension funds are nervous about stepping back in too early.

I think the Olympics getting canceled is only the tip of the iceberg when it to sporting and other cultural events. And more significantly, how we intend to go about our everyday lives for most of 2020 not only will this be costly in an economic context, but the human toll on families is unmeasurable.

Oil markets

Optimism over a huge US fiscal number has helped dampen the oil market sell-off as the US fiscal policy is targeted as mitigating the negative employment shock and will effectively put money in people’s hands to buy gas.

While Oil bulls continue to hold on to a glimmer of hope after US Energy Secretary Dan Brouillette said the possibility of a joint U.S.-Saudi oil alliance is one idea under consideration to stabilize prices after a 48 % haircut in March alone.

The problem is, however, all the money in the world is not going to get people back on planes so long as the virus is spreading, and travel bans are in place. The fiscal deluge is a sentiment play as opposed to an actual demand-side pop, so the budgetary bounce will likely have a short duration bump on oil prices. But it will certainly provide a massive tailwind when the virus passes.

News flow on the demand side continues to run dreary with the spread of Covid-19 across the developed markets. It is now reaching colossal emerging markets oil importer like India, which is triggering complete shutdowns of massive oil-importing economies.

While the anticipated lengthy absence of air traffic presents a significant obstacle in its own right, but with the expected ramp in supply, which suggests storage will fill very quickly, and then prices will plummet as physical demand continues to evaporate.

But this will also effectively turn the wells off. The first balancing signs and supply-side effect are the initial waves of CAPEX cuts with the Baker Hughes rig count showing a significant fall of 19 oil rigs last week.

As far as the Texas OPEC coordinated effort, with the proliferation of small-scale producers in Texas (and across the US), it always made a coordinated US response unlikely. Still, as we will see by the drop in weekly rig count data, the low oil price may ultimately achieve the same end goal.

As with most growth asset classes, it doesn’t remain very easy to call a floor in the oil price. I expect a high level of volatility as the market responds to news flow, both positive and negative. Still, we should likely place more emphasis on an extended period of oil in the $20 with the occasional dip lower.

Gold markets

Gold surged after the Fed committed to unlimited asset purchases.

Gold should trade higher in the medium to longer-term but may face some selling and resistance near the psychological USD1,600/oz level as much will ultimately depend on the USD given the massive Fed policy deluge has hardly made a dent in the US dollar resiliency.

But the key for gold is how quickly the Fed swap lines can relieve some of the USD funding pain across global markets as if dollar funding returns to normalcy, and this will probably remove one of the primary reasons to sell gold.

Currency Markets

The USD has been incredibly resilient on the back of liquidity shortages and forced hedging by underhedged corporates and real money. It’s inconceivable by any stretch and by any economic model that the greenback can survive today’s Fed announcement unscathed.

Granted, we’re now entering the most significant monetary policy experiment in world history, but doesn’t all these dollars getting added by the Federal Reserve computers, cheapen the USD?

The Malaysian Ringgit

Higher oil prices and a slightly weaker US dollar should release some pressure on the Ringgit today, but we should expect the MYR to remain in the autoclave due to the covid19 domestic economic shocks.

 

A Morning The World Stood Still. Lockdown, Shutdown & Limit down

Investors are recoiling in horror this morning at the explosive Covid19 death and latest headcounts around the world. The rapid spread has triggered unprecedented draconian containment measures and sees the world come to a standstill. All the while Congress is dilly-dallying on an aid plan.

Also, traders are buckling in preparing for a horrendous peek into their future this week when US initial jobless claims are released. The high-frequency data will undoubtedly confirm we’re entering a vortex of the fastest and most substantial rise in the US and global unemployment in modern financial history.

Current estimates for new US jobless claims are running around 2 million, but with Canada reporting 500,000 last week (37mm population), which would imply a US equivalent of 4,420,000. If 2 million is the expectation, I’d argue it is “light” (under-reported) regardless of what the data shows.

The relative calm seen Thursday did not make it to the end of the week. The S&P500 fell 4.3% Friday despite modest gains in European equities. US 10Y yields fell 30bps to 0.85%, and gold rose 1.6% on speculation that the liquidation of safe assets will slow.

Given the widening spread of Covid-19 outside China, economists in the process of unilaterally downgrading global GDP forecast for the third and, in some cases, the fourth time in the past two months. These rapid and unprecedented downgrades illustrate just how fast we’ve moved from a brief health scare to a full-blown global recession.

Traders are now pricing in a severe global recession as the US/EU adopt drastic measures to contain the pandemic, likely pointing to an unprecedented G2 recession (since World War II). While the situation in China, South Korea, and Singapore seems to be contained, recent data suggest the virus is spreading in other parts of ASEAN and India. As such, to defend against a secondary cluster spread, all of Asia has effectively gone into lockdown mode, suggesting growth in the region will fall well below current negative revision. Which of course is going to trigger more central bank policy easing and government support

Oil prices 

Oil fell another 11.1%, weighed down by news of enforced social distancing in NY state, and lockdown measures in California, two of the largest state economies in the US.

Oil markets collapsed out of the gate this morning as prices react in tangent to stringent containment lockdown measure that has seen life come to a standstill around the world. People are working/staying at home and only using their cars for the essential matters, as total demand devastation sets in.

Perhaps the only reason prices have collapsed below WTI $20 per barrels are reports that Texas is considering pulling up a chair to the bargaining table with OPEC. What was inconceivable only weeks ago might become a reality.

But with the prospect of storage facilities filling quickly and the potential endpoint of “worthless crude oil” is increasingly discussed. If an agreement isn’t forthcoming, these talks never happen, or they end in a contentious break-up, oil prices will most certainly head for the bottom at a ferocious velocity.

Gold markets

Gold continued to react to financial market sell-offs and, at times, supported as government and monetary authorities’ attempts to manage the economic and financial ramifications of COVID-19.

But in the face of the significant liquidation, gold was only closed down $25 in a week when US equities fell 18%, the USD surged, and other commodities tanked, all of which suggest some but not all of the gold haven properties are starting to glitter again.

More concerning for bullion investors is that the USD has also moved sharply higher. But if the market can get beyond an immediate dash for USDs, gold will have a chance to move higher. It has remained an excellent portfolio diversifier for the past two years.

For gold investors, hopefully, the demand for US dollars from Emerging Market central banks won’t cause them to sell gold to raise dollar and support their economies in this time of economic stress. If that does happen, the trap door will most certainly spring.

Currency markets

A weaker USD is part of the solution. Still, a stronger USD is unavoidable if investors fret about the liquidity (short-term rollover risk) and solvency (protracted revenue shortfalls) of dollar borrowers round the globe.

Volumes have been light this morning, perhaps reflecting the fact many Singapore and Hong Traders are working from home moaning about their Wi-Fi connection and small screens. (Bloomberg)

But traders also think that there’s a chance of more policy intervention on the way. The Fed could increase the breadth of EM SWAP lines ( last week, MAS and BoK were offered lines). They could enter the FX Swap market flooding the short-dated cash markets with US dollars. Or they could even possibly intervene by instructing the NY Fed to seel US dollar, which would likely signal the start of a concerted worldwide central bank effort.

G-10 

Euro

The EURUSD is most prone to be overwhelmed by the economic carnage with the Eurozone facing a demand shock without precedent in the single currency’s history. Italy’s coronavirus deaths now surpass China.

But it’s the debt sharing burden that will bring deep-seated political tensions to the surface between Germany and the broader Eurozone that will dominate the region’s political scrim for years to come post-coronavirus and could even signal a collapse of the single currency unit.

Asia FX

The significant increase in USD-denominated debt in Asia EMFX since the financial crisis suggests the demand for USDs will remain strong as the global economy weakens further.

The Ringgit

The Ringgit will likely come under further selling pressure on domestic economic concerns and more so against the backdrop of a stronger US dollar.

As well oil prices are under extreme pressure relative to 2018 and 2019, so the MYR oil price sensitivity will continue to provide a significant downdraft.

Also, the BNM will be most unlikely to drawdown on valuable US dollar reserves to support the Ringgit since the demand from local banks for dollars is robust.

 Nothing All That Shocking for a Change  

Latest headline

US Senate Majority Leader McConnell has introduced the text of a trillion-dollar coronavirus package, which includes direct payments of $1,200 for individuals and $2,400 for married couples. This will keep the “Readers Digest Prize Draw” style giveaway in focus. Of course, this will be most welcome by everyone who lost their job this week, but it’s merely papering over the recessionary cracks. A USD 1,200/ $2400 check buys lots of toilet paper, but in a Covid19 lockdown, it does not save jobs at restaurants or bars. And what happens about the double-dip demand when this check runs out.

Honestly, I apologize for being a bit cynical; its a great government hand out, but it’s not nearly enough if this virus hits a significant chunk of the US population.

Markets 

Central bank actions appear to have settled nerves for nowLooking across markets this morning, what strikes most of all is there is nothing all that shocking for a change, certainly not compared to the volatility seen over recent weeks. That is, except for oil prices, which rose significantly on the day.

It was a busy 24 hours for central banks. 

Adding to those measures over the past 24 hours, the Fed has introduced a backstop for money market funds; the ECB launched a EUR750bn bond buyback program, while the Bank of England lowered Bank Rate to a record  0.1%. And not to be outdone by their larger counterparts, the RBA has taken monetary stimulus to full-tilt, and the RBNZ has introduced a term lending facility.

Stimulus proving too hard to ignore.

While the markets are still in the autoclave, but after a very dislocated start in Europe, two critical pressure valves sprung overnight as Oils, and the Banking complex finally started to move in a positive direction.

The $1 trillion or larger US stimulus package is proving too large for foreign capital to ignore as it reduces a massive burden on both the financial and credit market. And with the Eurogroup signaling a willingness to further increase the balance sheet as necessary, opposed to leaving the heavy lifting to the ECB, this move was welcomed universally in domestic financial markets at least as long as increase remain manageable. Euro STOXX Bank 30-15 iShares closed nearly 6 % higher on the day.

The bounce in the oil complex was easily digestible and directly attributed to media reports suggesting the Trump administration may intervene in the Saudi-Russian oil-price war to get the two sides to work together. It would pressure the Saudis to cut oil production and threaten sanctions on Russia, in a move to stabilize markets.

US initial jobless claims spike to 281k.

Policymakers have acted decisively, but they can only pillow and not forestall a demand shock at the unemployment window jobless claims increased by 70,000 in the US for the week ended March 14 – the highest level for initial applications since September 2017. And to which has unceremoniously heralded in a chorus of recessionary calls from Wall Street.

The dollar crunch is not solved.

Fed’s new Commercial Paper Funding Facility has done little to ease the distress. The US commercial paper market – dominated by foreign issuers and a key bellwether for offshore dollar demand – 30-day rates have remained at excruciating levels. All the while, “Yankee” markets in Europe, a primary source of short-term USD funding on the continent, are trading at a massive premium.

Oil markets

A fair bit of short covering ensued after President Trump suggested he may tackle the oil crisis by brokering a deal between Moscow and Riyadh. Although usually one of the world’s most prominent proponents of lower oil prices, the President is acknowledging the US shale oil industry is getting caught in the middle of the market share contest between Saudi Arabia and Russia. US job losses and domestic credit concerns are too much to bear, so the US administration will jump in and attempt to resolve this battle of the oil producer behemoths.

With +$35 WTI stamped all over it if Moscow and Riyadh come to terms, Oil traders will likely be less indiscriminate with their sell strategy. But with the prospect of storage facilities filling quickly and the potential endpoint of “worthless crude oil” is increasingly discussed. If an agreement isn’t forthcoming, these talks never happen, or they end in a contentious break-up, oil prices will most certainly head of the bottom in ferocious velocity.

Gold markets

Gold continued to react to financial market sell-offs and, at times, supported as government and monetary authorities’ attempts to manage the economic and financial ramifications of COVID-19.

But it’s a bumpy ride as liquidity and participation continue to fall by the wayside. I’m not so sure this is so much a function of the market, or due to the fact, many Gold traders are working at home.

More concerning for bullion investors is that the USD has also moved sharply higher. The DXY index up as much as 5% from the lows and is trading close to the upper end of multi-decade ranges.

Greenbacks remain the currency of choice, and that demand is shackling any notion of an early gold comeback. The mad dash for the US dollars has gold on the defensive and is now one of the principal reasons for gold selling in the speculative markets.

For gold investors, hopefully, the demand for US dollars from Emerging Market central banks won’t cause them to sell gold to raise dollar and support their economies in this time of economic stress. If that does happen, the trap door will most certainly spring.

Currency Markets

Every currency on the planet remains directly in perils path so long as the USD liquidity squeeze moves like a wrecking ball through the G-10 complex.

USD upside has extended. The move continues to be driven by short-term USD funding stress.

Australian Dollar 

AUD enjoyed a bit of relief rally after RBA Governor Lowe’s press conference, but which was likely due to a questionable intervention rumor that quickly made its way through the street.

Although the RBA is on the list of countries getting new swap lines with the Federal Reserve, they most certainly are not going to waste those lines or current reserves stopping the Aussie falling, which is acting as a tremendous economic shock absorber.

And not least of all, why do they want to sell US dollars to a bank in New York when the local banks around Martin Place are clamoring for the greenbacks.

The Malaysian Ringgit

In addition to the US dollar liquidity squeeze which is ravishing local currency markets., the Ringgit dropped for the 6th consecutive day due to Malaysia’s lockdown measure that will surely have a negative impact on the struggling tourism sector and the more significant negative knock-on effect for the demand of big-ticket items as unemployment rises.

As such, the markets repriced the curve lower, which has been nothing been short of dramatic as the markets except the BNM to drop interest rates to 1.5 % along with SPR by at least 50 bp. This, too, is weighing on sentiment.

The market’s quick reaction suggests trader expect a significant hit to growth, although arguably, it’s difficult to quantify at this point in time. However, this view is getting compounded by China’s high-frequency activity data coming much weaker than expected. The anticipated recovery will start from a much deeper hole than initially expected.

And because the Yuan is holding up against “the basket,” the PBoC may be more inclined to let the Yuan weaken above USDCNH 4.17, which would then put additional pressure on the Ringgit.

 

Currency Carnage: FX Market’s Unhinged

  • In periods of excess market volatility and heightened uncertainty, the preference for staying ‘liquid,’ i.e., holding a more substantial amount of cash, increases. Some of it is purely technical (due to margin calls or a scramble to hedge currency exposure, for example), and some of it is precautionary (some corporates drawing on credit lines).
  • Corporate credit spreads have widened on the view that disruptions to supply chains alongside falling demand as a result of the viral outbreak could impair firms’ ability to access liquidity.
  • COVID-19 has disrupted trade on both the supply and the demand sides

 

  • The pandemic has increased pressures on globalization, amid signs of rising protectionism.

 

  • The surging dollar hits the global economy like a sledgehammer.

Markets

Well, its 3:30 AM in Bangkok, and I’m on my third cup of coffee trying to make sense out of this market carnage. But a safe bet I’m not the only market participant in Asia who had a restless night while continually waking up to check their trading apps and other mobile news services.

The market now realizes its some of all fear that the world’s central banks are powerless to stop the market turmoil.

With a more extensive and far quicker spread of the virus than generally expected just weeks ago and with early evidence that the impact on Chinese activity was far worse than initially projected, investors are hunkering down for a severe global recession.

As we buckle in for another volatile day on global trading floors, The S&P500 closed 5.2% lower Wednesday, unwinding the gains seen Tuesday. Weakness extended further after a 15-minute trading halt in the early afternoon, though a sharp rally in the last 30 minutes or so of trading softened the scale of losses. Smaller declines in European equities, and more minor again in Asia as well. What has been especially notable in recent days has been growing signs of forced selling of safe assets: US Treasuries sold off again Wednesday, with US 10-year treasury yields lifting a further 11bps to 1.18%. Gold fell 0.7%. And oil prices went into a freefall, down 24% to their lowest level since 2002.

Here’s my take of the currency carnage

Circumstances rapidly deteriorated with global mobility restrictions in full force. The global lockdown trigged self-accelerating appreciation of the US dollar as investors were forced to reduce leverage across all asset classes.

With few liquid options left to hedge into, the entire gale force of global risk hedging requirements spilled into the Foreign Exchange markets as nowhere else to hide other than the US dollar scenario steamrolled.

Much of the currency market focus has fallen on Cable overnight as the UK economy goes down the route of elsewhere and into full lockdown. The GBP hit 1.1500 overnight in fragile trade – the last time it traded lower than this was in March 1985, when 105 was the previous low. However, that is merely a symptom of the cause. Investors are forced to reduce leverage across all assets compounded by the USD liquidity squeeze.

It’s not like the downside outlook for the US economy is any better than elsewhere; in fact, non-traditional data confirm the US economy is shutting down quickly. Global currency markets have completely unhinged from a mechanical/technical reason compounded by the dash for dollars amid a USD liquidity squeeze.

Economics in the time of Covid

Economics in the time of Covid is a different beast with the best data being real-time that provides insight into the extent of the slowdown. US Restaurants are shuttered by mandate, and the data confirms a collapse with a few cities already at -100% table rates. But one of the more interesting ones is traffic data from TomTom. It shows the speed with which Houston went into a virtual shutdown, which both illustrates the ghost town outlook due to the collapse of the shale industry and mobility restrictions.

Yesterday London closing note I referred to the looming tail risk is that US unemployment is set to rise quickly. Attention has already turned to the scale of job losses, which will hit the US economy in the coming weeks and months. We’ll get our first clue of this on Thursday with initial jobless claims at 12.30 London. Headline expectations are for 220k initial claims, a modest increase from the previous week. The range of expectations isn’t huge, but the standard deviation of forecasts at 8500 is the biggest since December.

However, next week will be the truth bearer after state unemployment websites in Kentucky, Oregon, and New York crashed under the weight of traffic. And that according to an NPR/Marist poll conducted Thursday and Friday, 18% of households already reported someone being laid off or having hours reduced because of the coronavirus outbreak.US jobless claims highs of 695k in October 1982 and 665k in March 2009. I would expect these previous high-water markets to be obliterated and possibly hit 1 million new jobless claims.

Unlike the Lehman crash outside the financial sector, life went on as usual. In essence, restaurants took bookings; taxis took rides, shops were still bustling. This time around, the entire US (and global) economy on the precipice of shutting down, which means unemployment will skyrocket.

Where do we go from here?

Recently the focus has been on the market’s struggles, but ever so increasingly amid the market turmoil, and attention could start to turn towards the institutions that drive this market, especially the hedge funds themselves and their solvency. Yesterday it was announced that two UK property funds had become the first to “gate” due to market conditions. These will raise questions over whether other property funds follow suit, especially as investors in that sector could decide to sell whatever is liquid and is actively trading. Given the unbridled use of credit and leverage many of these institutions were operating on, we could be only bearing witness to the tip of the iceberg.

Will there be more financial repression if this continues? After all, there is nowhere safe at the moment to put your money other than a bank. The Fed and Bank of England may say they aren’t going to take rates negative, but what is going to stop commercial/ wall street and high street banks from starting to impose negative interest rates on their customers?

Oil markets

Crude oil is having a bit of a tough day today. Much of the impetus for the fall came after the headline earlier that Saudi Arabia’s oil minister told Aramco to keep supplying crude at a pace of 12.3mbpd over the coming months. And it has been one-way traffic since then.

The continued containment and lockdown response of the world’s major economies in response to Covid-19 will advance to a sharp impact on oil demand, but the OPEC+ producer group’s cranking up of supply into these unprecedented conditions will trigger even more selling.

The EIA US crude oil stockpiles rose last week while gasoline and distillate inventories fell last week, but the report predates the U.S. Covid 19 lockdown.

Even if global production remains static over the near term, let alone factoring in Saudi Arabia increased supply. Inventories will swell as gas and oil demand drops precipitously in the weeks ahead of when physical storage facilities are filled to the brim around the world. In this situation, it’s unclear if a point of equilibrium even fits into this scenario. As once the swift and savage physical rebalancing takes place, the markets could quickly fall to WTI $15 or even further, which is now becoming the base case for some.

Gold Markets

The gold narrative hasn’t changed provided there a cause for forced liquidation of other assets; gold prices will probably remain capped over the near term.

But as the demand for cash becomes more pervasive as personal liquidity and capital preservation become a dominant consideration in investors’ decision making. Bullion owners in any form physical, paper or scrap, will probably continue to liquidate in order to boost capital levels the more protracted the Covid19 global lockdown extends.

And if you’re wondering where the sovereign demand for gold is, according to Goldman, Russia demand has fallen off due to lower oil revenue.

But in my view, central banks are more concerned about increasing their USD holdings by any means and increasingly so through SWAP lines. At this stage, buying gold is well down their list of concerns. However, for the gold market concerns, hopefully, we don’t get to the stage where Central Banks need to sell gold to raise dollars as that’s when the trap door most certainly springs.

The World is All In!!

Markets

The Fed’s all-in strategy has failed to lift sentimentThe S&P fell more than 12% Monday, European stocks were between 4 and 5% lower following losses in Asia. US 10Y yields fell 22bps to 0.74%. Oil fell by almost 10%. Those moves follow weaker-than-expected Chinese activity data for January and February, intensification of citizen restrictions in the US and Europe, and despite leaders of the G-7 nations vowing to do “whatever is necessary” to support the global economy.

Unlike most instances of a sharp downturn in economic activity, this one was seen coming. The Fed bazooka does mater, But – critically – while the Fed wishes it could fire at the left-side of the V, it can only hit the right side with its stimulus efforts. Swamping credit markets with cash is their crucial motivation as conveying the appearance of keeping both credit lines and lending facilities awash with money during a possible credit crunch amid an economic downswing of this magnitude is critical. But painfully as it is, when you shut an economy down, low rates do not have a simulative effect on consumption until the shock passes.

This is 2008, but with a completely different focus. Back then, it was banks, his time bank balance sheets as fine the buffers built in after the GFC are working. Furthermore, liquidity tools are all working.

But this isn’t a banking crisis; it’s a global economic crisis where virtually every global industry will be facing extreme pressure without a public bailout.

Speaking of bailouts, one thing that has always been key in the market eye was how policymakers deal with a plummet in air traffic, which has sent Airlines shares into a death spiral while taking credit markets along for the ride. He combined One world, SkyTeam, and Star Alliance members have called on governments and stakeholders to provide extraordinary support. The group said there should be a re-evaluation of landing charges to mitigate revenue pressures.

Fortunately, for the airline industry, the White House was listening as economic adviser Larry Kudlow says the administration is drafting a financial assistance package for the airlines that are expected to include direct assistance, loans, and tax relief.

He also says it would consider sending cash to households as short-term relief. Hong Kong did something similar a few weeks ago, which, it was suggested then, is how sufficient helicopter money might work in practice while getting cash in the hands of the folks that need it the most.

Measures of volatility and risk in credit & equity markets are back to levels last seen in 2008 even as the Fed steps in again. But don’t misinterpret peak volatility with a trough in risky asset classes – history implies otherwise.

US bank stocks are around 18% lower. Eight US banks have announced they are suspending share buybacks and will instead focus on supporting clients.

Oil markets

Oil prices lifted off the mat in late NY trade after 24 hours of “sell sell sell” as COVID-19 newsflow over the weekend was exceedingly grim as Europe, and now the US begin to aggressively step up their reaction to the spreading of the virus. And emergency Fed cut in rates to zero serves to highlight the gravity of the situation.

Oil market historians are quick to point out that this is only the 5th ever demand decline in the modern era. But what’s different this time is that we are experiencing simultaneous supply and demand shocks.

Presumably, the market is getting supported by physical bargain hunters, but those storage facilities are rapidly filling. If storage does fill, quashing that demand, oil prices are sure to collapse further, and the global markets will then have to hope that the dispute between Saudi Arabia and Russia is resolved before we reach that point of no return.

In addition, the bounce in Asia could also be due to the front running of a possible China stimulus. Many traders are buying into the thesis that China will unleash the mother of all stimulus once China sees the virus through and people return to work

But Oil traders are hardly confused by the latest developments. On top of simultaneous supply and demand shocks, the market continues to move linearly as reports of global containment measure and more travel restrictions roll in. All of which suggest rallies will fade

And more damningly for oil prices is that perhaps the markets have underpriced the extent of the economic carnage as Covid-19 moves like a wrecking ball through the global economy.

When social distancing becomes and acceptable and widely used expression in everyone’s phrasebook, I don’t think people around the world are all that eager to jump in trains, plains, or automobiles, even if they wanted to. While the fear of secondary outbreak will likely keep them hunkered down well beyond peak virus

Gold markets

Yesterday early morning gold gains on the Fed rate cut reversed as equities slump, but losses pared; bullion is showing some signs of stabilization. Still, gold declines remain linked to investor’s need for cash.

A constant question on every bullion investor’s mind is why is gold retreating when uncertainty and’ risk-off’ sentiment is rising? Gold’s recent declines are chalked up to margin-related selling as equities fell. But there is an added fear element: the need for capital preservation is becoming a primary thought in investors’ decision-making process. Holders of gold, whether it be physical, paper, or even scrap, are liquidating to boost capital levels. But this may only go on for as long as equities remain so weak. The rebound late in NY is impressive.

Precious metals flow appear to be driven exclusively by forced liquidation across the yellow complex. ETF accounts are the most active with platinum leading the volume (the market is long; investors wanted to get out) and silver (XAUXAG ratio puffed up to all-time highs). Gold, which had attracted so much determinative subscription, there was initially more selling across the board overnight. Still, gold prices have axiomatically rebounded as gold is a hedge for all-seasons crowed was likely motivated by the deluge of central bank easing, which has made credit lines both reachable and actionable.

Similar conditions were seen in the aftermath of the financial crisis. Gold was initially caught in the crossfire but soon embarked on a rally to all-time highs. The policy response has been fast, and the velocity of devastation in asset values is unprecedented. But If gold is to retain its risk-off appeal, the recovery needs to be quick.

Good news for the gold investors is that the risk parity and vol control segment of the markets are running out of equity market risk to pare as stock market exposure plunged to GFC lows.

Forex markets

G-10

 

Traders need a more compelling reason to short the USD. Zero rates and QE will be very efficient in weakening the dollar once global growth sentiment turns around. But dollar funding stress across a breadth of global markets as evidenced but widening in the cross-currency basis last week signal more USD buying to come. However, if today’s Fed action effectively alleviates some for that credit stress, this would be the first step to a weaker dollar, particularly against currencies where risk premia are extensive such as EUR and AUD.

Beyond China (at a stretch), there is scant evidence that life is returning to normal. On the contrary, more significant restrictions on international travel, proximate social contact, and intra-country transit seem likely, which will undermine economic growth, with equity markets and credit markets taking more pain. Suggesting the greenback is not going out of favor anytime soon.

EM Asia FX

Yes, the global economic outlook is miserable, but what’s more critical for Asia FX risk is China. Yesterday’s China high-frequency activity data was horrible and even worse than expected amid the virus pessimism, which should continue to weigh on sentiment as China GDP revisions get marked lower.

The Bankers Association of the Philippines says FX and fixed income trading will be suspended from Mar. 17. (Bloomberg)

Taking a page out of China playbook, the Philippines policymakers are imposing the ultimate circuit breaker but shutting down the PSE as the island effectively goes into lockdown containment mod. It sounds like a prudent measure, although ultimately curbing short selling for a month or so might have been the first order of the day.

But the US dollar liquidity crisis needs urgent repair QE announced by the Fed overnight will help increase dollar liquidity in the global financial system. Still, the money needs to flow down to the real economy. This could give time. The fact EM central banks were not offered up Swap lines by the Fed at this time for them exchange UST’s for cash at the Fed window makes things a bit more urgent for small markets like the Philippines.

If there is a currency run in other parts of Asia due to the USD liquidity crisis, we may see similar curbs across Asia, starting with short selling restrictions.

In my view, its the USD liquidity crisis, not the economic damage is the absolute wrecking ball through Asia FX.

As Asia sees the virus pass before the west, things return to normal in ASEAN currencies quicker that most of G-10.

A Traumatized And Combat Fatigued  Market May Still Need Some Help Getting Into The Weekend 

Global equities went into free-fall overnight after a series of communication blunders triggered pandemic pandemonium on global markets. In mere weeks the market has shifted gears from a transitory health scare to a full-blown global recession. The White House imposed travel bans and provided the match in the powder barrel. But the market had been rapidly moving into combustion mode all week after Italy severed connections with the rest of the world, and closing all shops except food stores, pharmacies, and banks.

Global supply chains are no longer just “disrupted” but are now in the process of shutting down completely.

And even more worrisome is that the worst-case scenario and the sum of all fears are culminating with the view that policymakers remain well behind the curve.

The US government failed to impose any intra-US restrictions on travel, or large gatherings which were viewed as being entirely out of touch with reality. It provided the market with a hefty sell trigger. Everyone knows the number of reported cases in the US will skyrocket soon because proper testing has begun. So logically, without imposing the necessary containment measure, the US administration’s prevention strategy is extremely porous.

In what was otherwise a well-designed policy package, Lagarde’s communication misfire provided the market will not comfort. What spooked investors was a lack of signaling the ability or willingness do more – may be much more – if necessary. The market doesn’t need a boy who cried wolf response; it requires a considerable number, maybe something in the zillions.

But the ultimate in worrying signals comes after the markets failed to launch after the Fed announced their intention to flood the repo market cash. The move comes a day late, and a dollar short as the Fed action is being viewed as a bridge to get market into the weekend.

The market’s greatest fears are coming to fruition. Not only are Airline and Oil executives lining up at the Wall Street bankers’ doors. But now the who’s who of corporate America are drawing down on revolving credit lines.

Withdrawing dollars from the global banking system is triggering a massive dollar shortage, as seen by the widening in cross-currency basis.

Since the mad dash for cash has only started, things could likely get worse before better, so get ready to dip into your piggy banks just in case your local ATM runs dry of greenbacks.

But at the end of the day, the biggest issue in the market is not the impact of the virus itself, its the lack of monetary policy wiggle room to fight it, especially in the context of a collapse in inflation expectations.

Trading these markets is crazy as even I was getting scared of the volatility in my PnL yesterday. Maybe because it’s my own money now and not the banks !! But on that same note, last night did bring back memories of being on the desk through 1987 and 2008. Where trading too big is not OK, you might blow up or get fired. Too small is not OK either; you need to seize the moment. Trading in fast markets is when the most money gets made, and the alpha traders and the cream of the crop rises.

Oil Market

With Jet fuel demand falling off a cliff and recessionary fears moving like a wrecking ball through the oil industry, oil prices continued their decent in the abyss overnight and are now on track for a greater than 25 % this week.

The coup de grace came quickly on the heels of President Trump’s restriction on travel from Europe obliterating the outlook for near term fuel demand.

Brent crude one-year forward structure has also bearishly moved into a super contango for the first time since 2015, which has effectively relegated Bulls back to the pen.

Gold Markets

The gold market was caught in the crossfires of forced liquidation but eventually found support around $1560 a line in the sand from the previous broad asset sell-off from February 28

Asia gold buyers are likely a bit shellshocked this morning, but there were reports overnight suggesting that there was good demand into strong hands (real money funds), which could provide a backstop or even assist with a bounce.

Sill the missing element is Asia physical gold demand as even after falling $140 in a week, XAUINR is only back to levels from March 3.

Gold seems to have embarked on what looks like a reasonably steady downtrend ever since breaching $1700. I expect gold to be dragged down not just by oil, but equities as well. But in an environment where both bad news and good is bad for gold, investors still need to heed caution.

Currency Markets

Australian Dollar

Given Australia’s key role in global supply chains, the Australian dollar was pummelled overnight as global recessionary fears triggered a meltdown in the commodity market. With global investors viewing the Australian dollar as being backed by little more than a credit bubble waiting to happen sitting atop and iron ore mine, the currency received one of its worst one-day dressing downs on record plummeting to a 17-year low.

What is even more troubling, the collapse in the oil market is making things worse. With oil producers now having to operate below fiscal and current account break evens, the Australia resource sector will remain under pressure as companies will need to draw down reserves to fund their ongoing financial obligations. There is nowhere to hide this one out.

USDMYR

In a repeat of yesterday, ASIAN FX morning view.

Lower for longer oil prices will continue to stress the Ringgit. With the who’s who of corporate America drawing down on their US dollar revolving credit lines, the Global funding squeeze will dissuade investors from adding EM Asia FX risk But with the global mad dash for USD triggering the ongoing exodus of foreign money from local equity and bond market, the Ringgit as will the rest of the Asia FX complex remain under pressure until at least the US market plumbing is fixed.

Markets May Need Help Getting to The Weekend.

Markets

Equities weaker again Wednesday, with the S&P500 closing 4.9% lower, taking back the gains seen. Weighing on sentiment, the WHO declared the coronavirus a pandemic, noting it is “deeply concerned” by the “spread and severity” of the virus, perhaps most troublingly, however, by the “alarming levels of inaction” in various countries. While the culprit which send the ball rolling downhill was a report of the US coronavirus cases topping 1000

The market is faced with two highly uncertain bearish shocks in the form of an unholy Covid19 economic catastrophe in Italy, and most of Europe, compounded by a dizzying oil price downdraft with the apparent outcome a sharp price sell-off across all assets. Indeed, nothing is immune from this insidious virus. Still, the market may not be yet pricing in a worst-case scenario from this double whammy risk beat down.

Vacationers and business travelers continue to cancel trips, and social distancing is suddenly a term in common usage. So needless to say, all eyes remain focused on travel bans around the globe. That said, everyone knows the number of reported cases in the US will skyrocket soon because proper testing has begun. Is it fully priced? I am not sure, but I doubt? However, there is an increasing probability that current containment measures in Italy might become a necessary way of life across much of Europe and regionally in the US too, which could swamp the US economy.

It feels like we’re doing little more than moving from one air pocket to the next while the less turbulent air in between is getting supported by the thought of fiscal input. This will eventually trigger an even more aggressive budgetary response globally, but time is of the essence.

The first order of business is that in the US, there needs to be comprehensive testing to arrive at a credible tally of cases, without which we have no way to quantify the effectiveness of the next point. That is, there needs to be a policy response, draconian or not, that is perceived as sufficient to stop the virus from spreading further and mitigate economic damage. Both could easily take another few weeks, if not months. The question is, can we stand another week let along another month in Covid19 purgatory with the markets on the precipice of a cliff edge.

It still feels like the COVID-19 / energy credit wallop hasn’t seen its worst deadfall yet as the public health crisis will most certainly mushroom in the US and should be at its worst in the next two to four weeks probably. Only then will the market see from the bottom and maybe start buying the dip.

STRESS STRESS STRESS

It sure looked like a spooky NY afternoon with fixed income and stocks both trading poorly as it seems like a fund or multiple funds are unwinding a huge risk parity bet or fund. Absolutely bizarre moves in break-evens, TIPS, etc. It has to be viewed as a stress singal and liquidity issue, I think.

Meanwhile, corporations are going to start drawing on credit lines en masse, which will probably put more pressure on the system in ways that are hard to quantify or forecast but certainly not in a good way. Yes, the ” sum of all fears” is coming to fruition.

*HILTON TO DRAW DOWN PART OF $1.75 BILLION LINE AS VIRUS SPREADS
*BOEING WILL DRAW DOWN $13.8 BILLION LOAN TO STOCKPILE CASH
*BLACKSTONE URGES ITS COMPANIES HURT BY VIRUS TO TAP CREDIT LINES

I started my trading career on what effectively was a repo desk, but I’m far for an expert on today’s market plumbing. Still, I do know that in general, when everyone calls on lines at the same time, that is not good and will stress an already stressful market.

As such, look for possible mad a dash for the dollars as US dollar funding concerns grow, which could put ASIA and EMFX under pressure.

I’m tossing aside my correlation calculator for the next 72 hours.

I’m revising everything again for an unprecedented 4th time in 4days.

Taking on board

  • the spread of the virus in the US (additional consumption pull-back and supply chain disruption across multiple countries)
  • the slow pace of normalization in China
  • the oil price collapse
  • chaos stateside when the virus case count explodes higher
  • a brewing liquidity squeeze

OIL markets

Sure an expected fiscal policy deluge is on the way. Still, the markets continue for the most part to run with the dominant narrative as news coming out of Saudi Arabia after last week’s meeting collapsed has been uniformly bearish for oil, which is getting reflected in the nearest time spreads, which are dropping more profoundly into a contango structure.

Adding to the downdraft OPEC now expects there will be no growth in global demand this year so producer the oil outlook is pretty dire

OPEC and Russia oil price war in a way that leaves no doubt started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years

Traders are trying to use the 2014-15 collapse as a blueprint. Still, today it’s worse as the prognosis for oil markets culminates with the significant breakdown in oil demand due to the coronavirus.

But the markets are finding a bit of support in Asia and a couple of reasons why. China’s case counts are dropping, and people are slowly coming back to work. But there’s also some noticeable price front running in early Asia as after President Xi Jinping’s visit to Wuhan; Traders are viewing this is a signal that the mother of all stimulus programs could be announced soon. My working theory has always been that fiscal stimulus will come after things get better in China because there is no point stimulating an economy when nobody is at work. With everyone back to work, the time is about right for the Beijing Bazooka.

As well China’s demand is recovering as Teapots are finally ramping up production in consort with the restrictions on transportation and travel.

Gold market

Extremely confused by the price action in gold, but looking at the straining cross asset price action where both stocks and bonds are trading poorly, it’s signaling a liquidity issue. To which I assume, as in similar fashion to sudden gold market sell-offs during the great GFC, funds are selling gold to raise cash.

Currency markets

Australian dollar 

The non-price-sensitive speculators in New York continue to pound the Australian dollar lower likely triggered by yesterday’s 3.5+ standard deviation drop on Australian equities as the energy resource sectors came under the cosh.

If you’re playing reversion trade on an anticipated China stimulus package trade lightly today and buy Aussie after the NY close if you are looking to layer in as the latest algo sellers in NY are price agnostic.

The Euro 

The ECB meeting is too complicated to analyze. There are so many moving parts. In a world where everyone is cutting at the same time, do rate cuts matter for the currency?

USDCNH

Possibly a dollar funding squeezes afoot.

USDMYR

Lower for longer oil prices will continue to stress the Ringgit and if the expected liquidity crunch unfolds in the US market with everyone tapping their credit lines at the same time and showing up to their ATM”s en masse look for USD funding squeeze to dissuade investors adding risk buying the Ringgit and could trigger an exodus from local equity and bond market s

USDKRW

Yesterday the KRW curve collapsed. There has been keen selling KWR interest from locals funding USD, and foreigners were selling local equities and custodians lose USD deposits, as well as USD demand for quarter-end funding, which has taken 1m lower in a panicky fashion.

 

Market Riding The Wave Of Fiscal Leadership 

Better market sentiment eventually won out in US equities overnight, the S&P500 closing almost 5% higher after a volatile session that saw the index in the red at one point, and after substantial recovery in oil prices. Oil prices are up ~10% over the past 24 hours after the historical declines were seen Monday. US 10Y treasury yields have also risen, up 25bps to 0.79%.

But with White House headlines driving the bus, this thing could flip on a dime as we’ve had many failures to communicate with this administration, fingers crossed they don’t mess this one up big time.

Expectations for a “major” fiscal stimulus package by the US government have underpinned sentiment – even if the volatility suggests the market still needs a bit of coaxing. Indeed, investors were in desperate need of leadership from policymakers’ Central banks can do their bit, but in times of viral cataclysm, it’s governments that must be seen as in charge of the proceedings. US President Trump’s actions evidenced how little it takes for markets to respond favorably.

In the early stages of a fiscal response, an expression of dogged determination to do by any means necessary can be a game-changer. In a later stage, however, discernment will be based on the quality and how rapidly the measures are rolled out.

Although there remains a lot of uncertainty and pessimism in the market, traders are flourishing in this environment as the big swing moves are a recipe for fast money to merry make given the linear smorgasbord of risk on/off trades available in the market.

Oil markets

Oil investors are taking comfort, and prices are finding support from the White House administration plans for economic stimulus and a slowdown of new COVID-19 cases in both China in Korea. The virus outbreak in China looks increasingly to have come under control, while the drop in case counts in Korea, the best proxy case study for investors, is providing a light at the end of the Covid19 tunnel. As Korea sees off the virus, markets will assume aggressive quarantining in countries with advanced medical care will follow suit.

The good news is that oil markets appear already to be pricing in the rapid return of Asia oil demand. While we should expect volatility that could even briefly punish oil into the upper $20/b range, with the fiscal taps expected to open wide on a global manner, oil prices could find support. They may even continue to claw back lost ground when those fiscal pumps actuate.

The overnight bounce also demonstrates there is already some awareness that markets may have been too quick to price in a worst-case supply scenario for oil.

The bad news is that there no end insight sight to Saudi Arabia and Russian squabbling. However, OPEC members have been quick to remind market participants that backroom channels remain open. But if both colossal oil-producing giants are determined to take this fight ” the championship distance, it will be bad news for oil bulls. Reports overnight that Saudi Arabia is committing to supply 12.3mb/d of crude in April (around 2.8mb/d above their current production level) suggests any prospect that relies on cooperation from Saudi seems unlikely in the near term. While other press reports suggest Rosneft could raise production by 300kb/d very quickly from 1 April, suggesting Russia is also digging in for the long haul

Falling an exogenous supply shock, I see two possible upside scenarios from here: 1) Russia and Saudi Arabia could resolve their differences, paving the way for a return of the OPEC+ agreement and coordinated supply cuts to support the oil price. 2) Saudi Arabia and the rest of OPEC could decide to go it alone and collectively do what they can to help oil prices.

Despite the sizeable crude build, as reported in the API survey, oil prices have held up as the White House continues to fortify the cracks with a mega stimulus package.

Gold Markets 

The once-in-a-generation supply/demand shock in oil has temporarily diverted cross-asset market maker’s attention away from gold. It feels like the broader commodity complex has bedewed the price action, but so far, deeper dips to $1640 are currently well supported. Negative real rates and the sticky nature of the gold buyer propensity could offer up a primary level of support. Still, it’s far from a one-way street amid newfound USD demand as confidence remains shattered after failing to take out $1700 when the gold stars were aligned. And gold could fall much more now if Covid19 case counts continue to fall in Asia and the incidents in Europe stabilizes, which could trigger a cheapening of the global yield curve (price decreased yield goes up) and green light risk sentiment.

I also expect more opportunistic producer hedging at these levels – interest remains out of South Africa remains heavy, which continues to cap upticks.

If you follow my blog, you know I’m a regular buyer of RCM one once bars, but with Bangkok awash with scrap given the XAUTHB elevated level I don’t leave home without my gold testing kit these days as I can buy scrap 96-99 % pure $ 50-100 below spot yesterday. This could be taking some physical demand away from the market given Asia is awash with scrap, and smelters are doing vibrant business these days while offering Jeweler demand at a discount to spot. Indeed, the essence of gold is all about the supply and demand curve.

Currency markets 

The US Dollar

Despite rising fears of a global recession and credit crisis spurred by bankruptcies in energy, tourism, airlines, and other industries, the trading equation is getting more complicated. Over the last 24 hours, we have had a ton of policymaker noise.

President Trump’s seeming denial of the coronavirus crisis has unquestionably been a significant factor driving flows over recent weeks. Investors started to price in ever worse pandemic outcomes; the longer a credible response was absent. The ultimate game-changer came about on Monday, when the first indications that the White House might change tack, and immediately markets responded positively. Trump said that on Tuesday afternoon, he would announce ‘very dramatic’ actions to support the economy with ‘major’ steps to get ‘very substantial relief’ for businesses and individuals. It’s great for the USD when the President has the US  markets back

The Euro

The Euro fall is not merely a position reduction move ahead of the ECB, although that notion provided to be an extremely timely inflection for those that cut on the EURUSD surge to 1.1470-1.500 (my target zone entering the week). The move higher in EURUSD was all about the Fed cutting rates, likely down to zero, possibly as soon as next week, with the ECB unable to match the moves. Because monetary policy cannot backstop a coronavirus-driven economic hit, equity and fixed income markets panicked regardless. Once fiscal policy measures are being taken, they will become a driver of relative market performance. With the White House administration leading by example, US exceptionalism will without any time. As long as the European policy response remains underwhelming, EURUSD might not move much beyond 1.1500.

The Japanese Yen

Equity futures are a fair bit off the lows, and USDJPY has moved above 105 as a consequence of risk turning on. And while the critical risk marker has been subject to express elevator rides in both directions. The thought of fiscal by the US and Japan in a coordinated fashion does hint that the US treasury is willing to overlook a Tokyo policy influenced marginal cheapening in the Yen for the betterment of global trade and investor sentiment.

The Ringgit

Trades will take some comfort in the White House fiscal policy inspired rebound in the commodity markets that see oil prices claw back a chunk of the Monday losses. The problem for trading ASIA FX is how will lower US interest, but weaker growth in China impact currency sentiment. So, we could be back to growth vs. differentials. In my model, the three-month growth outlooks win out every time with global interest rates, so low m high yielder strategies aside.

In stock markets flow the Asia to big to miss optimism continues to resonate to a degree amid the genesis of rapidly falling regional rates, and the prospect of a stable and even more robust RMB does flicker the green light on ASIA FX pullbacks. However, growth risks suggest that chasing a local currency rally is but a mug’s game until the economic data definitively pivots.

With the market in a dollar buying from of mind, there will be some spots to pick on a pullback to 6.97 USDCNH while currency Ringgit leaves look attractive if you think the Oil market rebound will stick as the Ringgit could be a stable beta to oil trade in the making.

 Monetary Policy Is No Match For The Tip of The Covid 19 Iceberg Scenario.

Wednesday’s ‘Biden bump’ has been short-lived, with the S&P500 down 4% heading into the close, waxing and waning in negative territory throughout the session as investors fret over Covid19 tip of the iceberg scenario.

Investors are starting to price in worst-case scenarios anticipating that the spread of this virus will grow through Europe and the US and are now accelerating their hedging game plans for the eventuality of the Eurozone falling into recession and the US economy stagnating in the first half of the year.

With no material developments around the virus itself overnight, assessments of the economic costs look to have weighed on sentiment as the reality set in that significant chunk of global GDP is set to go up in flames.

One of the more damning reports that came from the International Air Transport Association signaling the industry was in a ‘crisis zone’ on the collapse in passenger demand, with the potential for losses in industry revenue between $63 and $113 bn in 2020. And as more of these profit warning reality checks roll in, all hopes continue to fly out the window.

Oil markets

OPEC is recommending the existing cut agreement be extended through 2020, with an additional 1.5mb/d cut implemented by the end of June, split 1mb/d OPEC and 0.5mb/d non-OPEC. Assuming Russia signs up, this should stop the oil market carnage — until the next piece of bad news about the spread of Covid-19.

The headline reduction is bullish vs. expectations (~800kb/d cut), but oil prices have given up gains that initially followed the OPEC news because of uncertainty on Russian willingness to commit to a pro-rata share that would be bigger than anything they have contributed so far (the bulk of the incremental 500kb/d cut would have to be from Russia).

No specifics yet, but I’d estimate a Russian cut would have to be about 350-400kb/d, against the existing commitment of 300kb/d (which they struggled to meet and maintain).

Even a smaller Russian cut would mean a more substantial reduction than I think consensus expected, but the optics of a disagreement with Russia will mute any bullish impact.

The OPEC+ meeting on Friday will involve Russia and other non-OPEC participants in the current agreement. I’d expect Russia to fall into line as we always seem to be dancing to a broken record when doing Saudi Arabia and Russian compliance tango during OPEC meetings.

Assuming the deal goes through below is a rehash of yesterday’s daily evolving market views. 

  •  OPEC+ -inspired dead-cat bounce is fully priced into the cake within a $ 2 -3-dollar margin of error (assuming 47-48-dollar level), which in oil markets volatility terms these days is a drop in the barrel referring to the margin of error

 

  • The enormous glaring issue is that while cuts will help normalize oil demand and inventories later this year, they can’t prevent an already started considerable oil inventory accumulation in both the US and China.

 

  • The expected OPEC+ cut of 1.5 mb/d helps but doesn’t overcome the revised -2.1 mb/d expected global demand loss in 1H alone. So, the inventory overhang, let alone the super spreader fear screams sell the OPEC bounce without hesitation.

 

  • There a common theme growing among oil trader that it seems that whatever cut is agreed/implemented, Russia will likely under-deliver on the quota, Saudi will over-deliver, and none of it will matter if bad news about the spread of the coronavirus keeps coming. Near term, oil prices will jump if a cut of more than 1mb/d is agreed, though. But it could prove fleeting and faders delight, especially if WTI fails to break $50.00 on any compliance agreement.

 

  • Unless OPEC over-delivers, the market is bound to be disappointed given the prevailing view that anything short of 1mb/d cut, oil is going to resume its downtrend amid demand concerns as a result of the coronavirus.

Assuming a breakdown in the deal,

WTI fall to $40 where then it could find some support a level that could downsize US drilling activity significantly from a break-even scenario

Gold markets

Gold looks like one of the most attractive assets in this global environment. With US rates likely heading towards the “zero lower bound.” This should mean that both retail and institutional investors, portfolio allocations in gold will rise exponentially.

The 50bp Fed cut gave gold a significant boost as US yield plummeted, which has continued to contribute to a surge in ‘fear-driven’ investment demand for gold.

Positive momentum is in XAUUSD favors a test of $1690-$1700 and possibly higher on another aggressive round of stimulus by central banks worldwide. With the market now pricing in more rate cuts around the globe and the JPY -XAU correlation re-established where Yen safe-haven bid is accelerating tangentially to the Covid19 outbreak spread. So, with the weaker dollar narrative kicking in, gold could easily moon shot significantly higher as the stars align for Gold investors this week.

Currency Markets

The Yen

Th BoJ is out of credible monetary options as such USDJPY downside is attractive both from a front-end rate differentials perspective vs. the US and on the potential for a safe-haven bid as risk aversion accelerates tangentially to the Covid19 outbreak spread.

The linear correlation of risk-off driven by both the demand fear and actual economic cost of the virus will continue to drive flows into the Yen. Still, as we approach 105.50(possibly the BoJ line in the sand), the more likely we should expect a Bank of Japan intervention response. But with few traditional bullets left in their arsenal, any form of overt intervention may to little more than offer trader with better levels to buy the Yen.

The Euro

With the Euro and JPY and trading very much on a simmer differential to the US tangent but for the Euro bears the position overhang from discretionary traders. Those fast money types who were in at the lows (<1.09-1.10) have been reducing from a max short position that was hit eight weeks ago, and there are still more to go.

It seems pretty clear that we have transitioned to a new playbook for EURUSD, where it’s not just the US equity and the TINA effect inflows driving the dollar up day in day out. Rates seem do seem to matter again. EURUSD was divorced from interest rate differential for ages as the nominal US rate advantage remained huge versus the rest of the G-10 world, while at the same time, tech inflows and Eurobond issuance created an insatiable demand for dollars.

But all that US exceptionalism stopped on a dime when the Covid 19 showed up on the doorstep of the US market.

While there are a few ways to slice and dice the rate differential story on the EUR vs. USD, But with EURUSD vols looking to move higher, the Euro loses its funder appeal. The one-year forward to vol carry ratio is working against the short Euro now, and that critical ratio was the prime reason for The Big Euro Short (EUR)

The Malaysian Ringgit

Global risk aversion and lower oil price on the back Russia failing to commit to OPEC compliance will take the shine off the Ringgit newfound luster today as Covid19 fear continues to sweep the world.

But with AsiaFX possibly replacing the USD as now being viewed as the cleanest dirty shirt in the global currency basket. But I personally don’t agree with this view as much of the positive Asian sentiment is getting beta driven by the Fed cut and USD weakness, the real bullish alpha exercise would be predicated on improving tourism and regional supply chain trend. So not overly keen to chase positive moves in Asia FX until signs of a data pivot which then will drive the alpha

In other words, I don’t think its a good idea to chase the rally in Asia FX until the economic data pivots and for tourism sensitive currencies (THB, SGD, and MYR), until there are signs of the travel alerts getting lifted.

What I’m reading today 

Wall Street Traders Are Tethered to the Desk with Virus Arriving

• “After spending years enhancing trading desks with cutting-edge analytics, fast access to outside venues and layers of surveillance, banks are finding it’s hard to relocate their human operators, even in the face of the deadly coronavirus. With the illness now reaching New York, firms are trying to figure out what to do with armies of employees who can’t simply log in from a laptop at home.”

 

A Central Bank Policy Panacea Boost Risk Sentiment

The significant action overnight was in the US stock market’s which retraced all of yesterday’s losses and some. The S&P 500 ended up more than 4% for the session after the house swiftly agreed on a bipartisan spending package that should encourage other G-7 policy markers to follow suit as a sense of urgency grips capitol hill.

But the big kahuna comes from the IMF after they unveiled a $50bn package of emergency financing for countries harmed by the coronavirus. While the IMF is usually viewed as a lender of last resort but being one of the first out of the gate with policy action will go a long way to set president, and we should expect more G-7 policymakers to follow in lockstep.

Indeed, investors are bullishly anticipating additional coordinated policy action from central banks and more significant budget spending from G-7 governments to support the global economy.

And joining the chorus of Central Banks in the race to the LZB, the Bank of Canada surpassed the market expectation by dropping the key overnight lending rate by 50 basis points and hinted that more cuts could be on the way.

Investors’ working framework remains consistent, suggesting that a shift to easy money policies will counteract market drawdowns by tempering spikes in the volatility index.

The Fed’s Beige Book report emphasized the widespread virus concerns; still, economic data again showed the US economy was healthy after February ISM non-manufacturing gauge jumped to a one-year high coming in well above market expectations.

For the moment, coronavirus concerns appear to have been supplanted at the top of newsreel by a refreshingly strong showing by the centrist democratic candidate and Former Vice President Biden. His victory could buoy risk markets as he is a candidate that markets find palatable, especially when compared with Sanders and his revolutionary rhetoric.

In case there was any doubt about global coordination after Fed Chair Powell on Tuesday when he said every central bank would make decisions in their context. The Bank of Canada on Wednesday said: “The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities.” Suggesting the central bank policy deluge is much more coordinated than Chair Powell has led on initially

Oil prices 

Crude prices continued to vacillate on OPEC concerns while the market was seemingly unsure what to make of the deluge of central bank easing but quickly gave back those gains as the market pondered what the implications and the severity of COVID-19’s impact on the economy would be.

The economic impact of the coronavirus has always been about fear of the virus. Fear is an economic problem. (Twitter is a super-spreader). We know central banks cannot directly reverse consumer anxiety.

Prices could find some support from better risk sentiment and the ongoing hope from the OPEC+ meeting taking place today and on Friday. But the market was disappointed by the apparent lack of urgency after Wednesday’s meeting ended without and agreement on a production compliance compromise. The clock is ticking, and time is of the essence, and as far as the market is concerned, what is essential is that OPEC+ presents a unified front and shows the group is capable of action.

Unless OPEC over-delivers, the market is bound to be disappointed given the prevailing view that anything short of 1mb/d cut, oil is going to resume its downtrend amid demand concerns as a result of the coronavirus. Hence the reason why Saudi Arabia is pushing for 1.5mb/d compliance commitment.

Behind the scenes, there seems to be building consensus that the OPEC+ -inspired dead-cat bounce getting close to being perfectly priced – and oil prices will fall unless OPEC + agree to 1.5 mb/d and

Gold markets

Over the past 48 hours, gold has received support, in line with the decline in long-term bond yields, which has contributed to a surge in ‘fear-driven’ investment demand for gold. 

The economic impact of the virus has always been about far. Fear changes consumer behavior, to what extent we don’t know. But what made gold a lot cheaper to own is that fear reached the Federal Reserve Board room and forced a rate cut.

And while it’s encouraging that the XAU and JPY correlation are getting re-established this week, which could signal healthier gold prices going forward, especially if risk sentiment continues to wobble. But with US election risk receding in a Biden bounce, the S&P 500 recovering above 3100, and the USD dollar not capitulating as fast as expected, demand has petered out as both the US election risk and weaker stock market were providing robust support channels for gold.

However, the market is starving for the information again. Still, the lack thereof, investors are easily influenced by the dominant narrative in the popular media fear frenzy cycle, which is suitable for gold prices as fear is the equity markets unwinder of risk.

Gold is an excellent hedge against stock market risk, and the inflationary aspect of war (recall the recent Iran escalation which saw gold moonshot). The yellow metal, however, doesn’t hedge deflationary wallops from epidemics. Hence the short-term price cap at $1650/oz despite the glaringly bullish correlations. (Risk-free bond yields and USDJPY)

But ultimately, all the reasons you what to have gold in your portfolio from and insurance perspective remain abundantly clear despite the constant market tango between fiscal and monetary stimulus. And gold remains the ultimate market “beast of burden “during uncertain times

Currency markets 

With every central bank cutting interest rates, it has effectively sapped the volatility juice from the currency market, but this might only be a short-term condition given the Fed has much more room to cut that other G-7 central banks.

Australian Dollar 

The Asian currencies that were pounded mercilessly in February are rebounding after a coordinated series of central bank interest rate cuts, and the story in China improving relative to the rest of the world. Improving economic conditions in Asia is great for the Australian dollar, which should continue to hitch a ride on the Asian basket coat tails.

With China’s industrial engines starting to rev up, it should stoke demand for iron ore. Nothing comes close to iron ore. Which is Australia’s biggest export easily, accounting for 4% of GDP, and 80% of it goes to China.

The Malaysian Ringgit

The risk smile is improving in the region thanks to G-7 leaders around the world who have committed to supplying markets with the mother of all stimulus packages.

But it looks like Malaysia will remain in a bit of political vacuum as the new prime minister Muhyiddin Yassin has postponed the start of the parliamentary session initially scheduled for March 9 by two months, in an attempt to ward off a vote of no confidence. And the rise in political noise tends to overshadow more near-term positive factors like Asia’s key bellwether currency barometer, the USDCNH. The Yuan the Yuan so is trading stably stronger (the key is stable) after the Fed rate cut and as the market positions for a China industrial reboot.

But with the regional data still dreary is still far too early to green light risk but it’s hare to argue that we’re not in a much better spot than expected after the markets quickly sidestepped the dreary China PMI deluge that’s to the central bank’s policy pump

The Euro 

The Euro is struggling for direction at the moment in the face of an imminent ECB rate cut and more robust than expected US economic data. But fiscal will be the big kahuna for the long EURUSD trade, and with the FED more likely to cut again and the ECB limited in scope, USD should weaken on relative terms.

While there are a few ways to slice and dice the rate differential story on the EUR vs. USD, But with EURUSD vols looking to move higher, the Euro loses its funder appeal. The one-year forward to vol carry ratio is working against the short Euro now, and that critical ratio was the prime reason for The Big Euro Short (EUR)

With the ECB about to cut rates, possibly creating a better buying opportunity, rather than chasing it higher real money is probably waiting to buy the Euro on an ECB inspired dip.

I would expect to see a similar game plan play out across the board as other central banks join the rate cut peloton, but the play here is ultimately for a weaker USD to carry the day since the Fed has further to fall in the race to zero.

Who’s next on the game plan

  •  RBNZ and Bank of England both look like decent candidates though 50 from the RBNZ looks more achievable than 50 from the Bank of England given the higher starting rate (1% vs. 0.75%) But the consensus view is a call of 50
  •  ECB, SNB, and BOJ need to get creative if they want to join the party. If USDJPY is 105.50 next week, the BOJ might find creative inspiration from that!
  • The RBA will be doing QE this year if this continues. Get your AGBs before they sell out.

 

Coordinated Policy In An Uncoordinated World 

The Fed and the market reaction

The Fed pulls forward what consensus had expected to happen in two weeks. After the initial bounce in the SP 500, there has been no significant bullish follow through in stock market flow. Existing sell orders did not get pulled, and more selling orders are getting added to the stack. As it appears discretionary traders were looking to sell on the algo spike to SPX 3120-25.

Value tried to run briefly on the Fed cut but struggled to make much ground in the absence of a fiscal pulse, and which continues to point to a mild disappointment trade from the G-7 event. Fear is the economic problem, and Twitter is the super spreader. We know central banks cannot directly reverse that, nor can they force people into shopping malls or onto planes.

The debate will rage on about the merit of the rate cut to which the markets are much divided. But from my perspective, the swift and decisive move was a necessary measure to support the equity markets which were entering a death spiral and demanded an urgent response.

In that regard, the Fed leadership was commendable, but a considerable level of caution still needs to be exercised.

Will rate cuts boost the service economy and get people back on airplanes and cruise ships into St. Mark’s Square? NO!!

The FOMC cut is a necessary stop-gap to buy G-7 more time to quantify the supply chain carnage and calibrate the appropriate fiscal measures.

But the clock is ticking.

Cutting at this time is a questionable use of limited ammunition. Without G-7 fiscal cannons firing, a rate cut alone is not going to solve supply chain issues or get people back on planes. The psychological benefits and positive asset price impacts of rate cuts right now may also be fleeting, especially as the market gets swamped yet again by more negative real-life headlines about new cases.

But after all, was said and done, I think we just bore witness to policy coordination in a most uncoordinated fashion, a sign of the times??

Oil markets

After the Fed cut interest rates, Oil markets, for the most part, remain stable. But in the absence of a definitive OPEC compliance strategy, oil policy remains mostly uncoordinated.

WTI and Brent prices, for the time being, have stabilized. Still, without the fiscal pump, planes, trains, and automobile demand for all things oil remain low, suggesting physical oil demand will remain tepid until the virus ebbs and the fiscally driven industrial pumps can take effect.

Lukoil VP Leonid Fedun said that OPEC+ could cut output by more than 1mb/d, including 200-300kb/d from Russia boosted sentiment, I guess the big question is how much of the heavy lifting can OPEC+ realistically be expected to do.

Oil should remain supported, but at this stage, the key is that OPEC+ presents a unified front and shows the group is capable of action. With the ultimate impact of the coronavirus unknown, getting the number precisely right will be impossible, suggesting covering all basis OPEC will need to deliver a bigger is a better production cut. Failure to agree on a cut will be a disaster as it would signal division in the ranks.

The meeting later this week should be a positive catalyst for oil and with oil near the bottom from a WTI breakeven scenario and closer to the bottom of a rational range for this year than it is to the top. However, a sustained move higher is unlikely until there is definitive evidence that the spread of the virus has slowed.

Gold markets

The deflationary aspects in a coronavirus world had weighed down golds appeal. But the yellow metal received an immediate fillip after FOMC chose not to wait until the upcoming March policy meeting to deliver monetary easing. Give the Feds sense of urgency it is clear that the domestic spread of the coronavirus in the US was one of the factors that contributed to the FOMC’s decision which is super bullish for gold.

So, where do we go from here? Well, it looks like we should expect monetary policy to “wax on wax on” as the race for the yellow jersey in the rate cut peloton to the LZB has only started, which could trigger a sense of buying urgency around the globe until the Fiscal taps turn on.

Who’s next?

  • The Bank of Canada has the most room to cut, by far. They are almost sure to cut 50 tomorrow, I think.
  •  RBNZ and Bank of England both look like decent candidates though 50 from the RBNZ looks more achievable than 50 from the Bank of England given the higher starting rate (1% vs. 0.75%)
  •  ECB, SNB, and BOJ need to get creative if they want to join the party. If USDJPY is 105.50 tonight, the BOJ might find creative inspiration from that!
  • The RBA will be doing QE this year if this continues. Get your AGBs before they sell out.

Currency Market

The Australian Dollar 

 AUDUSD traded well after the RBA cut, and I still like it higher, as described in my market note yesterday (Trade of the day). And while I’m bullish for both the EURUSD and AUDUSD to go much higher but waiting for a global fiscal policy coordinated effort could turn into the “Waiting for Godot” trade of the century.

But given my central premise of long Asia and long Aussie trade was the combination of China back to work and the 50 bp Fed cut, dips should look attractive after the machine cut longs at 6625 AUDUSD overnight. But the eureka moment for the Aussie and probably Asia FX to explode higher is the fiscal pump, which is far more complicated to deliver and not as simple as pulling a rate cut lever. Indeed, its a lot easier for people like my self to write about doing away with Black Zero, but its certainly a lot trickier for policymakers to expand an EU budget that is already swelling to 170 billion Euro, not to mention the squabbling amid 27 unique economies which all want Germany and France to do 99.9 % of the heavy lifting.

With 66 levels breached on the Aussie, the focus needs to shift to not only the fact that the Aussie spot position remains mega short but also to the fact that longer-term Australian investors hold a significant and increasingly unhedged foreign currency position. To that end, I suspect on a break of 67, and it could trigger a rush to hedge forward, which could woosh the spot Aussie even higher.

The Euro 

Similarly, on the Euro, while real money positions have shifted long over the past five weeks, the macro discretionary traders are still very much short. However, based on volume metrics, it appears the discretionary traders reduced about 1/4 to 1/3 of those short from max short position eight weeks ago. But of the two open positions, macro discretionary is the important one to watch as that is a fast money element in the markets, and they will have the most significant influence over short term positions. While trying to calculate the tipping point precisely, all roads lead to 1.1250 from a technical perspective and could be an essential level to watch on the charts for the shorts to trigger buy and reverse strategies.

The Ringgit

The Ringgit should trade favorable today after the Fed rate cut, which should see the post BNM rate duration bond flows into MGS extend.

Asia key bellwether currency barometer, USDCNH, sees the Yuan trading much stronger after the Fed rate cut amid market positioning for a China industrial reboot. What’s more challenging to calibrate flows as the stock market out streams has seemingly been offset by inbound bond flows as risk parity seems to be the name of the game these days.

Oil is trading more favorable, which will not hurt the Ringgit appeal, and neither will the China reboot.

I suspect the next significant regional bounce will come when travel alerts and such restrictions are lifted. But with the fear of secondary outbreaks still lingering, that might a long way off despite the Asia contagion rates stabilizing.