Dollar Climbs as Evergrande Uncertainty Percolates

China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million and leaving investors questioning whether it will make the payment before a 30-day grace period expires. A collapse of the company could create systemic risks to China’s financial system.

The safe-haven dollar had its biggest one-day percentage drop in about a month on Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment.

The offshore Chinese yuan weakened versus the greenback at 6.4641 per dollar.

The decline came a day after the greenback was lifted by Wednesday’s announcement from the U.S. Federal Reserve that it will likely begin to trim its monthly bond purchases as soon as November and flagged interest rate increases may follow suit sooner than expected as the central bank moves away from its pandemic crisis policies.

“We are in one of the situations, and this doesn’t always happen, where the dollar is the beneficiary of multiple ideas,” said Joseph Trevisani, senior analyst at

“The U.S. economy does look better than most of its competitors, there is lingering fear out there over Evergrande and what else is out there in the rather untransparent Chinese economy and political system, plus the Fed appears finally ready.”

The dollar index rose 0.237%, with the euro down 0.2% to $1.1713.

Kansas City Fed President Esther George said the U.S. labor market has already met the central bank’s test to pare its monthly bond purchases, and the discussion should now turn to how its massive bondholding could complicate the decision on when to hike rates.

Cleveland Fed President Loretta Mester echoed the sentiment for a tapering this year, and said the central bank could start raising rates by the end of next year should the job market continue to improve as expected.

In prepared remarks in a listening session with a wide swath of economic players, Fed Chair Jerome Powell did not elaborate on his own economic or monetary policy outlook, which he had outlined at the close of the two-day Fed meeting on Wednesday.

Sterling weakened a day after hawkish comments from the Bank of England on Thursday pushed the pound to its biggest one-day percentage gain since Aug. 23.

The Japanese yen weakened 0.43% versus the greenback at 110.77 per dollar, while Sterling was last trading at $1.3666, down 0.36% on the day.

Cryptocurrencies slumped after China’s most powerful regulators increased the country’s crackdown on the digital assets, with a blanket ban on all crypto transactions and crypto mining.

Bitcoin, the world’s largest cryptocurrency, last fell 5.89% to $42,256.47.

Smaller coins, which generally move in tandem with bitcoin, also dropped. Ether last fell 8.08% to $2,899.10 while XRP last fell 7.2889413% to $0.93.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Dan Grebler and Sonya Hepinstall)

Evergrande Misses Payment Deadline, EV Unit Warns of Cash Crunch

Evergrande owes $305 billion, has run short of cash and investors are worried a collapse could pose systemic risks to China’s financial system and reverberate around the world.

The company missed a payment deadline on a dollar bond this week and its silence on the matter has left global investors wondering if they will have to swallow large losses when a 30-day grace period ends.

China Evergrande New Energy Vehicle Group, meanwhile, said without a strategic investment or the sale of assets its ability to pay staff and suppliers and mass produce vehicles would be hit.

Evergrande’s silence on this week’s $83.5 million interest payment contrasts with its treatment of its domestic investors.

On Wednesday, Evergrande’s main property business in China said it had privately negotiated with onshore bondholders to settle a separate coupon payment on a yuan-denominated bond.

“This is part of the tactics of any sovereign-driven restructuring process – keeping people in the dark or guessing,” said Karl Clowry, a partner at Addleshaw Goddard in London.

“The view from Beijing is offshore bondholders are largely Western institutions and so can justifiably be given different treatment. I think people think it’s still a falling knife.”

China’s central bank again injected cash into the banking system on Friday, seen as a signal of support for markets. But authorities have been silent on Evergrande’s predicament and China’s state media has offered no clues on a rescue package.

“These are periods of eerie silence as no one wants to take massive risks at this stage,” said Howe Chung Wan, head of Asia fixed income at Principal Global Investors in Singapore.

“There’s no precedent to this at the size of Evergrande … we have to see in the next ten days or so, before China goes into holiday, how this is going to play out.”

Evergrande is expected to be one of the largest-ever restructurings in China and hopes are not high for a swift resolution.

The liabilities of China’s HNA group pale in comparison but its insolvency is still ongoing, with creditors seeking $187 billion, according to a source familiar the talks. On Friday, police seized both the HNA chairman and its CEO.

So far, there have been few signs of stress in money and credit markets as well as other areas that would signal that the crisis was spreading beyond China.


Evergrande appointed financial advisers and warned of default last week and world markets fell heavily on Monday amid fears of contagion, though they have since stabilised.

The conundrum for China’s leaders is how to impose financial discipline without fuelling social unrest, since an Evergrande collapse could crush a property market which accounts for 40% of Chinese household wealth.

Protests by disgruntled suppliers, home buyers and investors last week illustrated discontent that could spiral in the event a default sparks crises at other developers.

China’s fragmented property market is showing some signs of strain, which could spur a wave of consolidation among real estate companies.

Capital Economics’ senior China economist, Julian Evans-Pritchard, said Evergrande’s crisis had had a much bigger impact on housing demand than he had anticipated, and households had turned much more cautious, triggering a drop in prices.

“I think Evergrande is going to have real issues. I don’t think the interest payment is going to be made,” Marc Lasry, CEO of Avenue Capital Group, said on CNBC Friday. Lasry said he had sold Evergrande’s bonds.

Global markets on Friday seemed rattled by the missed payment and regulatory silence.


Some $20 billion of Evergrande’s debts are owed offshore while at home there are risks for China’s property sector and its liabilities spread across bank balance sheets and beyond.

There have been few signs of official intervention. The People’s Bank of China’s 270 billion yuan ($42 billion) cash injection this week is the largest weekly sum since January and has helped put a floor under stocks.

Bloomberg Law also reported that regulators had asked Evergrande to avoid a near-term default, citing unnamed people familiar with the matter.

The Wall Street Journal said, citing unnamed officials, that authorities had asked local governments to prepare for Evergrande’s downfall and distress is already evident among Evergrande’s peers.

Some banks, insurers and shadow banks have begun checks on their exposure to the troubled sector.

“We are concerned about the spillovers into the real economy and broader credit conditions,” said analysts at Societe Generale in a note. “The longer policymakers wait before acting, the higher the hard-landing risk.”

Analysts at BoFA Global Research, however, are among those who believe Chinese officials will be able to contain any Evergrande fallout.

“China has both the will and the tools to ring-fence a property crisis. Allowing the crisis to continue to escalate could threaten the key goal of social stability,” they said in a recent report.

Evergrande’s shares fell about 13% on Friday, while stock of its electric-vehicle unit dropped 20% to a four-year low. Its bonds fell slightly and its offshore bonds with imminent payments due last sat around 30 cents on the dollar and were thinly traded.

“It is clear now that Evergrande will make use of the 30-day grace period, to see if there is any further development or instructions from the government,” said Jackson Chan, assistant manager of fixed income research at research portal Bondsupermart.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 6.4589 Chinese yuan renminbi)

(Reporting by Anshuman Daga and Tom Westbrook in Singapore, Andrew Galbraith in Shanghai and Kirstin Ridley in London. Additional reporting by Clare Jim in Hong Kong. Writing by Tom Westbrook; Editing by Jane Merriman, Jason Neely and Nick Zieminski)

Dollar Slumps as Risk Appetite Rebounds

Investors’ risk appetite improved after Beijing injected fresh cash into its financial system ahead of an $83.5 million bond coupon by embattled property giant Evergrande, at risk of becoming one of the world’s largest-ever corporate defaults.

Worries about Evergrande’s payment obligations and what systemic risks to China’s financial system the property giant’s difficulties pose have weighed on global financial risk sentiment in recent sessions.

“Commodity currencies are broadly higher while havens are weaker, leaving the USD trading generally lower after a firm close following the FOMC (Federal Open Market Committee),” Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

The U.S. Dollar Currency Index, which measures the greenback against a basket of six rivals, was 0.5% lower at 93.037. The index, which had risen 0.25% on Wednesday, was on pace for its biggest daily percentage drop in a month but remains close to the near 10-month high touched in late August.

The offshore Chinese yuan strengthened versus the greenback at 6.4599 per dollar.

The dollar found little support from data that showed the number of Americans filing new claims for jobless benefits unexpectedly rose last week amid a surge in California.

Thursday’s improved mood boosted risk-sensitive commodity currencies, with the Australian dollar rising 0.9% and the New Zealand dollar up 1.0%.

The improved risk-appetite was reflected in Wall Street’s major equity indexes, with the S&P 500 on track for a gain of more than 1% and its largest two-day percentage gain since late July.

On Wednesday, the Federal Reserve said it will likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may follow more quickly than expected.

While positive for the dollar, the boost from the Fed’s announcement was undercut by hawkish messages from several central banks in Europe, and as Norway became the first developed nation to raise rates.

Norway’s crown jumped to a 3-1/2 month high versus the euro on Thursday after the central bank raised its benchmark interest rate and said more hikes will follow in the coming months.

Sterling extended its rise on Thursday after the Bank of England said two of its policymakers had voted for an early end to pandemic-era government bond buying and markets brought forward their expectations for an interest rate rise to March.

In emerging markets, the Turkish lira plummeted to a record low after a surprise interest rate cut of 100 basis points to 18% that came despite inflation hitting 19.25% last month

Meanwhile, bitcoin extended its recovery from a sharp fall earlier this week, rising 2.42% to a 3-day high of $44,642.78.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Saqib Iqbal Ahmed and Chuck Mikolajczak; Additional reporting Sujata Rao and Saikat Chatterjee in London and Tom Westbrook in Singapore; Editing by Bernadette Baum, Will Dunham and Hugh Lawson)

Fed Signals Bond-Buying Taper Coming ‘soon,’ Rate Hike in 2022

The moves, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

That action may proceed slowly, with interest rates seen rising to 1% in 2023, faster than projected by the Fed in its projections in June, and then to 1.8% in 2024, which would still be considered a loose monetary policy stance.

Inflation throughout that time would be allowed to run slightly above the Fed’s 2% target, consistent with its new, more tolerant approach to the pace of price increases, while unemployment is seen falling back to around the pre-pandemic level of 3.5%. Policymakers also downgraded their expectations for economic growth this year, with gross domestic product expected to grow 5.9% compared to the 7.0% projected in June.

Still, the shift shows movement among policymakers divided over whether the coronavirus pandemic’s ongoing impact on the economy or the threat of breakout inflation constitutes the bigger risk.

While no decisions have been made on the exact pace and timing of how the central bank will reduce its asset purchases, Fed Chair Jerome Powell said it seems “appropriate” that the taper could begin “soon” and be completed by the middle of 2022.

“Participants generally view that as long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” he said in a news conference after the end of the Fed’s latest two-day policy meeting.

Powell told reporters financial conditions would remain accommodative even after the Fed stops purchasing Treasuries and mortgage-backed securities and emphasized that the decision on the bond-buying program was separate from any actions regarding interest rates.

The Fed on Wednesday held its current target interest rate steady in a range of 0% to 0.25%.

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur,” said Sam Stovall, chief investment strategist for CFRA Research in New York. “You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

U.S. stocks extended gains after the release of the statement before retreating slightly during Powell’s news conference, with the S&P 500 index up 1.2% on the day. The dollar rose while the yield on the U.S. 10-year Treasury note edged lower.


Though acknowledging the new surge of the pandemic had slowed the recovery of some parts of the economy, overall indicators “have continued to strengthen,” the central bank’s policy-setting Federal Open Market Committee said in its unanimous policy statement.

If that progress continues “broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” it said.

The statement had been widely expected to signal that the Fed would soon begin winding down the $120 billion in monthly bond purchases it has been making to blunt the economic impact of the pandemic.

Fed officials said last December that they would continue purchasing bonds at the current pace until there was “substantial further progress” on the central bank’s goals for maximum employment and inflation.

Powell on Wednesday said officials could decide as soon as the next policy meeting in November that both of those standards have been met, based on what happens with the labor market and the broader economy, and make a decision on whether to taper.

But it was in their broader economic outlook that Fed policymakers made a less anticipated change.

The outlook for inflation jumped 0.8 percentage point for 2021 and the unemployment rate seen at the end of this year rose. In turn, two officials brought forward into 2022 their projected timeline for slightly lifting the Fed’s benchmark overnight interest rate from the current level, enough to raise the median projection to 0.3% for next year.

The move to lower GDP growth expectations for 2021 reflected concerns that the coronavirus is weighing on the economy.

“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery,” the Fed said in its policy statement.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Howard Schneider; Additional reporting by Jonnelle Marte and U.S. Finance and Markets Breaking News teamEditing by Paul Simao)

FOMC Teases Start of Taper “soon”

The actions, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

The current target interest rate was held steady in a range of 0% to 0.25%.

In a press conference after the statement Fed Chair Jerome Powell elaborated that if the economy continues to improve the FOMC could easily move ahead with tapering at the next meeting in November. The bar for lifting rates from zero is much higher than for tapering, he said.

STOCKS: The S&P 500 briefly extended a rally and was last unchanged from before the statement up 0.95%

BONDS: The 10-year U.S. Treasury note yield seesawed and was last up at 1.3226% and the 2-year yield firmed to 0.2342%

FOREX: The dollar index turned 0.2% firmer



“There are some notable takeaways. The divergence of views within the committee is interesting. We’re seeing a 50-50 split in terms of rate hikes in 2022. There’s just a big divergence of opinions on rate hikes and even further into 2023, a big range of potential Fed Fund target rates.

“The Fed did talk about potentially moderating its asset purchases soon, that’s setting up the committee to announce tapering in November, with a decision to actually taper coming in December. The Fed has made progress in that taper timeline and we think that will likely take place this year.”

“The other takeaways were the adjustments to the summary of economic projections. Inflation expectations have move higher for a touch longer than they originally thought, and then those growth expectations have come down a touch as well.”


“Very mixed signals from the Fed, resulting in the dollar’s choppy performance. Once the dust settles it seems that there are enough hawkish signals to keep the dollar biased higher, as the market pencils in a sooner-than-expected rate hike. Inflation also continues to trend higher. And although the Fed marked down its forecasts for growth and unemployment, it still has robust expectations for the economy.”


“Markets initially read the statement as hawkish, but that reaction is fading out as traders read more deeply into the Statement of Economic Projections. Fed officials acknowledged making ‘substantial further progress’ toward the central bank’s inflation goal, and demonstrated confidence in the labor market meeting that test by the end of the year.

“The FOMC warned markets of an imminent tapering decision, saying that a ‘moderation in the pace of asset purchases may soon be warranted’ if  economic conditions continue to evolve as expected.

“A record number of participants are worried about upside risks on the inflation front, suggesting that the central bank could move aggressively if price growth remains elevated into the early part of next year.”

“Officials are now deadlocked on raising rates in 2022, but the median forecast is for a 1% Fed funds rate in 2023, and only 1.8% by the end of 2024. This is not rapid tightening by any means – it’s slightly slower than the 25-basis-point-per-quarter pace seen in previous cycles.

“This could also mean that estimates of the ‘terminal rate’ at the end of the cycle have been lowered. This is dovish, and will be welcomed in financial markets. The dollar could tumble from here, particularly if Powell follows prior patterns and tramples on the dot plot during the presser.”


“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur. You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

“The reason the Fed is tapering is because the economy and corporate earnings are strong enough to withstand it. So investors are basically saying let’s buy equities because the economy is strong and the Fed won’t be raising rates until a year plus from now.”

“The Fed is not going to get behind the curve and won’t have to end up surprising us by raising rates much more quickly than currently anticipated.”


“Basically what we’re seeing here is a (U.S. Treasury yield) curve flattening shift in response to the summary of economic projections pulling forward Fed rate hikes. The Fed is now projecting a rate hike in 2022 as their median forecast, which is up from steady in the July summary of economic projections. As a result, what we’re seeing is a little bit of pressure on the front end (of the curve), while the long end views the slightly more hawkish Fed as a positive sign for keeping inflation in check along with some potential risk of the Fed moving too quickly and acting to slow the economy in the coming years.”

“We have seen a bit of an acceleration in the curve flattening based on the view that we’ve seen peak inflation and some of the risks related to the slowing economy in the third quarter.”


“It is an interesting point in time here, the tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening. The increase in the Fed’s projections in future interest rates though seems to be more what has caught the market by surprise at the margin, it is still consistent with our view that the Fed is likely to continue allowing inflation to run hot and remain anchored in the same measured pace as prior cycles. It really only increases the inflation risk that we have been taking seriously as we see some of the supply chain and labor shortages clearly not resolving with the end of unemployment benefits. Longer-term there is a lot of powerful disinflationary forces but for the moment they are clearly being offset and the risk is that becomes entrenched in consumer expectations.”

“For the moment, the markets seem to be taking this in stride with a relatively positive reaction from the stock market and from longer-term bonds, as far as the inflation outlook goes, I’m not sure this is a positive development.”

“It is also the measured pace, some increase in the dots was expected by the market and priced in to some extent but there wasn’t any acceleration, in fact there is a deceleration, which indicates perhaps some members of the committee have revised lower their terminal rate, it is hard to know, but the current dots as they are showing fewer increases in the out years and this is the first look we have gotten in the 2024 projections. So that is a notable development that perhaps is what is driving the positive response in longer-term interest rates and the shifts in currency markets.”


“Across the board it’s exactly what we were expecting, the Fed took another step towards a formal taper announcement, and that’s probably going to come at the next meeting or two.

“The key behind the potential rate hike was the upgrade to their inflation outlook. There are signs inflationary pressures are going to be transitory, but they are more persistent than expected. That’s the key driver as to why the balance has shifted to a potential rate hike in 2022 as opposed to 2023.

“We’re watching yield curves flatten. The Treasury market’s interpreting it as a hawkish surprise.

“It was very inline with expectations. Powell will use the press conference to reiterate to the idea that tapering is coming in the several months. It’s what I expected, not too hawkish and not too dovish.”


“Unless we know who is who, which we don’t, I’m not sure the dot-plot accurately reflects the Fed’s thinking. I don’t think the Fed’s tightening is going to be anywhere near as hawkish as they anticipate. It’s going to be hard for them to execute on this plan as the economy slows next year.”

For a look at all of today’s economic events, check out our economic calendar.

(Compiled by the U.S. Finance & Markets Breaking News team)

Dollar Choppy After Fed Statement, Evergrande Exhale Lifts Risk-Sensitive Currencies

The Federal Reserve on Wednesday cleared the way to reduce its monthly bond purchases “soon” and signaled interest rate increases may follow more quickly than expected, with half of the 18 U.S. central bank policymakers projecting borrowing costs will need to rise in 2022.

“The tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening,” said Steven Violin, portfolio manager at F.L.Putnam Investment Management Company in Wellesley, Massachusetts.

The dollar index rose 0.094%, alternating between gains and declines after the announcement, with the euro down 0.1% to $1.1711.

Property giant and Asia’s biggest junk bond issuer Evergrande said it “resolved” one payment due on Thursday via a private negotiation, easing concerns of default and possible contagion risk, while the People’s Bank of China injected 90 billion yuan into the banking system to support markets.

“Being able to make tomorrow’s bond coupon payment, that definitely lifted risk sentiment overnight and you saw a typical follow-through reaction in risk currencies, so Canadian dollar high, Aussie dollar higher, Kiwi dollar higher – that was kind of an understandable reaction,” said Erik Bregar, an independent FX analyst in Toronto.

Still, uncertainty remains whether the developer will be able to pay the coupon on its offshore dollar bonds, due on Thursday.

The Australian dollar rose 0.33% versus the greenback to $0.726 after rising as much as 0.49% to $0.7268 while the Canadian dollar rose 0.58% versus the greenback to 1.27 per dollar.

The offshore Chinese yuan strengthened versus the greenback to 6.4628 per dollar.

The safe-haven Japanese yen weakened 0.50% versus the greenback to 109.78 per dollar in the wake of the Bank of Japan’s decision to keep policy on hold.

Sterling was last trading at $1.3637, down 0.16% on the day ahead of a policy announcement by the Bank of England on Thursday, with expectations for a rate hike being pushed down the road by investors.

In cryptocurrencies, Bitcoin last rose 6.93% to $43,409.48 following three straight days of declines.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Will Dunham and Andrea Ricci)

Dollar Eases From Near 1-Month High as Fed, Evergrande Eyed

After reaching its highest level since Aug. 23 on Monday, the dollar straddled around the unchanged mark on the day, briefly moving higher as early gains on Wall Street’s benchmark equity indexes faded.

Investors are looking toward the Fed’s policy announcement on Wednesday for any signs of when the central bank will begin to scale back its massive bond-buying program, in a week filled with policy statements expected from a host of central banks around the globe.

“The market was trying to get a sense of was this turnaround Tuesday going to last, and if we had that continued improvement of risk appetite the dollar was going to pull back even more here,” said Edward Moya, senior market analyst at OANDA in New York.

“But there is just a lot of wait-and-see as far as what is going to happen with the Fed, what is going to happen with Evergrande. And right now if you are trying to make a dollar bet you really just want to wait until you get a better sense of what is going to happen with Evergrande and what the Chinese government is going to do.”

The dollar index fell 0.019% after reaching a high of 93.455 on Monday, while the euro was down 0.01% to $1.1724.

The greenback strengthened on Monday, along with other safe-havens such as the yen and Swiss franc, as concerns about the fallout from the possible default of China Evergrande unnerved financial markets.

Those concerns overshadowed efforts by Evergrande’s chairman to lift confidence in the embattled firm on Tuesday, as Beijing showed no signs it would intervene to stem any domino effects across the global economy.

The offshore Chinese yuan weakened versus the greenback to 6.4817 per dollar.

Before Evergrande’s debt crisis rattled markets, the dollar had been supported ahead of the Fed meeting this week, with economists surveyed in a Reuters poll expecting policymakers to signal expectations of a tapering plan to be pushed back to November.

The Japanese yen strengthened 0.13% versus the greenback, to 109.23 per dollar, while Sterling was last trading at $1.3658, up 0.01% on the day.

The Canadian dollar was poised to halt three straight days of declines against the greenback, after Canadian Prime Minister Justin Trudeau was re-elected to a third term but failed to win a majority in the parliamentary elections.

The Canadian dollar rose 0.06% versus the greenback at 1.28 per dollar.

In cryptocurrencies, bitcoin last fell 2.01% to $42,172.11.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Leslie Adler)

Analysis: Why the Fed Might Welcome a Bond Market Tantrum

Persistently low yields are a feature of bond markets across the developed world, with central banks mostly in no hurry to raise interest rates and a global savings glut that keeps debt securities in constant demand.

But it is in the United States that the contradiction between economic recovery and bond yields is starkest.

Even with growth tipped to surpass 6% this year and a “taper” in sight for the Fed’s bond-buying programme at the end of this year, 10-year yields are still stuck at just above 1.3%..

The Fed probably rejoiced at low yields in the initial stages of the economic recovery, but now needs bonds to respond to the end of pandemic-linked recession, said Padhraic Garvey, head of research for the Americas at ING Bank.

Current pricing, analysts say, looks more consistent with heightened economic uncertainty, whereas higher yields would align markets more with the signals coming from central banks.

“To facilitate that, we argue that there needs to be a tantrum. If the Fed has a taper announcement … and there is no tantrum at all, that in fact is a problem for the Fed,” ING’s Garvey said.

Analysts say a bond market tantrum would involve yields rising 75-100 basis points (bps) within a couple of months.

The original “taper tantrum” in 2013 boosted U.S. yields just over 100 bps in the four months after then Fed boss Ben Bernanke hinted at an unwinding of stimulus measures.

But that kind of sudden jump in yields looks unlikely right now, given how clearly the Fed has telegraphed its plans to taper its bond-buying. And as 2013 showed, bond market tantrums carry nasty side-effects including equity sell-offs and higher borrowing costs worldwide.

A happy medium, analysts say, might be for benchmark yields to rise 30-40 bps to 1.6-1.8%


Besides wanting higher yields to better reflect the pace of economic growth, the Fed also needs to recoup some ammunition to counter future economic reversals.

The Fed funds rate – the overnight rate which guides U.S. borrowing costs – is at zero to 0.25%, and U.S. policymakers, unlike the Bank of Japan and the European Central Bank, are disinclined to take interest rates negative.

The Fed won’t want to find itself in the position of the ECB and BOJ, whose stimulus options at the moment are limited to cutting rates further into negative territory or buying more bonds to underwrite government spending.

Jim Leaviss, chief investment officer at M&G Investments for public fixed income, said policymakers would probably like the Fed fund rate to be at 2%, “so, when we end up in the next downturn, the Fed will have some space to cut interest rates without hitting the lower bound of zero quickly”.

Another reason higher yields might be welcomed is because banks would like steeper yield curves to boost the attractiveness of making longer-term loans funded with short-term borrowing from depositors or markets.

Thomas Costerg, senior economist at Pictet Wealth Management, notes that the gap between the Fed funds rate and 10-year yields of about 125 bps now is well below the average 200 bps seen during previous peaks in economic expansion.

He believes the Fed would favour a 200 bps yield slope, “not only because it would validate their view that the economic cycle is fine but also because a slope of 200 bps is healthy for the banking sector’s maturity transformation.”


But even a tantrum might not bring a lasting rise in yields.

First, while the Fed may look with envy at Norway and New Zealand where yields have risen in expectation of rate rises, it has stressed that its own official rates won’t rise for a while.

Structural factors are at play too, not least global demand for the only large AAA-rated bond market with positive yields.

The Fed also, in theory at least, guides rates towards the natural rate of interest, the level where full employment coincides with stable inflation.

But this rate has shrunk steadily. Adjusted for projected inflation, the “longer-run” funds rate – the Fed’s proxy for the natural rate – has fallen to 0.5% from 2.4% in 2007. If correct, it leaves the Fed with little leeway.

Demographics and slower trend growth are cited as reasons for the decline in the natural rate though a paper presented last month at the Jackson Hole symposium also blamed a rise in income inequality since the 1980s.

The paper said the rich, who are more likely to save, were taking a bigger slice of overall income and the resulting savings glut was weighing on the natural rate of interest.

“One lesson from this year is that there is massive gravitational force, a price-insensitive demand which is pressing down on Treasury yields,” Pictet’s Costerg said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Stefano Rebaudo; Additional reporting by Dhara Ranasinghe in London and Dan Burns in New York; Editing by Sujata Rao and David Clarke)


Dollar Touches Three-Week High, Lifted by Recent Data, Fed Taper View

The dollar index, a gauge of the greenback’s value against six major currencies, rose to 93.220, the highest since the third week of August. It was last up 0.4% at 93.207.

For the week, the dollar index gained 0.6%, its largest weekly percentage rise since mid-August.

The Fed holds a two-day monetary policy meeting next week and is expected to open discussions on reducing its monthly bond purchases, while tying any actual change to U.S. job growth in September and beyond.

“While we doubt that the FOMC will set out a plan for tapering its asset purchases, the new economic projections may shed some light on its reaction function given building cyclical inflationary pressures,” wrote Jonathan Petersen, markets economist at Capital Economics, in its latest research note.

“Our view remains that inflation in the U.S. will stay elevated for longer than the FOMC and investors currently anticipate, in turn supporting higher U.S. yields and a stronger dollar,” he added.

Speculation about a Fed taper this year gathered pace after U.S. retail sales unexpectedly increased in August, data showed on Thursday, rising 0.7% from the previous month despite expectations of a 0.8% fall. A business sentiment survey also showed a big improvement.

In afternoon New York trading, the euro slid 0.3% to $1.1729, after hitting a three-week low of $1.1724 earlier in the session.

The University of Michigan consumer sentiment for September inched higher to 71 versus the final August reading of 70.3, but overall analysts said the rise was nowhere near the improvements seen in the Empire States and Philadelphia Fed manufacturing surveys.

The dollar held gains after the Michigan sentiment report.

Currency markets were generally quiet on Friday with traders reluctant to take on new positions ahead of a clutch of important central bank meetings next week including the Fed, the Bank of Japan and the Bank of England.

The dollar was up 0.5% against the Swiss franc at 0.9320 francs, after earlier hitting a five-month high of 0.9324 francs .

The dollar rose 0.2% to 109.92 yen.

The yen has shown limited reaction to the ruling Liberal Democratic Party’s leadership race, which formally kicks off on Friday ahead of a Sept. 29 vote. The LDP’s parliamentary dominance means the party’s new leader will become prime minister.

The dollar also rose to a two-week high against the offshore yuan and was last up 0.3% at 6.4711. The yuan is being pressured by growing worries about China’s real estate sector as investors fear property giant China Evergrande could default on its coupon payment next week.

The British pound fell 0.4% to $1.3738 as UK retail sales undershot expectations. However, with investors bringing forward forecasts for a Bank of England interest rate hike to mid-2022, sterling remains supported.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Muralikumar Anantharaman, Alex Richardson and Sonya Hepinstall)

Dollar Falters After U.S. Inflation Rise Eases, Safe-Haven Yen, Franc Up

Several Fed officials have suggested the U.S. central bank could reduce its buying of debt securities by the end of the year, but said an eventual interest rate hike would not happen for some time.

The Fed will hold a two-day monetary policy meeting next week, with investors keen to find out whether a tapering announcement will be made.

Tapering tends to benefit the dollar as it suggests the Fed is one step closer toward tighter monetary policy. It also means the central bank will be buying fewer debt assets, effectively reducing the number of dollars in circulation.

Data on Tuesday showing the U.S. consumer price index, excluding the volatile food and energy components, edged up just 0.1% last month has raised doubts about tapering this year, some analysts said.

August’s core CPI rise was also the smallest gain since February and followed a 0.3% rise in July. The so-called core CPI increased 4.0% on a year-on-year basis after gaining 4.3% in July.

“The softer inflation prints caused investors to push back on bets that the Fed could move sooner to taper bond purchases. Easing inflation would take the heat off the Fed to move prematurely,” said Fiona Cincotta, senior financial markets analyst at City Index.

She also cited U.S. core producer prices (PPI) data for August released last week, which also rose at a slower pace. Excluding the food, energy and trade services elements, producer prices rose 0.3% last month, the smallest gain since last November. The so-called core PPI shot up 0.9% in July.

“So the evidence does appear to be building that peak inflation has passed. That said, supply chain bottlenecks are expected to persist for a while so it’s unlikely that either PPI or CPI will drop dramatically or rapidly,” Cincotta added.

In afternoon trading, the dollar index was slightly down at 92.601, moving away from a more than a two-week high on Monday.

The euro was flat against the dollar at $1.1807.

Risk appetite soured on Tuesday as well, with Wall Street shares down while U.S. Treasury prices were up sharply, pushing yields lower.

Investors looked past decelerating inflation and focused on uncertainties about U.S. growth now clouded by the economic impact of the Delta variant.

Against the safe-haven Swiss franc, the dollar dropped 0.4% to 0.9189 francs.

Versus another safe-haven, the Japanese yen, the dollar fell 0.4% to 109.615 ye

In other currencies, the Australian dollar fell to a two-week low after Reserve Bank of Australia Governor Philip Lowe painted a very dovish policy outlook with no rate hikes on the horizon until 2024.

The Aussie dollar was last down 0.7% at US$0.7319. In cryptocurrencies, bitcoin was last up 3.1% at $46,400 . Ether changed hands at $3,344, up 1.9%.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Saikat Chatterjee in London and Shreyashi Sanyal in Bengalaru; Editing by Nick Zieminski and Paul Simao)


Key Events This Week: Cooling US Jobs Market May Give USD Bears Room to Breathe

Here are the events that could move global financial markets this week:

Monday, August 30

  • JPY: Japan July retail sales
  • EUR: Eurozone August economic/consumer confidence

Tuesday, August 31

  • JPY: Japan July industrial production and unemployment
  • CNH: China August manufacturing and composite PMIs
  • NZD: ANZ August business confidence
  • EUR: Eurozone August CPI
  • CAD: Canada GDP (June, 2Q)
  • USD: US August consumer confidence

Wednesday, September 1

  • CNH: China August Caixin manufacturing PMI
  • Japan, Eurozone, UK, US manufacturing August PMIs
  • EUR: Eurozone unemployment
  • Brent Oil: OPEC+ decision on production
  • US Crude: EIA crude oil inventory report

Thursday, September 2

  • EUR: Eurozone July PPI
  • USD: US weekly jobless claims

Friday, September 3

  • CNH: China Caixin August services and composite PMIs
  • JPY: Japan August services and composite PMIs
  • GBP: UK August services and composite PMIs
  • EUR: Eurozone July retail sales, August services and composite PMIs
  • USD: August US nonfarm payrolls, services and composite PMIs, ISM services index

Tapering now less-feared?

Despite saying he is open to pulling back on the central bank’s asset purchases this year, Powell sought to divorce the idea of tapering as an immediate precursor to a US interest rate hike.

In other words, although the Fed’s tapering may indeed start this year, the rate hike may not follow soon after the tapering ends.

This is because the Fed Chair once again said he wants to see sustained above-target inflation and a broad-based recovery in the jobs market. At Jackson Hole, he sent out a reminder about the 6 million jobs that are still lost since the pandemic, as well as reiterating his belief that the inflation surges may be “transitory”.

That message was heeded by the markets. After Powell’s speech, markets lowered their expectations for a November 2022 US rate hike from 53% to 40.5%. However, they still are forecasting a greater-than-even chance (76.5%) of a pre-Christmas rate hike in December 2022.

And this is where Friday’s jobs report comes in.

Markets are currently expected a figure of 750,000 jobs added last month, which is lower than the June and July figures that were above 900k.

USD bears could breathe a sigh of relief on signs of moderating jobs growth and a stagnant unemployment rate, as those should mean a longer runway before the US interest rate hike. And given the persistent threat of the Delta variant’s spread through the world’s largest economy, that could delay workers’ return to jobs. If this Friday’s jobs data indeed prove to be subdued, that might lower the chances of a sooner-than-later Fed rate hike, while preventing the greenback from surging higher in the interim.


Oil markets await OPEC+ decision

Recall that back in July, OPEC+ agreed to raise output by 400k barrels per day (bpd) starting in August, accompanied by subsequent 400k bpd hikes each ensuing month.

However, since that July decision, the Delta variant’s resurgence in major economies has forced lockdowns once more in countries such as China, Australia, and New Zealand. Hence, it remains to be seen how OPEC+ takes into account these demand-side risks, while ensuring members can claim enough market share to keep them satisfied.

Although oil markets are still expected to tighten through year-end, one doesn’t need to be reminded about how swiftly the Delta variant can alter that outlook.

Should OPEC+ press ahead with its intended supply hikes, that could signal confidence that global demand is robust enough to absorb that incoming supply. Still, if traders and investors don’t share that same optimism, should OPEC+ leave its supply hike plans unchanged, that could prompt Brent oil to unwind recent gains and falter back into the sub-$70/bbl region once more.

Oil markets will also be closely monitoring the impact of Hurricane Ida on US oil supply infrastructure. Signs of tightening supplies, depending on the duration, could spur oil prices higher despite Brent being resisted at its 50-day simple moving average at the time of writing.


For a look at all of today’s economic events, check out our economic calendar.

Written by Han Tan, Market Analyst at FXTM

For more information, please visit: FXTM

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Asia Market: The Future Looks Bright, but the Moment is Hell


  • Despite the S&P’s biggest down day since October, the future looks bright
  • Risk-off panic becomes increasingly self-fulfilling
  • Fed meets market’s expectations i.e. no taper
  • In the face of risk-off Armageddon, oil prices remain well supported
  • Gold is down and remains stuck in a tight range


The S&P was down 2½% heading into the close – the biggest down day since October. Nerves about vaccine rollouts weighed on sentiment and significant volatility among some stocks targeted by retail investors.

Yes, the future looks bright, but the moment is hell.

It’s been a gruelling 24 hours as turmoil reigned over equity markets with reopening narratives getting pushed back well into Q2 due to messed up vaccination and rollout strategies. And, adding to investor pain, there are worries around a subtle hawkish shift in policy from the PBoC. And to rub even more salt in the wounds, macro markets went into complete flux mode on reports that ECB officials believe markets are underestimating the chances of a rate cut spurring desynchronized global growth fears.

Investors had been optimistically shooting for a Spring Break reopening, hoping Governments would start lifting restrictions on economic life once the most vulnerable 20-25% of the population are vaccinated. For now, at this stage of the rollout game that’s little more than a pipe dream. Delays in the rollout of Covid-19 vaccines, coupled with lingering lockdown measures, marked a malocchio of the market’s worst held fears.

Vaccine distribution is the most crucial deliverable to get out of this mess.

And while the US stimulus debate is taking the second chair to the vaccine rollouts, a break in the bi-partisan impasse, or even by the reconciliation process could come at a most welcome time.

VAR meltdowns are the worst of all panic events

In a most unvirtuous circle, the risk-off panic became increasingly self-fulfilling as risk control mechanisms kicked in when early covering in consensus shorts, at massive losses mind you, then gave way to selling high flying technology longs from the Hedge Fund community, in the main to cover margin calls triggering a cascading house of pain effect across broader markets.

We remain in a market dominated by risk-on risk-off proclivities, and even more so as we reach peak vaccine impulse melding with incredibly uncertain economic outlook – not to mention being near the end of the fiscal runway. Still, we’re 100 % landlocked in a liquidity-driven environment where all boats rise with YTD performance of US equities and US dollar lower, all suggesting significant co-movement between risk-on asset classes.

It would be easy to codify the rise in risky asset classes since the post-election risk premiums evaporated simply as risk-on. But, of course, the more significant characteristic has been the rotation within asset classes towards the YTD laggards and ‘reopening’ sectors across the board.

So, a negative view on any one of these risk-on asset classes will almost inevitably also lead to negative opinions across the entire risk-on spectrum, including cyclical commodity prices like oil. Any further headline disappointment, be it vaccine rollout or even US stimulus, could prompt further de-risking over the coming days, despite the still-intact longer-term bull narrative.

I’ve been cautious on markets over the last week and remain so. It always feels horrible to be part of a broader camp looking for a more significant selloff, and it seems with everyone looking for an equity market pullback, their wishes did come true. But it won’t be easy to get back in the saddle with any conviction until the vaccine distribution mess gets sorted as it delays everyone’s plans for a brighter day.

While recent Covid-19 news and snail-paced vaccine rollouts have been horrifyingly discouraging, the big picture does not change in terms of markets outlook. Namely, an unprecedented amount of monetary and fiscal stimulus, a structural shift towards much more spending, a potentially unmatched economic rebound – whether starting in Q2 or Q3 – and a reasonable chance of inflation for the first time in several decades. Once the systematic correction gives way, things could brighten up again.

As we move back into the “look through” trade environment, supported by monetary and fiscal puts, investors are quickly rediscovering that not all growth assets are created equal in a Covid downtrodden economic climate, and the forever fickle FX market is testament to the thesis that nothing goes up in a straight line.


As the markets had widely expected, the Fed made very few changes to the statement. But for investors’ concerns, relevant messaging can be summed up as a single-issue event: no taper. Fed Chair Powell looks to have come with the express intention of conveying just that one message.

However, on the drop of time around coronavirus risk in the Fed statement (they dropped “medium-term”), Powell said they did that because in their view there are vaccinations now. So if there’s one hawkish feature to this press conference, this is it.

The sole reason for the massive balance sheet expansion – Covid-19– will be mostly gone in 6-9 months. And since monetary policy works with long and varying lags, it is, or rather will soon be, time for central bankers to consider policy normalization.


In the face of risk-off Armageddon, oil prices – thankfully for broader markets – remain well supported due to OPEC’s dogged determination to stay in damage control mode, adjusting supply constraints to alleviate the projected oil demand level attrition in Q1.

And mercifully for risk markets, not just oil bulls, crude stocks were down 9.9Mb, bullish vs consensus for a +0.4Mb build in crude, the five-year average of +4.5Mb and more significant than the -5.3Mb draw reported by the API yesterday.

Because stocks are in the midst of a VAR type meltdown, oil prices aren’t necessarily as exposed to the market’s risk-on risk-off proclivity around Game Stop and High Tech de-grossing. But oil prices do remain precariously perched and extremely sensitive to any news about snail-paced vaccine rollout.

Perhaps one factor that has been slightly unnoticed is the substantial rise in energy prices and cyclical commodity prices triggered by expectations of a hyper reflationary environment over the next twelve months and has resulted in a significant increase in market-based inflation expectations, where this unmistakable reflationary exuberance was getting expressed in FX.

The broad recovery in risk assets via oil prices since November has not only affected market-based inflation expectations but boosted every asset class on the street.

I think “risk markets” can thank their lucky stars that Saudi Arabia’s crystal ball outlook was clear as a whistle, and their proactive production cut measure buttressed investors from a more significant meltdown.


The global FX market went into a defensive posture, expressing and hedging the risk-off views through high beta to risk currencies. Given the Canadian dollar’s tight correlation to the S&P 500, the Lonnie quickly became a favoured short form both hedgers and speculators.

The stars aligned for EURO bears as the single currency was simultaneous getting hit with the risk-off ugly stick, overtly dovish ECB member chatter and extended EU lockdowns. But this all-over-the-place communication from the European Central Bank suggests some manoeuvring is going on behind the scenes and doesn’t put ECB President Christine Lagarde in a favourable light.

EURUSD is bounced off 1.2050 support for now as the shift to negative rates remains unlikely given what would happen to the banking system. That being said, the ECB’s verbal currency threats haven’t explicitly included their method for pushing back before, so the odds of a rate cut have gone up ever so slightly.

EM stocks and currencies struggle under the weight of snail-paced vaccination rollouts, both domestically and in the developed market, driving US dollar safe-haven demand.

In USDAsia, some USD buying has gone through the market since New York opened after a relatively quiet, tight-ranged session in Asia. Flow-wise, there has been some buying of USDIDR, USDPHP, USDKRW and USDCNH in social size and small two-way interest in USDINR.

The ringgit and the rest of Asia FX remain ensnared in relatively tight ranges as the big picture does not change its outlook. Namely, an unprecedented amount of monetary and fiscal stimulus. A structural shift towards much more spending, a potentially unmatched economic rebound – whether starting in Q2 or Q3 – and a reasonable chance of inflation for the first time in several decades


With the FOMC only holding the interest course, it wasn’t enough to boost gold, especially in the face of a more robust “safe-haven demand” for the US dollar. Compounding matters, gold is getting sold again, albeit lightly to cover margin calls weighing on sentiment.

Although gold is down, we remain stuck in a tight range. Still, the trend is looking less and less constructive, as the yellow metal struggles to recover from the selloff that took place at the start of the year, and with the historically bullish January seasonality soon to be taken out of the equation.

For a look at all of today’s economic events, check out our economic calendar.

FX Traders Monitoring Yuan after PBOC Makes Moves to Attract Foreign Investors

Investors are monitoring China’s Yuan movements on Monday after the People’s Bank of China (PBOC) announced a rule change that made it cheaper to short the national currency.

Traders short the Yuan when they expect the currency to weaken in the future. One way to do so is to borrow in Yuan in hopes of buying it back at a lower price later and pocketing the difference.

In the Monday morning trade, the onshore Yuan changed hands at 6.7224 per dollar, as compared to levels below 6.7 against the greenback seen last week. Meanwhile, its offshore counterpart last traded at 6.7188 per dollar. The price action in the currency was directly influenced by the rule change, “which makes it less expensive to short the (Chinese Yuan) and signals less (concern) about currency weakness,” said National Australia Bank’s Tapas Strickland.

China’s Central Bank to Cut FX Risk Reserve Ratio to Zero

China’s central bank said it will lower the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading to zero with effect from Monday.

Under current rules, financial institutions must set aside 20% of the previous month’s Yuan forwards settlement amount as foreign exchange risk reserves.

“The People’s Bank of China (PBOC) will continue to maintain flexibility in the exchange rate, stabilize market expectations, and keep the Yuan basically stable at reasonable and balanced levels,” the central bank said on its website.

The move came after the onshore spot Yuan rate ended at a 17-month high on Friday against the dollar, its biggest one-day percentage gain since 2005.

Policymakers Want to Open Up Domestic Financial Markets to Foreign Investors

Tommy Xie, economist at OCBC Bank in Singapore, said the PBOC’s move could serve to keep the Yuan’s appreciation in check, and that is also reinforced how policymakers are keen to open up domestic financial markets to foreign investors.

“It is the exit of intervention, which marks the further step for RMB to move towards market driven pricing mechanism,” Xie said, referring to the renminbi, or Yuan.

“By removing the restrictions on derivatives, it will create a more flexible (hedging) environment for foreign investors.”

Chinese Officials Worried About Yuan Appreciation Ahead of US Presidential Election

Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said the PBOC’s move was not meant to reverse the Yuan’s rising trend, but had come earlier than he expected.

“The authorities might be worried about Yuan appreciation risk driven by the U.S. presidential election,” he said.

On Friday, the onshore spot Yuan rate ended at a 17-month high on Friday against the U.S. Dollar, its biggest one-day percentage gain since 2005.

Friday’s gains in the Yuan were largely prompted by speculation that Democrat challenger Joe Biden might win the U.S. presidency and improving Sino-U.S. relations.

For a look at all of today’s economic events, check out our economic calendar.

Theres a Bull in a China’s Shop

With the China A50 index (CN50 on MT4/5) putting on a lazy 7.5%, while the Hang Seng, the index where we saw the bulk of client flow, rallied 3.8%. Things have settled down a touch today, but China is a truly hot market – For perspective, the A50 index has gained 24% in 16 trading sessions.

*Pepperstone clients can trade the A50 index (CN50) and Hang Seng (HK50), as well as USDCNH (yuan traded in HK). The A50 index being the top 50 Chinese mainland companies traded as a futures index on the Singapore exchange – it has a 96% correlation with the CSI 300.

Volume has been incredible too, with 40.58b shares traded through the CSI 300 on Monday – the most since 15 July 2015, with turnover some 212% above the 30-day average. Offshore funds were big buyers of Chinese equities, with orders through the HK to Shanghai (Northbound) ‘connect’ coming in at record levels ($45.12b). They were also big buyers of CNH too, as we can see in the daily chart of USDCNH, with price smashing through the 200-day MA. If USDCNH is trading lower, then it will subsequently put a bid in EURUSD, AUDUSD and NZDUSD too.

Watch this space, but if Chinese equities are going higher and offshore funds want to get exposure via HK, then USDCNH should trade lower.

Listed brokers are flying, as you’d imagine when we see such intense volume through the exchanges, and if we look at broker names traded in HK, we can see some outrageous one-day moves. Some chunky earnings upgrades from CICC are also helping, with the investment bank now seeing 25% y/y growth, although the absolute flow and appetite for equity is obviously the main rationale for buying brokers.

Monday’s one-day move in Chinese HK-listed brokers

Should the bulls be worried about excessive leverage just yet?

We can look at the level of margin debt used for equity transactions as a vehicle for leveraging up and speculating on financial markets, and here we see this figure hitting RMB12t on Friday – one suspects this would be higher now, although, it is still only half of below the outstanding balance in June 2015, when, of course, we saw rampant equity speculation. A relaxation of the rules governing margin trading ( in June from the CSRC (China Securities Regulatory Commission) is clearly in play and helping sentiment.

One consideration is that given the increase in the market capitalization of China’s equity markets is that margin transactions as a percentage of market cap is still only around 14%, where this reached 27% in 2015. We also see margin financing as a percentage of free float sitting at 4% vs 10% in 2015. Neither are at outrageous levels and this is a strong consideration for the regulator, who on one hand see advantages in higher asset prices but has a strong consideration for financial stability. It doesn’t feel like authorities will reign in speculation just yet.

  • Yellow – Total outstanding balance of margin transactions
  • Blue – A50 index
  • White – China CSI 300

Do we fade the rally?

If we look at any technical oscillator, such as an RSI or stochastic it will suggest the upside is limited and that the market is incredibly overbought. The move in the RSI is obviously a function of just how powerful and impulsive the move has been of late, but are we at a point where we think the market is simply going to roll over and decline 15%? My view is that any weakness in the next few days will likely be supported, and while there are risks a touch of the heat comes out of the move, traders will be taking the timeframe in and watching price to assess where buyers step back in.

Technicals aside, if I look at certain market internals, they are screaming euphoria – which in any other market would suggest looking very intently at one’s stop placement or even reducing bullish positioning. But China is a different vehicle altogether and when FOMO marries with the shared belief that authorities want higher asset prices we can see markets making new highs despite grossly overbought levels.

  • In order – top – China CSI 300
  • Number of companies > 20-day MA
  • Number of companies > 50-day MA
  • Number of companies > 200- day MA
  • Number of companies at 4-week high


Let not forget that retail participation in the Chinese markets is arguably far higher than anywhere else in the world, and somewhere north of 70% of the daily flow – so when local traders hear a message they act.

By way of catalysts, many have credited an article in China Securities Journal (from Xinhua) that detailed “support to a strong start for a bull market in A-shares will mark the beginning of new opportunities”. This is certainly positive when married with the recent relaxation of margin trading regulations. We also see monetary policy more broadly having been eased in recent times and the fact that China’s economic data has turned more positive is also a tailwind to risk appreciate –

China is hot

China is hot right now and is a market worth putting on the radar. With all talk of a tidal wave of retail participation in global equities, it seems China has firmly joined the party.

For a look at all of today’s economic events, check out our economic calendar.

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Chris Weston, Head of Global Research at Pepperstone.

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USD: Outlook from Hong-Kong

Geographically, managing Hong-Kong is a sovereign matter of China.

Historically, it became a global issue since the British Empire took over this important city in the XIX century. During the entire XX century, it has been in possession by the British under lease agreement serving their economic and geopolitical interests. In 1997, it was returned to China.

Economically, after the global balance of economic power shifted from the dissolved British Empire to the US, the American interests are now what stands in the way of China taking full control over the city. Hong-Kong’s own interests and independence from China would be an easily resolved problem if it was only between Hong-Kong and China. But it isn’t; that’s why it is so complicated.

Geostrategically, Hong-Kong is an ideal penetration point through which the US can exert their influence and leverage power over China. Playing the Hong-Kong’s “independence and democracy” card, ideologically aligned with the Western rhetoric, against the Chinese “domination and communism” card, the US has a politically outsourced stronghold in Hong-Kong. Its primary target is to attract and consume China’s attention and resources as much as it’s needed to keep China’s international aspirations in check.

Why now

This year’s global political agenda suggests making a “small war” over Hong-Kong and eventually winning it may earn voters admiration to the US President. Namely, Donald Trump. Voices of the reasonably thinking and the moderately patriotic citizens in the US will be shouted down by the admiration of the millions who see their President as strong as ever reinstating “democracy and freedom” in Hong-Kong right in front of China – at the peak of anti-China moods in the US. As always, to make victory one needs an enemy, a war, and an excuse to make it. China, Hong-Kong, and “democracy at risk” are the three respective elements that perfectly fit this narrative.

What now

Hong-Kong to China and the US is the same is Moon to Earth and Mars. As unique and important as it is, Hong-Kong will inevitably drift to the gravity of China, while the US is just too far away. Nonetheless, there will be fights over it for the reasons explained above. These fights, however, have limitations from the US side more than China.

Primarily, there are a lot of American corporations with their regional headquarters, production centers, and outsource bases in Hong-Kong. While Donald Trump may imply that he is it trying to protect their interests over there, practically, any turbulence over Hong-Kong shakes the stability of these corporations operation in this region. That questions the long-term prosperity of these companies and most of all, supply chains. Market sectors dependent on trade would be exposed to the highest risks.

Second, any deterioration of the US-China relations drags investors’ attention to the US dollar. Consequently, the Chinese yuan loses value. It has lost already quite much – in fact, the USD/CNH currently trades at historical highs of 7.20. In theory, that’s unacceptable to the US exporters who cannot compete with cheap yuan. So far, Chinese financial authorities are forcefully suppressing the USD/CNH.

But nothing will be able to stop it increase in the case of further deterioration potential to a second cold war, as warned by the Chinese officials. Therefore, aggressive positioning against China may strike at the US in the long-term keeping the USD as high as ever in the times of prolonged risk aversion.

This post is written and submitted by FBS Markets for informational purposes only. In no way shall it be interpreted or construed to create any warranties of any kind, including an offer to buy or sell any currencies or other instruments. 

The views and ideas shared in this article are deemed reliable and based on the most up-to-date and trustworthy sources. However, the company does not take any responsibility for accuracy and completeness of the information, and the views expressed in the article may be subject to change without prior notice. 

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


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.

 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.


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.


Markets May Need Help Getting to The Weekend.


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.


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.


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?


Possibly a dollar funding squeezes afoot.


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


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.

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.