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.

(Read Our Pepperstone Review)

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.


Coordinated Policy In An Uncoordinated World 

The Fed and the market reaction

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

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

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

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

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

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

But the clock is ticking.

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

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

Oil markets

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

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

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

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

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

Gold markets

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

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

Who’s next?

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

Currency Market

The Australian Dollar 

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

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

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

The Euro 

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

The Ringgit

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

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

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

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

Week Ahead: “Covid-19, And The ‘Cleanest Dirty Shirt’ Argument”

During a week when the coronavirus threatened to become a pandemic that hammers global growth, with reportedly 6 % of the world population under quarantine, and probably more as China continues to adjust the reporting goal posts. Yet the US market continues to whistle while walking through the graveyard with the S&P 500 Index advancing four out of five days, posting three records along the way. Investors took solace in robust economic data, better-than-expected earning reports and the fact a quorum of the global central banks have the markets back which we will highlight in the Asia Week Ahead section

A question that’s cropping up a lot right now is: Why are equities up and bonds up too? The S&P 500, the Nasdaq, and the Dow Jones Industrial Average are all trading around record highs while the 10-year US Treasuries yield is at 1.58%, from 1.9% at the start of the year.

The US Federal Reserve, in an attempt to avoid another meltdown in the repo market as seen in September 2019, overcooked things when it injected billions of dollars of cash into the system to push rates lower. This left banks with sufficient money, which is now being used to buy bonds and equities. Particularly growth stocks which have only been able to gain “because” Treasury yields are so low. And while growth and defensive stocks have been in favor, the S&P500 isn’t as risk-on as the index reading might appear. The leaderish is very defensive and narrow around growth names (US tech, basically), but that has not stopped the market frustrating the bears in the past and now feels no different. Depressing the returns available through the duration in risk-free government bonds creates incentives for investors to re-allocate capital to stocks even more so into the resilient US markets.

This is essentially the “cleanest dirty shirt” argument for owning US assets, which is particularly salient at the moment given the likely asymmetric growth impact of the coronavirus shock.At present, the growth impact of the virus remains expected to be more severe in China (and hence in Germany) than in the US. Which in turn is providing massive inflows into the US dollar

S&P 500 Chart

But despite the Covid19 hanging like a dark cloud over Asia and will continue to be a market focal point well into March. So far, the US economy has been immune to the flu’s nasty effects, and its thought that if there will be an impact, it will be both small and transitory. But the key to the bullish US storyline is that fundamentals are strong, and the economy continues to grow, which basically acts as the key MythBusters debunking the recessionary fear-mongering.

Coronavirus has probably caused investors to be underweight, or at least not get involved in this rally. But low rates are keeping the juice in the market led by defensives, and the harmful data that is expected is now so well-flagged that it has become irrelevant. And since stocks are as much a momentum story as anything else while getting juiced by the Fed repo remedy, investors might feel they have little choice but to get on board or risk getting left at the station.

Week Ahead

This week’s economic dockets will provide a heavy dose of Fed speak with garnishing’s that will provide insights into current-quarter housing and manufacturing activity. With respect to Fed communications, the minutes of the January 29 FOMC meeting (Wednesday) will be a focal point for traders—in particular, discussions around the Fed’s policy review.

Last week, we saw a surge in the number of new Covid-19 cases in Hubei due to the adoption of new diagnostic methods; however, outside of the province, the number of new cases continued to trend lower. In response to adverse economic effects of the outbreak throughout the ASEAN region, policymakers are putting together fiscal and credit support, while mulling over further rate cuts. On the data front, Malaysia’s Q4 growth surprised to the downside as exports deteriorate. Next week, economists are expecting no changes to Indonesia’s policy rate, while Thailand’s growth is likely to remain weak at mid-2% in Q4. Looking ahead, risks to growth and rates outlook in Q1 remain tilted to the downside amid the Covid-19 outbreak.

Proposed ASEAN stimulus packages

In addition to probable rate cut to the MLR and LPR cuts in China, the Ministry of Finance advanced RMB848bn of the local government bond quota, while local governments provided various tax and fee relief measures to local companies.

In South Korea, Finance Minister Hong and BoK, Governor Lee held a joint meeting. Without giving details, they pledged emergency measures to minimize economic fallout from the Covid-19 outbreak,

Taiwan is seeking a special budget worth NTD60bn (USD2bn) to support profoundly affected sectors like F&B, tourism, transportation, and agriculture

The Thailand Convention and Exhibition Bureau (TCEB) plans to spend THB200m to support affected sectors, in partnership with the Thai Chamber of Commerce (TCC) and SET-listed companies – with more stimulus measures to follow.

Malaysia to announce a stimulus package early next month, to support growth, which is likely to include targeted spending for affected sectors, including tourism and manufacturing.

Singapore is likely to announce a series of stimulus measures in response to the Covid-19 outbreak, included in the 2020 budget due out on Tuesday.

Key Asset Classes

Currency Markets

With the coronavirus hitting and uncertainty mounting, the U.S. dollar indexes have steadily strengthened, but that is not the entire story. Advanced economy currencies’ weakness is driving much of the dollar strength. Most of the indexes used to measure “the dollar” are really indexes that measure the euro with a few other currencies in there for good measure. Meanwhile, emerging market currencies are holding up well.

The relatively indifferent Asia FX reaction to the Hubei news suggests that investors continue to continue to look through the economic impact.

The USD has been enduringly bid d, although FX vols are only slightly higher. The downtrend in USDCNH since September 2019 remains intact, 12-month forward points narrowed further, and an ongoing sell-off in risk reversals over the past week suggests a more limited demand for protection against a CNH sell-off as the PBoC is offering up a convincing backstop.

Overall the somewhat muted reaction may be attributable to the fact that the number of new cases outside China has failed to rise. However, investors’ sanguine response to the economic fallout from the coronavirus will be tested in the coming weeks, so at this stage of the game, Asia FX investors don’t want to run to far ahead of the economic realities. Hence, they remain cautious about adding more currency risk before assessing the depth of the economic fallout.

Perhaps a bit of this phenomenon along with the US long weekend effect.

There are three main channels for this fallout.

One is the tourism channel. The impact is easily quantifiable, and the initial reaction of the markets has been most punitive for the more vulnerable economies on this metric – THB and SGD. What’s harder to assess is the damage via the other two channels – supply chains and demand contraction, and for this, we need to see the empirical data. For that impulse, the release of Korea 20-day exports (Feb 21) is essential

The Euro

Interest rate level differentials between the US and NIRP( EURO) economies remain quite broad in a historical context, and these wide differentials continue to attract capital flows into US assets as is evident from persistent strength in the general dollar

Investors also, to s large degree, continue to ‘look through’ the economic impact of coronavirus, ostensibly driving EUR weakness via long carry positions.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for yield carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

Again, it’s the “lose-lose” situation for the Euro that we suggested at the start of the year.

But does the Euro have legs to run? the market got paid out of a fair bit of puts in the past few sessions. The risk reversals are going better bid for puts.1month 25-delta risk reversal is 0.25 vol bid for puts – it was 0.5 bid for calls a week ago. Positions are not stretched vs. 2015 peak of 84% open interest


In the battle of the weekend, hedges vs. Covid-19 data surprise, secondary transmission clusters, or if you think China reporting transparency is questionable. The one clear winner was gold as the yellow metal continues to shrug off an enduringly influential USD buoyed by ongoing investor concerns over COVID-19. It appears that investors are continuing to seek gold as a quality asset or hedge against the economic impact of the outbreak. And with US markets closed on Monday in observance of Presidents Day. This will leave Asian and European markets, which appear more sensitive to COVID-19, in control of the gold market. So with little chance to buy a dip on Friday after a consensus headline retail sales print. US Covid-19 hedgers we forced to chase gold higher due to the US long weekend effect which was probably commensurately more bullish for gold than would otherwise be the case

But putting a broader spin on gold’s appeal beyond the current Covid-19 narrative, which will likely be a transitory event and might have a muted impact on central bank policy outside of Asia, I focus on Friday’s US retail sales data.

Listening to commentary surrounding the consumer, it always seems to be on the edge of doomsday even beyond the armageddon quacks on twitter. So, with investors very hypersensitive to any measurable negative US consumer data point regardless of how small, it’s likely going to drive an overreaction of sorts.

The three-month moving average of US core retail sales has been flat for two months now (0%), and negative for the two months before that. This suggests a trend loss in core consumption is a cause concern. And while Cherry-picked data points can back-up nearly any position, but the 3-month moving average detail is the primary driver of the US Treasury rally on Friday , and likely the catalyst behind the demand gold into the weekend, after all, virus transmission outside of Hubei is falling?

So far, the Fed has been sticking to its consumer-spending-driven growth narrative, so last week’s soft retail control figure introduces some doubt into that picture. While it is early in the quarter and retail sales are often revised, the next retail sales release on March 17 takes on added significance as it has the potential to impact the Fed’s current policy narrative.

While Gold appears to be stuck in no man’s land for now mired in the 1560-1590 range, with trading volumes somewhat depressed since the beginning of the year, but clearly, gold is still very much on everyone’s tracking systems. But if I saw no reason to chase it on Friday at 1575, I certainly don’t see a reason to pursue it now while arguing that it remains prudent to either wait for fresh catalysts and/or more attractive levels to reengage for short term trader. But for long term retails traders who should be averaging in with small clips, price sensitivity gives way to the steady trend higher. But when it comes to gold investing /trading, it’s all about your investment time horizon.

Given the expanse of the coronavirus in China, gold physical demand is likely to suffer while other regional gold hubs like Hong Kong, Singapore, and Bangkok, whose economies have been ravaged by the tourist impact, physical demand is also likely to hurt .So the current bullish impulse could be thwarted by the lack of physical demand

But a Fed Policy review screams buy gold

January 29 FOMC meeting (Wednesday) will be a focal point for gold traders —in particular, discussions around the Fed’s policy review. As Chair Powell noted in his post-meeting press conference, the FOMC unanimously agreed that the current stance of policy is appropriate as long as the data are broadly in line with their outlook. However, when queried about average inflation targeting, Powell suggested that under a different framework, it may lead to a different approach to policy.

Interest rate level differentials between the US and NIRP( EURO) economies remain quite extensive in a historical context, and these wide differentials continue to attract capital flows into US assets as is evident from persistent strength in the broad dollar.But gold institutional traders know the stronger USD is a problem for the FED who may unintentionally walk onto steadily thinner ice. Excessive dollar strength threatens to upend commodities and ultimately cause the Fed to miss inflation targets. Cutting rates will fiend of further dollar strength and will make target inflation more achievable.

In addition, given Chair Powell’s discussion of the coronavirus at the press conference, there very well may be information in the minutes about the Board staff’s insight into the economic impact of the virus.

The OIS market is currently pricing a 25% chance of a rate cut by the April FOMC Meeting and a 50% chance of a cut for the June meeting. With the coronavirus still a significant source of risk for the markets,but most investors believe market impact from the virus is still several months away and for the most part leaving other factors unchanged. The issue at hand for the Fed is that inflation is below target, and if it goes unchecked, dollar strength will make this worse.

But with bond and gold markets singing from the same song sheet, even if the Fed delays cutting rates and it could exacerbate downside risk for inflation, so absent a dovish pivot by the Fed ,the curve inversion could possibly intensify and will untimely drive gold prices higher. Thus in my view inversion is signaling mounting risks for lower inflation and inflation expectations, not imminent recession

But ultimately, it will take a more aggressive improvement in risk sentiment to chip away at long gold positioning. And with the Fed possibly moving to cut interest rates to defend their inflation targets, gold could be given bigger wings to fly.

Oil Market: will they or won’t they

Oil markets bounced around in relatively tight range on Friday as investors fretted about the Covid-19 demand devastation effect while receiving some encouragement that Saudi Arabia is rally OPEC and friends to reschedule and emergency meeting. Of course, lip service is more comfortable to deliver than actually to get Russia to sit at the table. Still, if prices fall more profoundly below $ 50.00 WTI, it will probably trigger a meeting, so there remains a psychological floor in place which markets have been bouncing off.

Into weeks end prices remain supported by speculation that the spread of the coronavirus has slowed and as the market continues to focus on advancing towards OPEC+ reaction to the Covid-19 linked demand slow-down, which was confirmed again in the IEA’s OMR that cut its projection for 2020 demand by 0.5Mbd with a cut to 1Q20 of 1.3Mbd.

But ultimately, it’s all about the waiting game as traders sit on their hands hoping for Russia to play ball before taking on more oil risk

However, as I was discussing with my network of oil traders over the weekend, OPEC+ is but a band-aid to stop the bleeding, not necessarily a bullish impulse unless they cut 1 million barrels of daily production out of the equation. Oil market needs China back online , which made for a good read of Bloomberg’s Chinese Refiners Go on Buying Spree as Oil Too Cheap to Ignore Friday article but should not be confused with a recovery in China crude demand as run rates remain depressed. But it’s much better to have Teapots buying rather than selling stockpiles.

Asia Economic Calendar

Twitter Follow

Finally, after 8 years, I’m starting to get more active on Twitter, where I’m sharing interbank views from an assortment of Top tier global banks, I’m in contact with, so follow me, and I will be sure to follow you back and drop me a message to say hello.


Weekly Twitter follower suggestions

One of the larger accounts I recently started to follow (which I seldom follow) is Tracy Alloway from Bloomberg. I’ve been interviewed by Tracy a number of times on Bloomberg TV, and she is just flat out smart witty and tinged with humor that makes for a good twitter follow.



Asia Open: The Schitts Creek Scenario




The Schitt’s Creek scenario

“Schitt’s Creek” is a Canadian TV comedy series about a wealthy video-store magnate Johnny Rose (Eugene Levy) and his family suddenly find themselves broke, and they are forced to leave their pampered lives to regroup in Schitt’s Creek. If you haven’t seen it give it a try

Stock Markets 

The US market is closed for Presidents Day, so in the absence of an unexpected headline shock action could be a bit muted as it typically is during a US holiday weekend

The growth over value theme continues to play out, and, as with the last few Fridays, there was little appetite to add to risk into the weekend.  still, the US market managed to post gains

The bad news is that on Sunday; authorities reported 2,009 new cases and 142 more deaths nationwide; the good news is, however, it represents a drop in new cases from the coronavirus outbreak for a third consecutive day.

This will be good news for the market to run with this morning and we should see the usually predictable unwinding of weekend defensive hedges out of the gates and the SPX should continue to plow higher on the “cleanest dirty shirt” argument for owning US assets, which is particularly salient at the moment given the likely asymmetric growth impact of the coronavirus shock. At present, the growth impact of the virus remains expected to be more severe in China (and hence in Germany) than in the US.

Fund flows continue to be supportive of the general risk-on theme. EPFR data showed $23.6bn flowed into fixed-income funds in the week ending Wednesday, the most significant inflow since 2001. I am surprised that fund flows into equities were not higher given the ongoing move. For now, equity markets remain in look through mode.

However, it’s not hard to be skeptical about just how much looking through investors will be willing to bare the cost of for the next few weeks, especially if China’s high-frequency data comes out worse than expected. Although, to be frank, I’m not really sure what to expect from the data, but if it comes out bad enough for confidence to plummet, investors could quickly find themselves up the creek ( Schitt’s Creek)without a paddle. Let’s face it, financial markets are not known for their rational thinking lately and given the 500 million or so mainlanders affected by the Covid19 quarantine, and it’s also not hard to come up with more downside risks than upside ones right now.

This is a tricky market environment. There isn’t intemperate fear, and there isn’t unreasonable optimism. The easy trades of reverting overextended markets are gone, which has turned traders very wary of taking on big wagers. While the virus stories don’t carry the same headline gravitas, it’s still a focal point while the economic data fears continue to simmer on the back burner. It will soon be the fear of the data unknowns’ that will keep investors awake at night. But that has not stopped the market frustrating the bears in the past and now feels no different. Depressing the returns available through the duration in risk-free government bonds creates incentives for investors to re-allocate capital to stocks even more so into the resilient US markets.

Oil markets

The oil price action continues to be swayed backward and forwards by news flow around the Covid-19 infection/death rates and the prospects of OPEC+ agreeing a quota cut to balance off the demand slowdown. However, with a reality check about to set in when the China high-frequency data start to roll in, and in the absence of the Russian compliance commitment, any excuse to sell still feels like the sentiment in the market right now. And while the worst is probably priced into the China equation, the convexity of global economic data to how much of the China economy comes back on-line should not be underestimated, especially with a reported 500 million Chinese lives touched by the quarantine. That over 1.5 times the US population!!

On Friday, oil market investors took solace after the US energy secretary noted only “slight reductions in production” from the coronavirus and that the agency is “not yet concerned about its ultimate impact. “After markets closed, the office of the US Trade Representative announced it would lift tariffs on aircraft imports from the EU, from 10 to 15% effective March 18, though it stopped short of raising higher tariffs on other goods.

Gold Markets

There’s more to the recent gold move that meets the eye. While retail sentiment seems to be now moving purely on the end of coronavirus headlines, long term strategic buyers are starting to take notice of a soft underlying read for US retail sales. The headline for January was in line, but the bit that matters for GDP – retail control – was weaker, recording a flat outturn against expectations of a 0.3%mom rise and with a sizeable downward revision for December. The recent trend has been weak: 3m annualized is only up 0.22% and the 6m annualized is down -0.12%, only the second negative reading since the GFC (the other was during the collapse in December 2018).While it is early in the quarter and retail sales are often revised, the next retail sales release on March 17 takes on added significance as it has the potential to impact the Fed’s current policy narrative.

And while analyst has been focusing on ASEAN central bank policy measures. It’s the Fed who is now wearing the yellow jersey in the rate cut peloton as there are far more cuts priced for the Fed than the other central banks. From the time coronavirus cases started to pick up in mid-January, the Fed went from being middle of the pack to now leading the pack at 36bp of cuts being priced. This is a bullish swing in the gold narrative

Also, the convexity of global economic data to how much of the China economy comes back on-line should not be underestimated, especially with a reported 500 million Chinese impacted by the quarantine.

With the US stock markets trading at record highs, and downside risks outnumbering upside one’s by a count of 2:1 according to my watch list. It’s not hard to figure out why Gold markets are bid.

With bond yields falling on coronavirus concerns and as the effects of existing tariffs make there way through the US economy .But when factoring in geopolitical tensions such as the recent standoff between the United States and Iran, a potential technological divergence between Washington and Beijing, and the possibility of a U.S.-EU trade war, gold should be on everyone’s radar

Stock market liquidity?

Liquidity on driving equity? That’s not what the chart below shows. The Fed’s balance sheet is pretty much unchanged so far this year and shrank over the latter stages of January. Same for reserves balances. Yes, both rose steeply in Q4 last year, but they haven’t made further progress this year.

Well, the markets will soon get to test the liquidity theory as The New York Fed reported it would lower its 14-day repo offerings by $5 bn, down to $25 bn through March 3, and then down to $20 bn from March 3 onward. The overnights will drop $20 bn to $100 bn maximum. On Thursday, the Fed provided $30 bn in 14d and $48.85 bn in overnight.

Still, its bill purchases hold at $60 bn/month, so perhaps the idea is to get back to a more conventional balance sheet management sooner rather than later.

Currency Markets

Asia FX

Mainland authorities have leaned mostly on targeted measures like individual re-lending facilities, with the macro policy response more fiscal (additional pre-financing quota for local governments) than monetary (net OMO injection of the only 140bn in the last two weeks), and USDCNY fix mostly been in line with the model, after the initial lowballing adjustment post-LNY. With RMB1.2tn of OMOs maturing early next week, the focus will be on whether PBoC rolls them using MLF, and at a cheaper price point (ahead of LPR reset on the 20th). The emphasis in rest of the region is on Singapore Budget (18th), Bank Indonesia MPC (20th), and BOK (27th)

Even although coronavirus risk premia are reducing and vols are taming there a gigantic swath of economic carnage left in Covid-19 wake so even with Hubei province not reporting fewer infections from the day before, its full steam ahead for the region’s economic stimulus plans

If the past week is any indication, investors are will be looking for a buying Asia FX opportunity but could remain cautious about adding more currency risk before assessing the depth of the economic fallout. But with regional policymakers taking protractive actionable measures to thwart of the legacy effects of Covid-19, this should be viewed as growth positive. But the market appears to lack a catalyst for a real trend, and I expect consolidation to continue until bluer skies look likely.

The Yuan

USDCNH slipped from the high of 6.9917 and traded at 6.9830-80 last Friday Asia morning but back up again in the NY time zone. There was no demand for long USD gamma, however. Instead with the curve pointing south implying that traders seemed to have priced in a potential RRR cut Friday, so when it didn’t come, forward points reverse higher and dragged spot along for the ride. The drop in the daily virus headcount is a positive for regional risk as the curve now refocuses on PBoC policy measures which should be bullish for the Yuan

The Ringgit

For the Ringgit, which is a mid-level carry currency, it very much relies on a pickup in growth expectations to recover sustainably. And with another rate cut looks largely priced into swap markets and out to 10Y on the bond curve and with 10Y MGS trading this week with yields through 3.0% to all-time lows, it might be up to equity flows to do much of the heavy lifting this week as perhaps offshore blond flows could turn more neutral from here after significant inflows in the past three months. Look for the Ringgit to take it’s lead from the Yuan today

The Thai Baht

The USDTHB continues to hold well above the 31.00 level as currency trader to a tee the negative tail to the Covid-19 outbreak is best expressed at this stage via being long USD vs. THB.

Singapore Dollar 

FX and rates curves in Singapore are mostly already pricing in a shift by MAS to neutral. While the reduction in new flu cases, ex-Hubei has already helped Asian FX consolidate. But if the response to SARS were any indication, it might take a ‘positive announcement shock’ like a lifting of the travel ban to get the Singapore dollar moving in the other direction.

G-10 Currency markets

The Yen

Why isn’t the Yen working? Don’t even get me going? Besides the fact, Covid -19 poses a significant near-term downside risk to Japan’s economy, negative rates, and a magnetic attraction to the 110 level have made it an expensive proposition to purchase in a panic and then sit on.

The Euro 

Any concerns about your short Euro position? You bet. Besides President Trump’s twitter feed set to exposed if the EURUSD breaches 108, the ECB’s strategic review has a hawkish bias, particularly given the current euro weakness. I think this supports the euro if this is the case G10 traders will take their cue for the rates markets as this should create a measurable bounce in near term EU interest rate yields. Still given the dismal economic outlook in Germany, given my current view, look to sell on rallies to the 1.09 handle, not before. While downside optionality volumes are exploding, cash remains a bit neutral at this point suggesting the market looks to well-positioned for a downside move, and in this low vol environment short term positioning looks a bit extreme at the moment

The Australian Dollar

The Aussie, which continues to trade super beta to China risk is punching higher this morning on improving regional risk sentiment as China reported a drop in new cases from the coronavirus outbreak for a third consecutive day.


Market Resilience Reigns Supreme

Market resilience to coronavirus developments has been tested over the past 24 hours as reported cases of the virus in Hubei spiked almost 50% after the provincial government there began counting cases confirmed by imaging scans in addition to the existing test kit methodology. Even with that, the market impact was little more than a pause in the general bullish upward trend rather than risk-off.

The critical question today will be whether the near 10-fold spike in new virus cases reported yesterday proves to be a one-off. And while there remain some concerns about Chinas transparency with regards to the methodology for counting people with infections. But there is ample evidence to calm markets that the jump is merely a fossil of the reporting — not a sign that the outbreak is spreading faster or farther. All of this suggests that the market base case remains unchanged that the Covid-19 will be primarily contained by end-March, though occasional outbreaks may continue to be reported in April.

And confirming the market recovery Oil prices, which are a crucial bellwether for Covid-19 investor risk sentimentalso managed to lift 0.5% despite the International Energy Agency suggesting oil demand is likely to grow at the weakest pace since 2011 this year due to the coronavirus. Indeed, the IEA expects to see an outright decline in demand in Q1-20, the first “in more than ten years”.

US jobless claims fell more than expected. And given this high-frequency data series is one of the best real-time indicators of recessionary pressure, the key here is the data is not sending any worrying signals about the health of the US economy and labor market.

Markets have shrugged off a surge in the number of coronavirus cases in Hubei, and investors are back in stock buying frame of mind. It seems there’s a definite thematic playing out. Coronavirus has caused investors to be underweight, or at least not get involved in this rally. But low rates are keeping the juice in the market led by defensives, and the harmful data that is expected is now so well-flagged that it has become irrelevant.

Sure, there’s a lot of “hee and haw” that leadership is very defensive and narrow around US tech. But countering this closed-minded view is that earnings have been hitting expectations across the board; US data remains exceptional, so there is a strong rationale to stay long beyond the easy money argument.

Oil markets

Oil put in a positive performance for the day, reinforcing the view that oil markets have already priced in much of the coronavirus-driven lousy news. Barring an acceleration of new infections, the markets should remain relatively supported until we get the “first look data” surrounding supply chains and demand contraction knock-on effect in China as a result of the virus transmission

But keeping the lid on prices, OPEC had hoped to announce additional production cuts of 600,000 BPD. Still, with Russia’s refusal to participate, no action is anticipated before OPEC’s next meeting in March. And of course, the stream of gloomy revised demand outlook by key market monitoring agencies does little to help the oil markets bullish cause.

Gold Markets

Gold benefitted from a resurgence in investor risk aversion. The catalyst remains COVID-19 headlines.

Although gold rallied on fresh COVID-19 concerns, risk appetite lately tends to rebound quickly. So, unless there is new negative news to prompt a renewed deterioration in risk-on equity demand, this could limit gold’s top side ambitions.

For now, policymakers have been content to cite the downside risks to growth from COVID-19, but have argued it is too early to say what the scale of the impact might be and is not providing enough dovish impulse to push gold to the vital $1600 /oz, But the strong USD and a distinct air that risk-on investor sentiment will increase are enough to put a cap on gold.

Investors’ sanguine reaction to the economic fallout from the coronavirus will be tested in the coming weeks. If the economic data comes out weaker than expected, you will be happy to have included gold as a quality asset class in your portfolio. In these uncertain times, gold should remain prime quality asset purchases as a hedge against a stock market correction.

Currency Markets

USD Dollar 

US Retail Sales is going to be essential for the FX market, and while intraday ranges have been relatively tight, they could even be narrower today as the market might sit on their hands. But if there a trade to be had, it could be through short-term tactical plays vs. a weaker Retail sales print. Although I don’t have an absolute reason to fade the core number +0.3%, some may view the estimated headline print a bit optimistic, given global growth uncreates. But one thing that I have learned after decades in the FX game is never to speculate against the resilience of the US consumer even through hell or high water.

Asia FX

The relatively indifferent FX reaction to the Hubei news suggests that investors continue to continue to look through the economic impact.

The USD has been enduringly bid d, although FX vols are only slightly higher. The downtrend in USDCNH since September 2019 remains intact, 12-month forward points narrowed further, and an ongoing sell-off in risk reversals over the past week suggests a more limited demand for protection against a CNH sell-off as the PBoC is offering up a convincing backstop.

Overall the somewhat muted reaction may be attributable to the fact that the number of new cases outside China has failed to rise. However, investors’ sanguine response to the economic fallout from the coronavirus will be tested in the coming weeks, so at this stage of the game, Asia FX investors don’t want to run to far ahead of the economic realities. Hence, they remain cautious about adding more currency risk before assessing the depth of the economic fallout.

There are three main channels for this fallout. 

One is the tourism channel. The impact is easily quantifiable, and the initial reaction of the markets has been most punitive for the more vulnerable economies on this metric – THB and SGD. What’s harder to assess is the damage via the other two channels – supply chains and demand contraction, and for this, we need to see the empirical data. For that impulse, the release of Korea 20-day exports (Feb 21) is essential.

The Malaysian Ringgit 

The US equity markets are getting encouraged by easy money around the Fed repo remedies, and the S&P 500 bounces as not driven by growth rebound. Hence, without an impressive rebound in China data and or global growth, there is no positive risk knock-on effect from US markets as Asia currencies remain out of favor given the gloomy local economic outlook. Eventually, buying into a post-coronavirus manufacturing rebound will make sense. Still, it’s a bit early to start front running that trade versus the strong USD, so the Ringgit continues to trade defensively.

G-10 Currency 

The Euro 

Investors continue to ‘look through’ the economic impact of coronavirus, ostensibly driving EUR weakness via long carry positions.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

Again, it’s the “lose-lose” situation for the Euro that we suggested at the start of the year.

The Pound 

Following news of UK Finance Minister Sajid Javid’s resignation, as reported by The Sun newspaper, judging by press reports, it would seem that the UK prime minister wants complete integration of Downing Street and the Treasury.

The pound is rallying as closer integration between “No 10, “and the Treasury would almost certainly mean a loosening of fiscal rules and higher budgetary spending than under Sajid Javid.


Ho Hum, Another Day Another Stock Market High Water Mark. US Markets Close At Record Highs As Coronavirus Fear Ebb.

Revised market open 

China Hubei Coronavirus update Feb 12th: 14,840 additional cases (under revised standards) v 1,638 prior; Daily death toll 242 v 94 prior

Revised standards have started to include cases diagnosed under new method – Notes it started involving cases diagnosed with the new process among confirmed cases from Thursday (Feb 13th) –

This certainly doesn’t sound good, and if I’m reading this headline correctly as on the first glean, there could be a severe case under-reporting going on.

Stay calm and buy the dip?

The Hubei Coronavirus update headline has initially hit like a ton of bricks given this is one of the market’s biggest fears.

So, traders have jumped into sell first, ask questions later mode. But is it time to stay calm and buy the dip?

The headline on the sharp jump in Covvid-19 cases looks gnarly on the surface. Still, it is essential to note that in Hubei, the epicenter of the outbreak, there has been a severe shortage of testing kits reported over the past few weeks. Many people who had symptoms (and even positive affirmation of things like pneumonia) were unable to be confirmed as virus carriers due to the testing kit shortage, and some were sent home to self-quarantine. The government made a push this weekend to clear the backlog of tests, and this big jump in confirmed cases could be a result of this.

And while there could be a knock-on effect where the Rest of China has been under-reporting. Still, I don’t think its a threat to the virus cluster beyond Hubei at this stage as other countries are certainly adhering to strict reporting protocol, and the cluster effect outside of China is receding.

On a more market-friendly note, the PBoC will continue to intervene perhaps now even more aggressively either with RRR or deeper interest rate cuts.

But Asia market rather than a global market and of course, demand sensitive to China commodities like Oil will be more re prone to the sell-off. Still, for ASEAN currency risk, its unlikely to weaken off to significantly as Yuan is doubtful to weaken through 7.0 USDCNH given the PBoC policy backstop.

Ho Hum, another day another stock market high water mark.US markets close at record highs as coronavirus fear ebb.

US equities post another day of gains WednesdayS&P500 up 0.5% heading into the close, US 10-year treasury yields rose 3bps to 1.63% and the 2s5s curve – which inverted earlier in the week – has turned positive again. Asia equity futures are trading in the green pre cash market open with the China proxies looking to open up well, while oil lifted 2.6%

Investors’ sentiment was boosted by the fact that China reported the lowest number of new virus cases since the end of January, while a senior medical adviser suggested the outbreak could be over by April.

Central bankers continue to remind that it is too early to gauge the economic impact from the virus fully; the RBNZ and Riksbank the latest to acknowledge downside risks. Still, the market looks increasingly willing to look through virus headlines. And with market flush with cash providing the juice in the market and given the negative data impact is so well flagged, in no small degree the growth downgrades have become somewhat irrelevant.

With risk positive momentum building and stocks and commodities both singing from the same song page, it appears the markets are finally letting go of the coronavirus fears.

Although “The Street” is downgrading growth forecasts, for now, the market has decided enough is enough. And the source of funds for the latest asset price move is the PBoC policy bazooka bolstering Asia sentiment the Fed’s repo remedies which have left banks awash with cash.

The coronavirus impact is probably just a near term demand shock that has been mitigated by central bank liquidity. Still, given that stocks are purely a momentum story at the moment, investors have little choice but to get on board or risk getting left at the station.

S&P 500 3400 level sure sounds like a beautiful Valentine’s day gift, especially if you own equities.

Oil markets

Oil is up as OPEC awaits an official response from Russia regarding proposed production cuts. This despite a hefty inventory build reported by the EIA.

Oil markets posted its most significant daily gain in six-week after reports of coronavirus cases in mainland China appear to be leveling off, according to the latest data from the Johns Hopkins Centre For Systems Science and Engineering.

So, despite the sizeable inventory swell, the EIA report fell through the cracks given the mounting evidence the coronavirus transmission is slowing. At the same time, oil demand sentiment is getting further boosted by stories that Foxconn hopes to resume 50% of its production in China by the end of the month and be at 80% capacity by the end of March.

But not wanting to sound like a killjoy, the markets have a sizeable glut to deal with, and the EIA report did little to alleviate those oversupplied concerns, bringing market attention full circle back to the elephant in the room, Russia agreeing to the JTC production compliance.

But Russia may find it easier to stomach temporary production cuts given relief is just around. And their market share won’t necessarily be compromised by US production, which would also be less willing to absorb the start-up cost to ramp up production immediately Which could be hugely bullish for oil markets

But clearly, the big story for prompt oil concerns is coronavirus fears are lifting as the virus transmission eases and which should send more shorts running for cover, While those shorts that remain at the risk-on party won’t be dancing to far from the exits as China demand could return with a vengeance.

Gold markets

Gold demand was tempered by the strong US dollar and rising risk appetite and while the underlying support remains there, but the upside looks limited over the near term.

Gold has been range-bound of late but supported given the headwinds it faces. Two factors continue to offer support One is that global monetary policy remains soft, and interest rates are low. The other is that geopolitical risks beyond the coronavirus are bullish. But with ETFs, and Comex net long positions high and if anything, a little bit stretched. When flagged against a firm USD, stock market gains, and the bounce higher in US bond yields, it suggests fast money traders who have been driving the bulk of action these days would probably be more inclined to trade gold from the short side limiting gains.

Chair Powell’s comments to the congress were bullish for gold longer-term but neutral in the immediate to short term. Without an immediate dovish Fed impulse, there is limited upside for gold currently, but the US election cycle risk should support gold. The race now moves to Nevada with a caucus on 22 February with an essential debate before that on 19 February, but it is still unclear if Michael Bloomberg, who would pose a real threat to Trump, will meet the polling criteria to make it to the debate stage.

Asia FX

The Yuan 

The PBoC continues to stabilize the markets has limited RMB weakness via fixing USD/CNY lower than the market’s expectation while introducing various countercyclical measures to encourage portfolio inflows. As the market gradually pivots out of the virus haze and begins to see some light at the end of the tunnel and coupled with the mainland macro measures designed to ramp up production, Asia FX traders could start to front-run the China rebound trade more aggressively.

According to Deutsche Bank MTD, net equity inflows are at ~$2bn, slightly more than in January and well above the 2019 average, while bond flows in January showed ~ $2.1bn of inflows.

So, if the PBoC continues to limit RMB weakness, and with Bond market rallying, portfolio inflows should continue to remain active, especially given the ongoing bond index inclusion, such as to the GBI-EM, which will include China starting from the 28 February. Hence the healthy Hedge Fund appetite for all things RMB.

The Ringgit

While the Ringgit weakened on the worse than expected GDP print, which then brought forward rate cut prediction. Improving regional risk sentiment as coronavirus cases in mainland China appears to be leveling off, and rising oil prices should provide some immediate support for the Ringgit.

The Tourism basket

While the Thai Bhat has recovered from the peak coronavirus fear levels, the Singapore dollar continues to struggle for traction. But unlike regional currencies like the MYR that should benefit from the local rebound trade on the back of China pent up production demand coming back online. There has been a sizable chunk of tourism revenue in Thailand that has been lost, and you can’t replace that. So, any further gains in the THB might not be so immediately forthcoming, given that it’s impossible to make up that lost revenue. Still, the Thai market is in a much better place than it was only 48 hours ago.

Secondary virus cluster fears continue to weigh on Singapore, so traders remain very defensive knowing the MAS could eventually cut interest rates to support the flagging Singapore economy.

G-10 Currencies

The Japanese Yen

The main G10 flow over the past 24 hours has been USDJPY, with the pair back above the 110 handles as risk continues to trade well supported. And with risk sentiment well supported as virus fears turn benign, it seems pointless to fight it. While +110 has proven to tricky level to go long recently, gains could be a bit of a grind today unless the stock market momentum takes a run at the S&P 500 3400 levels.

The Euro

In EURUSD, the constant supply over the past 24 hours taking its toll. The pair is trading below Tuesday’s lows, but still holding just below the October lows, at least for now. And now with the Euro as the go-to currency trade funder via EM FX kicking in, offers will likely remain thick over the near term. The markets at a critical level, so the next move could be key.

Canadian Dollar 

More positive signs for the Loonie is that more topside strikes north of 1.3500 is getting offered through the brokers as the spot price weakens, given the recovery in oil prices.


Bubbles do Funny Things To Bank Traders.

US equities were a touch stronger Tuesday but trading well off intraday peaks with S&P500 up 0.1% heading towards the close. US treasury yields rose, — ten-years up 2bps to 1.59%. With gains in European equities and most of Asia as well, the market looks increasingly willing to look through concerns about coronavirus, newly named Covid-19 overnight by the WHO. In his Congressional testimony, Fed Chair Powell noted the Fed is “closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.” However, it was too early to make a full assessment. BoE Governor Mark Carney was similarly cautious but noted the virus had not led to any tightening of financial conditions for UK banks.

But it could be the degree to which investors are willing to look past weak China high-frequency data in the coming weeks will that help determine whether the risk rally has the legs to run.

I was relieved this morning to see the markets hadn’t gone stark raving bonkers and taken the S&P 500 closer to 3400. However, risk parity bubbles do funny things to bank traders who appear to be borrowing a page out of George Soros playbook “when I see a bubble forming; I rush in to buy it. “Six weeks into 2020 and already the S&P 500 has hit the mean of strategists forecasts for the year-end of 3355 points. On a further 7% gain, the SPX will be above the most bullish of all predictions recorded by Bloomberg of 3600.

But the markets are probably not quite as risk-on as the record-setting pace might suggest. Growth or defensive stocks have outperformed value by 25% so far this year. Equities are indeed reigning supreme, but it’s driven by the mega-momentum stocks (tech) rather than the economically-sensitive cyclical stocks. Suggesting that even if the consensus view for a sharp “V” economic reaction to coronavirus is wrong and the recovery period takes on a hockey stick shape, institution equity ownership is still pretty cautious by design. So provided the Federal Reserve has the markets back, the bulk of US stock market positioning should remain relatively immune to the current market worries at this stage. So, if you’re looking for a contrarian storyline, you might want to skip the next few paragraphs.

There is quite a bit of ink being spilled to say that markets are not taking nCoV seriously. But with 10-year yields falling to sub-1.6% and the Fed hinting that its reaction function includes Covid-19 and the PBoC already flooding markets awash with cash, papers over that cautious scenario. Such easy financial conditions with the potential for even more comfortable conditions as global central banks dovish reaction function to a temporary global growth shock has investors champing at the bit.

Why are equities up and bonds up too? 

The S&P 500, the Nasdaq, and the Dow Jones Industrial Average are all trading around record highs while the 10-year US Treasuries yield is at 1.58%, from 1.9% at the start of the year. For that, everyone can blame the central banks, who have succeeded in dampening volatility by guiding markets successfully in the direction they want them to go.

The US Federal Reserve, in its bid to avoid another repo market meltdown reminiscent of September 2019, had probably overflooded things when it injected billions of dollars of cash into the system to push rates lower. This monetary policy overcooked state of things left banks with heaps of money, which they are putting to work buying bonds. And as such, equities, particularly growth stocks, are reveling in the afterglow of the Fed easy money have only been able to gain “because” Treasury yields are low.

And with everyone thinking the Fed is either on hold or cutting with a rate hike a long way off as such traders continue to look for optimal bullish risk-reward and continue to shrug off the likely economic impact of the Covid-19.

Are things stretched too far? 

Possibly but at this time, there is absolutely no stopping equity market momentum. So far this year, investors have shrugged off patchy earnings, increased tensions between the US and Iran, and the nCoV outbreak. There isn’t much else you can throw at them right now. With that in mind, it seems pretty lame to think the outcome of the Democratic presidential primary is going to have much impact. Perhaps the biggest threat to the market is the consensus view that the effect of the coronavirus will be a V-shaped recovery.

Oil markets

With OPEC and friends paralyzed thanks to Russia DEC CL 20 vs. 21 in contango BrentWTI <$4 suggesting globalized Covid-19 effect runs deep. Any thought to what breaks this daily descending channel??

Although prices bounced back from a one-year low, the thought that OPEC could sit on their hands until March has brought the bears back out on mass. OPEC + failure for now to follow the Joint technical Committee’s recommendation to cut an additional 600kb/d of production has allowed sentiment to turn cumulatively more negative.

The anticipation of an early February emergency meeting of the OPEC+ group had supported oil prices. Still, a near term meeting seems to be a view supported on little more than a wing and a prayer at this stage. And now, it appears OPEC wants to quantify the demand implication before acting. Still, with the cartel failing to act swiftly on the JTC recommendation, this has allowed the narrative to fester and create divisions within the group.

But surely, it’s tough for OPEC and Russia to ignore the forward curve that continues to move deeper into contango. And traders probably wouldn’t be surprised to see an emergency meeting called if WTI moves much lower.

We’re at a significant inflection point for the Oil markets. If China fails to contain the virus domestically within a few weeks and or virus clusters expand around the globe, it’s a whole new kettle of fish as tail risks get incredibly fatter for oil markets.

Gold markets

There has been very little interest in gold in the past few days as the stronger USD continues to sap gold momentum, plus the bulk of buying on the back of virus fears went through early last week.

With the majority of hedge positions in place, as nCoV risk turns benign and investors continue to shrug off the economic impacts from Covid-19, gold speculators and fast money accounts will generally start to trade the ranges in gold from the short side — effectively keeping a lid on price action which then ultimately triggers some profit-taking from weaker gold longs.

With markets awash with cash, the fear of creating an equity market asset bubble alone should keep the Fed parked on the sidelines, not necessarily bullish for gold. But instead, it’s US fiscal policy, which remains long term price friendly.

So far, global financial markets have soaked up the growth in US debt. The yield on the critical 10-year has stayed well below 2% and is close to 1.5%. Interest repayments, as a share of GDP, are only half the level of the early 1990s, which puts less pressure on government coffers. That is despite the growth in debt. But this is a knock-on effect of investors’ demand for safe assets, which include gold.

While Fed policy certainty is probably lessening the demand for gold, but should investors’ appetite for US debt start to fade, gold is likely to be one of the few beneficiaries as investors seek gold as quality assets. This may not happen any time soon, but it’s a good enough reason to hold gold as a prime quality asset in your portfolio.

In the meantime, look for gold to trade in the well-trodden territory as a stack of quality assets like US bond and the dollar battle it out for your safe-haven flows.

Currency markets

I get it that we’re a bit more cautious in Asia, especially given that we are closer to the epicenter of all the Covid-19 fears. Still, should Asia traders be 250 pips overly cautions given the broader collapse in USD-Asia (USDCNH) that transpired after handing the book over to London yesterday?

Still, I think running Asia currency risk based on global stock market performance, which is absent a bump in economic Asia sensitive cyclical stocks, doesn’t appear to make much sense given that local currency tail risk remains pretty fat. And while it makes sense to unwind some overextended long Asia weekend gamma hedges (or in my case getting stopped out on long USDCNH hedges at breakeven) given the typically robust convexity of regional currency sentiment to PBoC stimulus. However, views are immaterial to what price action suggests, and that is what we should trade on, not opinions.

Singapore dollar

Could the Sing dollar be the regional voice of reason as, despite the overnight collapse in the broader USD-Asia complex, the USDSGD remains bid around 1.3870 on local support?

Today Asia FX view 

As we enter the land of currency confusion, Asia FX markets continue to beat to a familiar drum. USDAsia remains better offered on the back of improved risk sentiment. This seems to be taking hold as hopes build that China will soon reopen for business, the Zhong Nanshan scenario holds, and as the PBoC policy guides us to risk parity nirvana. Time will tell if that view is correct.

As for G-10

Forty-eight hours is the typical duration for G-10 trends these days. When it comes to painting a dominant currency view, it feels that I’m confined to an empty windswept desert. Forget trend following, home run swings or break out trades, these types of market reward patience where bunts singles, doubles and mean reversion remain the trade calls of the day. I defer to my FX reversion algorithm, which doesn’t need a currency view for a trade of the day.


China Tariff Cut Was The Eureka Moment But It’s a pre-NFP Friday And The Situation In Hubei Still Looks Challenging


It was another good day for global equities, which saw the S&P500 up 0.2% to notch a fresh record high. European stocks again saw similar gains. US 10-year treasury yields slipped 1bp to 1.64%. The eureka moment came on the back of China’s pledged tariff cuts, which has captured the imagination of analysts and bullish investors alike. And with indications that the coronavirus outbreak is plateauing outside of China, it too provided an open invitation to strap on risk as investors appear increasingly prepared to shrug off concerns about the viruses enduring impact on growth.

Provided the US reciprocates the Chinese tariff cut with one of its own, the trade calm will be viewed in a very trade-friendly light and well beyond the immediate fiscal benefits. The sweetener is a fantastic pacesetter for Phase 2 of the trade negotiations. Still, the frontrunning commitment is also very reassuring after the legacy of delays to Phase One while also eases some coronavirus growth concerns.

Why market could pare risk today

Beyond the usual pre NFP moves which typically sees traders jockeying for a position amid their regular Friday housekeeping duties

While the outbreak appears to be stabilizing outside Hubei Province, but the situation in Wuhan and Hubei may still be challenging, and the disruption to China’s economy will likely continue in the short term. This may give cause for pause or at minimum investors coming up for air as the street feels a wee bit long after aggressively front running both the reflation and Wuhan transitory trade this week.

And the possible equity market correction when the full economic impact of the virus is realized in the next series of ASEAN data releases is supporting the gold market diversification hedge.

Outlook for next week

With the thought that global central banks are more than willing to cover the markets back, the extent to which investors look through” weak China data in the coming weeks will help determine whether this week’s risk rally has the legs to run.

Remember, its an election year, and a timely roll back in a chunk of US tariffs could trigger a move in the S&P500 to 3500 all but assuring a Trump victory.

Gold markets

Gold suffered quite a capitulation this week, yet demand endures.

  • The gold seasonality effect is ebbing.
  •  The Wuhan shock and awe fear are receding.
  •  US exceptionalism inflows are punching both SPX and USD tickets higher.
  • US 10-year yields have begun to move off their post-coronavirus lows, and less easing is being priced in, yet gold endures.

Why is gold so strong? Wednesday’s strong ADP payroll result has put the USD back atop the king of the hill, and the US currency looks firm. Equities have been surging, with new highs hit in the US and European markets, and bond yields have been nudging higher. All this implies lower gold prices. Not to mention weak EM physical demand, where the bulk of the world’s gold bullion is purchased. Yet gold still remains firm.

Ultimately in this Risk on Risk off (RoRo) environment, gold is perceived as a fantastic asset to hold if equities correct. Investors do not have, in many cases, better alternatives with the bulk of government bond yields globally are still negatively yielding. So, gold remains bought for portfolio diversification and as a quality asset, which seems to have room to outperform other safe havens regardless of whether risk sentiment deteriorates further given its strong inverse correlation to lower short term interest rates.

In short, gold offers an excellent hedge with the market possible, returning its focus to US-China trade headlines while US election risk comes into focus.

Oil markets

PEC+ technical meeting results in a recommendation for a 600kb/d production cut. This will need to be discussed at a ministerial meeting at a date that has yet to be agreed upon. This cut would be above the low end of the range recently mentioned in press reports, but well below the high end (1mb/d+), and price action is enough to tell you the market is disappointed

But the bigger fly in the ointment is Russia as the remain a reluctant cutter given their breakeven are much lower, so we’re starting to see the U-turn in prices I alluded to yesterday if Russia doesn’t play ball. Still, we’ve seen this all before, and at this time, there is little reason for the market to suspect Russia will break from the usual pattern of flip-flopping until the last minute but ultimately agreeing to cut.

Regardless of Russia’s motivations, the 600kb/d may only provide little more than a band-aid on a broken leg as more oil price downgrades are expected to come down the pipe due to ruinous demand effect the virus is having on Chinese consumption. For instance, the more pronounced the virus effect is on China, the more significant the oil demand devastation as estimates are now getting nudged higher to 3.2Mbd + (~25% of China demand and ~3% of the global market) amid the extended period of industrial and consumption gridlock in the Chinese economy.

But with the market preparing for (black) swan dive, its critical that OPEC + compliance comes through to put a floor on oil prices.

Currency markets

Asia FX

To the extent that currency traders are willing to front-run both the global reflation and Wuhan transitory trade in the absence of quantifiable economic data will dictate the pace of play in Asia FX.

The Ringgit is trading to the top end of my weekly range. Possibly due to  Malaysia’s export sensitivity to a weaker China economy, and now with local traders are adjusting risk tolerances for a possible BNM proactive interest rate cut, we could see a bit more weakness into the weekend. Indeed, this could be a case of short-term pain long term gain, but look for 4.15 to hold; however, as bond inflows should pick up with a rate cut in the offing.

With a litany of ASEAN central bank cutting interest in the face of weaker economic growth, ASIA China sensitive FX may not be the best place to hold currency balances with the US dollar holding firm. Let alone leveraged foreign exchange risk over the short term, given the market risk on risk-off (RoRo) proclivities around the key bellwether USDCNH.

While the Wuhan rebound trade could be a home run this year, traders may feel more comfortable getting the widely expected doomy China’s high-frequency data and regional export numbers, which are going to be weak, out of the way before entering the rebound trade.

Currencies that are most sensitive to the China/Asia growth cycle and commodity demand took a hit during this growth scare. The Won and Aud stand out the most. While currencies with high real yields have performed surprising well like the IDR, as the Indonesian bond market remains extremely attractive for real money investors


The Eur continues to languish through the Risk on-risk off RoRo cycle. There is no haven appetite as Europe has the developed world’s lowest real yields. But when risk appetite turns on, because of those low yields, the Euro becomes the world’s best funder as everyone short trades the Euro to fund those EM carry trades. It’s a continuous cycle of ” lose-lose ” for the Euro in a “RoRo” environment.


Asia Open:The PBoC Policy Bazookas


Global markets have advanced on the back of the better tone from yesterday’s Asian session. The main staging post was unquestionably the Chinese equities that managed to claw back some of Monday’s steep losses. The CSI 300 finished the day up 2.64% after a 7.88% drop. Other Asian markets, however, weren’t initially so passionate. Still, in the absence of hard data to quantifiably guide risk, the diminishing fear factor around the virus, along with the PBoC policy bazooka, has boosted sentiment.

In turn, there has been a significant bounce in Chinese equity ETFs overnight. The FTSE China A50 (XUA) is leading the charge, which makes sense if you believe the   FT article about a so-called “national team.” Who are saddled up and ready to defend the PBoC’s equivalent of Maginot line? (I hope that analogy resonates on some level) And clearly, the broader markets believe these proxies offer a better steer as its been a great day in the macro markets with a multitude of crossovers (SPX & USDJPY) ripping higher.

Just as has been seen in stocks, the virus panic is starting to come out of bonds. But if your holding bonds amid this disinflationary shock of the coronavirus in the pipeline, you may want to take heed. The coming deluge of stimulus could have an astonishingly inflationary impact.

I’m probably the market’s worst stock picker, but I’m always quick to own up to my mistakes. And while I have been quick to suggest of late, that the US equity market doesn’t provide the best pilot for risk, that view is entirely wrong. With the falls in the commodity market clouding my better judgment and pushing the markets fear index through the roof, the SPX has been unyielding in its propensity to consume virtually everything the market can throw at it, including the kitchen sink. If war, the mutant black plague, or even with half of China going underground hasn’t knocked the S&P 500 off its high-horse, I’m not sure anything will.

There has to be some particular reason beyond tarot card readings why the market is on the ups, and while the economic impact is starting to surface, there is still a lot of number crunching to be had.

However, here is what I’m thinking based on a less fuzzy look through the Wuhan virus lens,

1) The coronavirus outbreak appears to be slowing outside the Hubei Province.

2) The PBoC policy responses are lining up

3) expect more fiscal measures to follow

4)the WHO falling short of labeling the Coronavirus outbreak a pandemic. Instead, WHO sees an epidemic with multiple locations, with cases outside of Hubei described as “spillover cases.”

5) reasonably dismissive commentary from central bankers about the long-term impact (Bostic in the US and the RBA’s post-meeting statement),

So, markets look to be shrugging off Coronavirus concerns. At least for now.

Oil markets

Crude tried to rebound on Tuesday, as OPEC and its allies convened what amounts to an emergency meeting in Vienna to conduct an “urgent” assessment of how the coronavirus outbreak is likely to impact demand for crude, which plunged 16% last month in the worst start to a year since 1991.

And while OPEC + is apparently on the same page and speaking from one voice, the market is replying with an even louder unified voice as Oil traders continued to give their sell button a good work out overnight.

Additional OPEC+ cuts are necessary to put a floor on oil prices and the thought that they are unlikely to sit on their hands, even prompted a decent short-covering rally. But to no avail, as the market looks to be building up for yet another (black) swan dive. WTI settled below the critical $50 mark for the first time in over a year as Chinese refineries are stuck trying to give oil away. So, unless OPEC can discover a way to put oil back in the ground, the path of least resistance could be lower.

Oil continues to be driven by growing concerns about the demand impact of the coronavirus and the potential offsetting impact of a possible OPEC+ supply response.

But let’s not try to sugar coat things here, with nearly 50 % of China industrial complex shuttered we’re headed for one of the worst Q1 economic growth periods on record. With a significant haircut yet to be completely factored into the equation, for the finely tuned global oil supply balances, it will be like the equivalent of mixing oil and vinegar; they don’t mix.

Honestly, every time I read an OPEC headline, I have thoughts of The Little Dutch Boy putting his thumb in the dike.

The oil market is falling sharply, which is pretty alarming given OPEC is considering an emergency cut. But the implied near-term conservative fall in demand from China could create a supply/demand imbalance of >1Mbd in 1Q. The magnitude of this of implicit demand-driven inventory swell is of epic proportions and closely correlates with a historical sell off’s towards near term cash cost levels (break evens). So, once the reality of the data demise sets in, we should expect a lot of Q1 oil price revision coming down the pipe. Even more so, after looking at my inbox this morning, which is brimming with “Impact of the coronavirus on global growth” conference call invitations.

Gold markets

I got up early to write my gold commentary, and I have spent two agonizing hours trying to formulate a view with some level of sensitivity. Even more so, after looking at the latest EFT gold holding data, I would imagine a lot of investors are taking it on the chin today.

The gold market hit the skids as global equity markets rebounded on receding Wuhan virus fears. Still, arguably the move may be overdone and possibly attributed to positioning length as many investors got stopped out of positions as momentum continued to cascade lower.

The recovery in investor risk-on appetite, as corroborated by equity market rallies across the globe, incontrovertibly undercut the demand for gold. For now, China’s liquidity measures have more than offset the market fears about coronavirus concerns.

With Nasdaq hitting a record high and attracting USD inflows, which has seen $Index holding above 97.80, this also dented oil demand.

Bond yields also rose, which is typically negative for gold, but it was the rebounding equity market that did the most damage.

And then to rub salt in the gold market, wound positive US economic data undercut prices. December factory orders rose the most in 18 months in December.

Currency markets

I’m not sure if it’s still too early to repurchase a blue ticket back to AsiaFX, but the PBoC policy bazooka and currency guidance are certainly offering up an inviting springboard. While its also a bit early to suggest outhouse to the penthouse, the PBoC’s backstopped knock-on effect should ultimately attract regional inflows, especially if the Yuan continues to travel on a positive tangent. . And with the Ringgit turning overly bearish in quick order on China risk as local equity outflows raced higher given Malaysia’s export to China sensitivity. The PBoC stimulus effort could provide a boost to both Malaysia’s manufacturing and commodity export sectors and as quickly reverse the tide.


With that said, the bias remains to buy USDCNH for a defense against a fix above 7.0 USDCNY if economic concerns in China deteriorate quickly. In turn, a bearish for EMFX fix above 7 USDCNY, will provide the next staging post for a significant Asia FX risk wobble, which could then open the door for a Yuan correlated MYR selloff reminiscent of August -September 2019 lows.

The same goes for the rest of EMFX Asia.

WHO Raises Alert, But Global Pandemic Fears Ease


Not so surprising from the market’s perspective as traders had already moved from buying the dip to selling fact, the World Health Organization (WHO) Director Adhanom: declared coronavirus a “Public Health Emergency of International Concern.” The upgrade, however, has triggered some shorts to cover after the director gave the WHO’s stamp of approval to China’s aggressive containment effort. While in the same breath, eased some mushrooming fears by suggesting the number of outbreaks is relatively small, easing ballooning global pandemic fears

Over hedged positions have continued to unwind; still, the market is left with the struggle to quantify the economic impact of the coronavirus, which is a cause for concern. Yet, for now, the market’s risk lights have shifted from flickering on red to a steady shade of amber, which could bring more risk back into play. It’s incredible just how resilient US equity markets are. It appears that investors are taking another virus shrug and are now turning the focus to this week’s dovish fed delivery that suggests equity valuation multiples can continue to expand because rates are low.

But at this stage, this should not be confused by the start of a big transitory trade as the market will need more clarity on the results of containment efforts in China. But the peak in coronavirus cases might be near, and the turning point may not be far away; however, the key will be the spread of the virus slowing each day, so this could be a considerable weekend for risk as the market remains focused on headcount.

A little encouragement was all that was needed. And those that were taking a more rational view of things and viewed the dip as an excellent buying opportunity are getting rewarded across a plethora of growth asset classes.

US Q4 GDP came in touch ahead of expectations on Thursday at 2.1%. But softer details around personal consumption & PCE, however, will likely keep US ‘weaker growth’ narrative and the market consensus 2020 ‘weaker USD vs. Euro ‘ trade alive. Not that it ultimately died, it’s been more or less a case that dollar bears have been unwilling to stand in the way safe-haven dollar flows compounded by the low FX volatility and negative carry.

While it will remain challenging to put concerns over the coronavirus to one side, but fortunately for the overall risk climate, the robust data in the US should at least be able to keep risk on the even keel.

The Bank of England’s Monetary Policy Committee left rates on hold on Thursday at 0.75%. And short sterling positions came under pressure immediately on the BoE hold but, given the dovish nature of the decision, a +1.3100 top was about right on the overshoot, and the market then eventually settled into the 1.3075-1.3100 level.

I’ve been trading Mark Carney from his 2008 Bank of Canada days and Carney’s style of delivery – the ‘on the one hand, and on the other hand’ mechanism – means the presser tends to have a lot of flip flops. But at days end, it’s challenging to view Carney’s comments through anything other than a dovish on hold lens with undetermined Brexit uncertainties yet to play out.

Oil markets

With the WHO decree now out of the way, and with a softer upgrade than expected which lessened pandemic fears, oil traders can get back to the business at hand.

While it’s virtually impossible to quantify the full extent of the demand destruction from the virus outbreak, if there was one asset class more oversold than others, it had to be oil given the bigger than life global supply overhang.


Saudi Arabia is reportedly open to discussions about moving a planned OPEC+ meeting to early February from March to coordinate action and counter the oil price slide. In the wake of the WHO’s softer decree, the market will likely now view OPEC compliance efforts in a more constructive light as the negative sentiment snowballing effect from the coronavirus gets temporarily kicked to the curb.

Shorts were covered very aggressively into the NYMEX close as a global pandemic appears less imminent for now. But the key for the move to extend will be the interpretation of peak contagion as viewed through the spread of the virus slowing each day. So, the next 24-72 hours could be critical for a near term oil price comeback.


Gold falls as risk appetite rises on a less risk toxic decree from WHO as the equity market sell-off reverts. Gold was very much an equity market play this week as traders we’re buying gold as a hedge against a stock market meltdown. So, with the S&P 500 gaining nearly 50 points in fast order into the New York close, gold has come off hard as fast money speculators headed for the exits all at the same time into the NY COMEX as the futures execution window was closing quickly.

The coronavirus is evolving but ultimately a short-term transitory story; however, the bullish long-term gold strategy remains intact. And it is supported by a fed impulse after Chair Powell was not too subtle about sounding dovish.

The US elections and an array of other market risks have been put on the back burner and have been consumed by the bandwidth taken up by the virus. Still, the laundry list of market threats is not about to diminish anytime soon, and this will remain supportive for gold.

Currency markets

A very aggressive 200 pips USDCNH sell-off in the NY afternoon, which is typically a shallow liquidity period for currency trading as a whole, let alone CNH and other ASEAN NDF’s.


But with ASEAN risk at the epicenter of all things virus and with the local adding machines continuing to tally up the negative China GDP implications. It might be safe to assume for the short term anyway there could be US dollar demand on dips across the ASEAN basket to defend possible outflows when China comes back online. But with global contagion fears easing, it’s hard not to think that those concerns won’t start to diminish also.

It’s Going to Take More Than the ” Surgical Face Mask Hedge”

Perusing the ASEAN market increasingly tilted landscape, it’s going to take more the “surgical face mask” hedge to reverse the trend, which is trading at 10 X premium in my neck of the woods (Bangkok), incidentally.

Fears are increasing again and should continue to weigh on global markets with Asian equities suffering harder knockdowns. I am skeptical investors will be as quick to jump into trades fading these moves until the transitory period sets in.

But the market is so finely tuned these days, and in a matter of days, its self-correcting mechanism takes hold without the need for central bank policy. One of the more undervalued market self-correcting mechanisms is how quickly financial conditions loosen. From last Friday’s tops to peak fear yesterday, the bond markets shaved off a whopping 15 basis points on ten-year US yields, which offset the stronger dollar and decline in the equity market and accomplishes much of the central bank heavy lifting. But I’m not sure that itself will be enough to paper over all the cracks.

To be sure, the weakness in underlying ASEAN bourses and soon to be global is transcending the usual suspects, luxury, travel, and tourism.
Investors could be forgiven for thinking that markets have it in for them at the moment. Just as the market puts phase one trade deal to bed, then we get hit with geopolitical concerns around a potential US-Iran war, and just as those fears died down, they were replaced by WARS of another kind (Wuhan Acute Respiratory Syndrome)

The market was able to shrug things off quickly in the past, but the other risk here is that all the bandwidth is being taken up by the virus, and is taking focus away from other issues.

Frankly, I’m surprised there was very little attention paid to the progress Bernie Sanders had made towards the Democratic nomination.

FX Foreign outflows from SETi continued.  YTD outflows from Thailand approached $400mil, the highest outflows among Asian markets this year.  THB broke 31 as of this morning, and USDTHB continued to grind higher.

I’ve been a bit narrowly focused on THB and CNH for obvious reasons. Still, I think the ASEAN basket, and especially the Malaysia Ringgit will remain extremely vulnerable over the next few sessions on potential outflows as what supported the Ringgit entering the Year of the Rat is gradually evaporating. As discussions on the expected market fallout from the Novel coronavirus continue to send waves of negative across the bow and the market reaction is shifting from a knee-jerk USD adjustment to a full hedge buy-in as Asia’ key bellwether proxy nudges towards 6.99 (USDCNH). The Ringgit remain prone beyond the CNH correlation basis.

Welcome To Yet Another Turn Around Tuesday

Also, there’s been quite a turnaround in fixed income after the US Treasury markets were solidly bid into the European session on the back of “safe-haven” demand, and as Inflation expectations/break-even moved lower in consort with enormous fall in commodity prices, But as risk shifted into positive gear the yields on US 10-year treasuries lifted.

And the robust results from Apple beating Q1 estimates, as well as Q2 guidance estimates, should help carry the US market’s positive tone into the Asia session.

But overall the here is no smoking gun in terms of one single headline, but Zhong Nanshan, a Chinese respiratory expert, is being quoted by Xinhua as saying the coronavirus outbreak could reach a peak in 10 days or so.

And, South China Morning Post, citing an expert, says Hong Kong researchers have already developed a vaccine for the coronavirus, but need time to test it.

I was amazed by the amount of bandwidth getting exhausted over this virus scare and how it could negatively affect investors’ psyche. But I should have been focusing on the TV effect after some of  the more influential market TV commentators spent the past 48 hours talking about “when to buy the dip.”, it seems to have resonated.

S&P e-minis traded positive all day yesterday – through Asia, Europe, and into the US session, which seems to have spurred the dip-buying fervor. But I think this is further proof that big investors believe the bulk of the US market risk is concentrated in stocks not directly exposed to the current market worries in no small degree.

There was a lot of fear factor playing out in the bond market over the past 48 hours as investors thought US inflation could become unanchored due to the toppling commodity prices and push the Fed to let the doves fly. But the market remains well above the absolute fear zone. The carnage in the Oil patch in late 2014 through 2015 was much more of an issue, and trade war fears pushed break evens toward crisis levels last summer. So far, the virus effect has palled in comparison as inflation break evens have fallen but not by much.

But the market as so finely tuned these days, and in a matter of 24 hours, its self-correcting mechanism takes hold without the need for central bank policy. One of the more undervalued market self-correcting mechanisms is how quickly financial conditions loosen. From last Friday’s tops to peak fear yesterday, the bond markets shaved off a whopping 15 basis points on ten-year US yields, which offset the stronger dollar and decline in the equity market, which are both large negatives for financial conditions.

On the US economic data front, which fortunately didn’t fall through the cracks, investors were left to digest a positive smorgasbord of US consumer confidence and home price data. Which reinforced the ongoing Fed narrative that consumer spending can carry the load and sustain the expansion through the continuous soft patch in investment.

Now it’s pivot time to the FOMC, where the Repo market appears to be not overly stressed, but there could be some marginal guidance there. But there will also be questions about the Fed’s response to the virus. Powell should stick to the mantra “will respond as necessary” and that “it is a transitory shock.” This should be enough to reassure investors that the Fed has ample policy wiggle room and to also remind them that epidemics are transitory, and so are the market fallouts.

Oil Prices

Oil prices stabilized very much in line with risk sentiment, and oil prices were further bolstered by the API report, which showed US crude stocks fell as traders continue to trudge through the unenviable task of figuring out the potential demand devastation impact from the coronavirus.

But this week, gold was very much and equity market play, so most of the damage done to gold prices appeared to be triggered by the comeback in equity markets overnight.

The FOMC is in focus, but with the recent virus scare, it’s improbable the Fed will stray too far from their current mandate while not wanting to upend the apple cart by commenting on the Repo market with sentiment arguably still fragile.

On the Virus front, Chair Powell will likely hammer home the transitory nature of the virus, which will not be particularly bullish for gold.

Still, there remain a plethora of risks that suggest gold prices could easily and quickly regain lost ground suggesting bid in dip mantra will continue to resonate.

But in 12 hours, the market has swung from 70:30 $1600 before $1560 to now 80:20 $1560 before $1600 as gold investors remain extremely impressionable by the moves in US equity markets.

Currency Markets

The key Asia bell-weather fear gauge, the offshore Yuan, continued to advance and pare losses overnight, apparently triggered by Xinhua and SCMP headlines. Long USDCNH was the market preferred defense strategy with onshore markets closed so positioning was massive long

Even yesterday, the strong adverse reaction on the CNH had macro names piling into long Yuan positions, probably thinking that the exaggerated sell-off didn’t reflect the actual mortality rate that is currently very much in line with the common flu.

And while it doesn’t feel like hold on to your hat moment for a short-term reversal and short squeeze on USDJPY but the relatively tame market reaction to the big jump in new nCoV cases is encouraging. And when combined with the taming of the Yuan beast (USDCNH topped and reversed), it might bring out more ASEAN currency risk-takers from a state of self-imposed hibernation (my hand goes in the air), which should be positive for local currency risk.

In G-10, you would expect the risk reversal to play out in AUDJPY, so that could be a bellwether for the day. Mind you, G-10 and ASEAN FX trader’s duration thresholds have compressed to about 2-4 hours in this environment, so I think the market could remain a bit whippy.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader