As Covid fears melt
Like the snowpack during spring
The yen, too, recedes

Remember when there was a universal idea that if the world’s second largest economy, and its fastest growing one at that, essentially shut down due to complications from an exogenous force (Covid-19), it would force investors to show concern over their risk allocations and seek out haven assets? Me neither! Remarkably, equity investors have become so convinced that central banks collectively have their “backs” that there is virtually no interest in limiting positions. This is certainly true across all equity markets, where after a mere twenty-four hours of modest concern over the fact that Q1 iPhone sales would be negatively impacted by Covid-19, the all clear signal was given. This time that signal took the form of the Chinese government announcing that they would be supporting the domestic airline industry, either encouraging takeovers of smaller airlines in financial trouble by their larger brethren, or via direct capital injections into companies. My sense is we will see both of those actions in order to be certain that no airlines go under.

Headlines like the following: “Chinese Companies Say They Can’t Afford to Pay Workers Now” from a Bloomberg story are seen as irrelevant and have no impact on risk assessment. Apparently the idea that the Chinese private sector, which accounts for two-thirds of GDP growth and 90% of new jobs, has basically been shuttered is not relevant in the calculations made by equity investors. Let me just say that the idea of risk has certainly evolved lately.

But this is the story. Equity investors are convinced that central banks will never allow stock markets to decline again and will do everything in their power to prevent any such decline. And while that may be true with regard to central bank efforts, there is a potential flaw in the theory. Central bank power, just like virtually everything else, is subject to the law of diminishing returns, and we are already seeing that situation in Europe and Japan. So even though central bankers may try to stop all declines, do not be surprised when a situation arises where they cannot do so.

Interestingly, bond market investors have a somewhat different view of the landscape as we continue to see interest in Treasuries and bunds with yields in both instruments continuing to grind slowly lower. However, for now, the equity markets are in the spotlight and driving the narrative.

So, with this in mind, it is easier to understand that Asian markets mostly rallied last night (Nikkei +0.9%, Hang Seng +0.5) although Shanghai edged lower by -0.15%. European markets are rocking this morning with the DAX (+0.55%), CAC (+0.7%) and FTSE100 (+0.8%) leading the way higher despite news that Adidas and Puma have seen sales collapse to virtually zero in China. US futures are also pointing higher, on the order of 0.3% as we would not want to be left out of the action here.

Treasury yields continue to sink, however, with the 10-year down to 1.56% while German bunds have fallen to -0.42%. So there is clearly some demand for haven assets, perhaps just not as much as we would expect. And finally, in the FX market, havens have lost their appeal. Most notably, the yen has tumbled 0.5% this morning, trading well back through 110 and touching its weakest point since last May. Clearly, there is no fear in FX traders’ collective minds. Funnily enough, gold prices continue to rally, having closed above $1600/oz yesterday for the first time since March 2013, and are higher by a further 0.5% this morning.

With this as a backdrop, it is very difficult to paint a coherent picture of the markets today, at least the FX markets. In the G10 space, we have already discussed the yen’s decline, marking it as the worst performing major currency today. On the flip side, NOK is the big winner, +0.5% as oil prices rebound on the news that Chinese airlines are not all going to disappear. CAD is the second best performer, also on the back of the oil news, although it has only managed a 0.25% gain. And other than those three currencies, nothing else has moved more than 10 basis points from last night’s closing levels. On the data front overseas, UK CPI was released a tick higher than expected at 1.8%, although the pound has seen exactly zero movement on the back of the data. If nothing else, new BOE Governor Andrew Bailey must be happy that the road to 2% inflation is not quite as steep as previously expected.

In the EMG space, movement has been even more muted with the biggest gainers ZAR (+0.3%) and RUB (+0.25%) on the back stronger commodity and oil prices while the biggest decliners have been HUF (-0.3%) and TRY (-0.25%) with the former seeing profit taking after a nearly 2% rally in the wake of central bank discussions of tighter policy to fight inflation there, while the lira is responding to a rate cut of 50 bps as the central bank seeks to unwind the drastic tightening it implemented in mid-2018 amid major inflationary pressures. And while I wish there were some more interesting stories, the reality is the big narrative of central banks preventing risk sell-offs remains the only theme in the market.

Looking at this morning’s data we see Housing Starts (exp 1428K), Building Permits (1450K) and PPI (1.6%, 1.3% ex food & energy). Then at 2:00 we get a look at the FOMC Minutes from January’s meeting. Fed watchers are focusing on any discussion regarding the balance sheet and repo as it remains clear there is not going to be any interest rate change anytime soon.

So that’s what we have for today. Arguably, the dollar is ever so slightly on its back foot, but the movement has been infinitesimal. While I continue to believe that ultimately the Fed will ease policy further, for now, the dollar remains the brightest bulb in the box, and so should continue to attract buyers.

Good luck
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