The Minister, Prime, has declared
Come June, the UK is prepared
To tell the EU
If no deal’s in view
He’ll walk. Sterling bulls should be scared!
Meanwhile as the virus keeps spreading
Investors have found it’s tough sledding
There’s no end in sight
For this terrible blight
Thus, risk assets, most holders keep shedding
While Covid-19 remains the top story across all markets, this morning we did get to hear about something else that mattered, the UK position paper on their upcoming negotiations with the EU regarding trade terms going forward. The EU insists that if a nation wants to trade with them, that nation must respect (read adhere) to the EU’s rules on various issues, notably competition and state aid, but also things like labor conditions. (Funnily enough, China doesn’t seem to need to adhere to these rules). However, Boris has declared, “At the end of this year we will regain, in full, our political and economic independence.” Those are two pretty different sentiments, and while I believe that this is just tough talk designed to level set the negotiations, which begin next week, there is every chance that the UK does walk without a deal. Certainly, that is a non-zero probability. And the FX markets have taken it to heart as the pound has suffered this morning with the worst G10 performance vs. the dollar, falling -0.3%.
In fact, it is the only currency falling vs. the dollar today, which some have ascribed to the dollar’s waning status as a haven asset. However, I would argue that given the dollar’s remarkable strength this year, as outlined yesterday, the fact that some currencies are rebounding a bit should hardly be surprising. Undoubtedly there are those who believe that as Covid-19 starts to be seen in the US, it will have a deleterious impact on the US economy, and so selling dollars makes sense. But remember, the US economy is the world’s largest consumer, by a long shot, so every other country will see their own economies suffer further in that event.
A more salient argument is that the US is the only G10 country (except Canada which really is too small to matter) that has any monetary policy room of note, and in an environment where further monetary policy ease seems a given, the US will be able to be more aggressive than anyone else, hence, lower rates leading to a softer dollar. While that is a viable argument, in the end, as the ongoing demand for Treasuries continues to show, people need dollars, and will buy them, even if they’re expensive. Speaking of Treasuries, the 10-year yield has now fallen another 4bps to 1.29%, a new all-time low yield. And you can’t buy Treasuries using euros or yen!
So as things shape up this morning, it is another risk-off session with most equity markets around the world in the red (Nikkei -2.3%, Kospi -1.1%, DAX -2.5%, CAC -2.4% FTSE 100 -2.2%) and most haven assets (CHF +0.55%, JPY, +0.3%, Gold + 0.4%) performing well. The Covid-19 virus and national responses to the infection continues to be the lead story pretty much everywhere. In fact, last night’s US Presidential press conference was seen to be quite the fiasco as President Trump was unable to convince anyone that the US is on top of the situation. And while I’ve no doubt that things here will not run smoothly, it is not clear to me that things are going to run smoothly anywhere in the world. Fast moving viral epidemics are not something that large governments are very good at addressing. As such, I would look for things to get worse everywhere before they get better.
Looking at some specific FX related stories, perhaps the biggest surprise this morning is the euro’s solid rally, +0.5%, which was underpinned by surprisingly strong Economic Sentiment data for the month of February. This is in spite of the fact that growth figures throughout the major economies on the continent have been turning lower and the unknown consequences of Covid-19. And the euro’s strength has been sufficient to underpin the CE4 currencies, all of which are up by even greater amounts, between 0.6% and 0.85%. Again, these are currencies that have been under pressure for the best part of 2020, so a rebound is not that surprising.
Elsewhere in the EMG bloc, we continue to see weakness in the commodity producers, with oil falling more than 2% this morning and base metals also in the red. MXN (-0.7%), CLP (-0.45%), RUB (-0.3%) and ZAR (-0.3%) remain victims of the coming economic slowdown and reduced demand for their key exports.
This morning’s US session brings us a lot of data including; Initial Claims (exp 212K), Q4 GDP (2.1%) and Durable Goods (-1.5%, +0.2% ex transport). Yesterday’s New Home Sales data was much better than forecast (764K), which given the historically low mortgage rates in the US cannot be that surprising. We also continue to hear from Fed speakers, with each one explaining they are watching the virus situation closely and are prepared to act (read cut rates) if necessary, but thus far, the economic situation has not changed enough to justify a move. It is comments like these that highlight just how much of a follower the Fed has become, unwilling to lead a situation.
Speaking of the foibles of the Fed, I must mention one other thing that serves to demonstrate how out of touch they are with reality. Economists from the SF Fed released a paper explaining that, as currently constructed, the Fed will not be able to achieve their inflation goals because in the next downturn, with rates so low, the public worries that the Fed will not be able to add more support to the economy (my emphasis). Now, I think about the Fed constantly as part of my job, but I am willing to wager that a vanishingly small number of people in this country, far less than 1%, think about the Fed at all…ever! To think that the Fed’s inability to hit their target has anything to do with public sentiment about their power is extraordinary, and laughable!
At any rate, today’s session looks set to continue the risk-off stance, with equity futures down 0.75% or so, and while the dollar has been under pressure overnight, I expect that will be short-lived.