In case you still had any doubt
That growth has encountered a drought
The readings this morning
Gave adequate warning
That markets are set for a rout

You may all remember the Chinese PMI data from last month (although granted, that seems like a year ago) when the official statistic printed at 35.7, the lowest in the history of the series. Well, it was the rest of the world’s turn this month to see those shockingly low numbers as IHS Markit released the results of their surveys for March. Remember, they ask a simple question; ‘are things better, the same or worse than last month?’ Given the increasing spread of Covid-19 and the rolling shut-downs across most of Europe and the US in March, it can be no surprise that this morning’s data was awful, albeit not as awful as China’s was in February. In fact, the range of outcomes in the Eurozone was from Italy’s record low of 40.3 to the Netherlands actually printing at 50.5, still technically in expansion phase. The Eurozone overall index was at 44.5, just a touch above the lows reached during the European bond crisis in 2012. You remember that, when Signor Draghi promised to do “whatever it takes” to save the euro. The difference this time is that was a self-inflicted wound, this problem is beyond the ECB’s control.

The current situation highlights one of the fundamental problems with the construction of the Eurozone, a lack of common fiscal policy. While this has been mentioned many times before, it is truly coming home to roost now. In essence, with no common fiscal policy, each of the 19 countries share a currency, but make up their own budgets. Now there are rules about the allowed levels of budget deficits as well as debt/GDP ratios, but the reality is that no country has really changed their ways since the Union’s inception. And that means that Germany, Austria and the Netherlands remain far more frugal than Italy, Spain, Portugal and Greece. And the people of Germany are just not interested in paying for the excesses of Italian or Spanish activities, as long as they have a choice.

This is where the ECB can make a big difference, and perhaps why Madame Lagarde, as a politician not banker, turns out to have been an inspired choice for the President’s role. Prior to the current crisis, the ECB made every effort to emulate the Bundesbank, and was adamant about preventing the monetization of national debt. But in the current situation, with Covid-19 not seeming to respect the German’s inherent frugality, every nation is rolling out massive spending packages. And the ECB has pledged to buy up as much of the issued debt as they deem necessary, regardless of previous rules about capital keys and funding. Thus, ironically, this may be what ultimately completes the integration of Europe. Either that or initiates the disintegration of the euro. Right now, it’s not clear, although the euro’s inability to rally, despite a clear reduction in USD funding pressures, perhaps indicates a modestly greater likelihood of the latter rather than the former. In the end, national responses to Covid-19 continue to truly hinder economic activity and there seems to be no immediate end in sight.

With that as our preamble, a look at markets as the new quarter dawns shows that things have not gotten any better than Q1, at least not in the equity markets. After a quarter where the S&P 500 fell 20.0%, and European indices all fell between 25% and 30%, this morning sees equity markets under continued pressure. Asia mostly suffered (Nikkei -4.5%, Hang Seng -2.2%) although Australian stocks had a powerful rally (+3.6%) on the strength of an RBA announcement of A$3 billion of QE (it’s first foray there). Europe, meanwhile, has seen no benefits with every market down at least 1.75% (Italy) with the CAC (-4.0%) and DAX (-3.6%) the worst performers on the Continent. Not to be left out, the FTSE 100 has fallen 3.8% despite UK PMI data printing at a better than expected 47.8. But this is a risk-off session, so a modestly better than expected data print is not enough to turn the tide.

Bond markets are true to form this morning with Treasury yields down nearly 7bps, Bund yields down 3bps and Gilt yields lower by 6bps, while both Italian (+5bps) and Greek (+9bps) yields are rising. Bond investors have clearly taken to pricing the latter two akin to equities rather than the more traditional haven idea behind government bonds. And a quick spin through the two most followed commodities shows gold rising 0.8% while oil is split between a 3.5% decline in Brent despite a 0.5% rally in WTI.

And finally, in the FX world, the dollar continues to be the biggest winner, although we have an outlier in Norway, where the krone is up by 0.8% this morning, despite the weakness in Brent crude and the very weak PMI data. Quite frankly, looking at the chart, it appears that the Norgesbank has been in once again supporting the currency, which despite today’s gains, has fallen by nearly 9% in the past month. Otherwise, in the G10 space, CAD is the worst performer, down 1.4%, followed closely by AUD (-1.0%) as commodity prices generally remain under pressure. In fact, despite its 0.25% decline vs. the dollar, the pound is actually having a pretty good session.

In EMG markets, it is HUF (-2.5%) and MXN (-2.1%) which are the leading decliners with the former suffering on projected additional stimulus reducing the rate structure there, while the peso continues to suffer from weak oil prices and the US slowdown. But really, the entire space is lower as well, with APAC and EMEA currencies all down on the day and LATAM set to slide on the opening.

On the data front this morning, we see ADP Employment (exp -150K), which will be a very interesting harbinger of Friday’s payroll data, as well as ISM Manufacturing (48.0) and Prices Paid (44.5). We already saw the big hit in Initial Claims last week, and tomorrow’s is set to grow more, so today is where we start to see just how big the impact on the US economy Covid-19 is going to have. I fear, things will get much worse before they turn, and an annualized decline of as much as 10% in Q1 GDP is possible in my view. But despite that, there is no indication that the dollar is going to be sold in any substantial fashion in the near term. Too many people and institutions need dollars, and even with all the Fed’s largesse, the demand has not been sated.

Volatility will remain with us for a while yet, so keep that in mind as you look for hedging opportunities. Remember, volatility can work in your favor as well, especially if you leave orders.

Good luck and stay safe
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