New Aspirations

In Europe, the largest of nations
Has made clear its new aspirations
As Covid now peaks
In less than three weeks
Some schools can return from vacations

Despite less than stellar results from other countries that have started to reopen their economies (Japan, Singapore, South Korea) after the worst of the virus seemed to have passed, Germany has announced that by May 4, they expect to begin reopening secondary schools as well as small retail shops, those less than 800 square meters in size. This is a perfect example of the competing pressures on national leaders between potential health outcomes and worsening economic conditions.

The economic damage to the global economy has clearly been extraordinary, and we are just beginning to see the data that is proving this out. For instance, yesterday’s US Retail Sales data fell 8.7%, a record decline, while the Empire Manufacturing result was a staggering -78.2. To better understand just what this means, the construction of the number is as follows: % of surveyed companies reporting improving conditions (6.8%) less % of surveyed companies reporting worsening conditions (85%). That result was far and away the worst in the history of the series and more than double the previous nadir during the GFC. We also saw IP and Capacity Utilization in the US decline sharply, although they did not achieve record lows…yet.

Interestingly, we have not yet seen most of the March data from other countries as they take a bit longer to compile the information, but if the US is any indication, and arguably it will be, look for record declines in activity around the world. In fact, the IMF is now forecasting an actual shrinkage of global GDP in 2020, not merely a reduction in the pace of growth. In and of itself, that is a remarkable outcome.

And yet, the question with which each national leader must grapple is, what will be the increased loss of life if we get back to business too soon? Once again, I will remind everyone that there is no ‘right’ answer here, and that these life and death tradeoffs are strictly the purview of government leadership. I don’t envy them their predicament. In the meantime, markets continue to try to determine the most likely path of action and the ultimate outcome. Unfortunately for the market set, the unprecedented nature of this government activity renders virtually all forecasting based on historical information and data irrelevant.

This should remind all corporate risk managers that the purpose of a hedging program is to mitigate the changes in results, not to eliminate them. It is also a cogent lesson in the need to have a robust hedging program in place. After all, hedge ineffectiveness is not likely to be a major part of earnings compared to the extraordinary disruption currently underway. Yet a robust hedging program has always been a hallmark of strong financial risk management.

In the meantime, as we survey markets this morning, here is what is happening. After yesterday’s weak US equity performance, Asia was under pressure, albeit not aggressively so with the Nikkei (-1.3%) and Hang Seng (-0.6%) falling while Shanghai (+0.3%) actually managed a small gain. European bourses are mostly positive this morning, but the moves are modest compared to recent activity with the DAX (+1.0%), CAC (+0.6%) and FTSE 100 (+0.4%) all green. And US futures are pointing higher, although all three indices are looking at gains well less than 1.0%.

Bond markets have been similarly uninteresting, with 10-year Treasury yields virtually unchanged this morning, although this was after a near 12bp decline yesterday. German bunds, too are little changed, with yields higher by 1bp, but the standout mover today has been Italy, where 10-year BTP’s have seen yields decline 14bps as hope permeates the market after the lowest number of new Covid infections in more than a month were reported yesterday, a still high 2.667.

Turning to the FX market, despite what appears to be a generally more positive framework in markets, the dollar continues to be the place to be. In the G10 space, only SEK is stronger this morning, having rallied 0.25% on literally no news, but the rest of the bloc is softer by between 0.15% and 0.3%. So, granted, the movement is not large, but the direction remains the same. Ultimately, the global dollar liquidity shortage, while somewhat mitigated by Federal Reserve actions, remains a key feature of every market.

Meanwhile, in the EMG bloc, we have seen two noteworthy gainers, RUB (+1.0%) and ZAR (+0.5%). The former is responding to oil’s modest bounce this morning, with prices there up about 2.0%, while the latter is the beneficiary of international investor inflows in the hunt for yield. After all, South African 10-year bonds yield 10.5% these days, a whole lot more than most other places! But, for the rest of the bloc, it is business as usual, which these days means declines vs. the dollar. Remarkably, despite oil’s rebound, the Mexican peso remains under pressure, down 0.6% this morning. But it is KRW (-0.95%) and MYR (-0.85%) that have been the worst performers today. The won appears to have suffered on the back of yesterday’s weak US equity market/risk-off sentiment, with the market there closing before things started to turn, while Malaysia was responding to yesterday’s weakness in oil prices. Arguably, we can look for both of these currencies to recoup some of last night’s losses tonight.

On the data front, this morning brings the latest Initial Claims number (exp 5.5M) as well as Housing Starts (1300K), Building Permits (1300K) and Philly Fed (-32.0). I don’t think housing data is of much interest these days, but the claims data will be closely scrutinized to see if the dramatic changes are ebbing or are still going full force. I fear the latter. Meanwhile, after yesterday’s Empire number, I expect the Philly number to be equally awful.

As much as we all want this to be over, we are not yet out of the woods, not even close. And over the next month, we are going to see increasingly worse data reports, as well as corporate earnings numbers that are likely to be abysmal as well. The point is, the market is aware of these things, so inflection in the trajectory of data is going to be critical, not so much the raw number. For now, the trend remains weaker data and a stronger dollar. Hopefully, sooner, rather than later, we will see that change.

Good luck and stay safe
Adf

Covid’s Attacks

We’re finally going to see
The data which shows the degree
Of all the impacts
By Covid’s attacks
On life as we knew it to be

Risk assets are under pressure this morning as market participants once again reevaluate the cost-benefit analysis of government actions during the ongoing Covid-19 crisis. The question which bedevils both politicians and markets is, what is the proper balance between restricting economic activity via lockdown orders to prevent further spread of the virus vs. maintaining economic activity in order to prevent the global economy from collapsing? The problem is there is no easy answer to this dilemma, and the reality is that every nation has a different tradeoff based on the nature of its economy as well as the social and cultural mores that exist there.

And so, every nation continues to go their own way as they try to figure out the response best suited for their own circumstances. What is beginning to change as time passes is the data reports that will be released in the coming days and weeks will now be reflective of the first periods of shutdowns and will offer the best indications yet of just how severe the economic damage, thus far, has been. Remember, most data are backward looking. In fact, other than the Initial Claims data, which is both timely and has been awful, analysts are simply guessing at the economic impact so far. Thus, much will be learned this week and next as we start to see the first measurements of how significant the impact has been to date. In fact, we start with today’s Retail Sales data (exp -8.0%, -5.0% ex autos), as well as Empire Manufacturing (-35.0), IP (-4.0%), Capacity Utilization (74.0%) and then the Fed’s Beige Book at 2:00. All of this data is for March, which means that the crisis was in full swing for the bulk of the period. Expectations, as can be seen above, are for substantial declines across the board. But are econometric models based on history going to be effective in forecasting unprecedented events? My money is on no. If the first pieces of data we have seen are any indication, then today’s numbers will be much worse than currently anticipated.

However, as any economist worth their salt will explain, markets are discounting instruments, always looking some period into the future, rather than looking backwards. And that is, no doubt, just as true now as before the Covid-19 outbreak. The question of the moment then becomes, just how far ahead is the market discounting? There seems to be a significant difference of opinion between the bond and equity markets, with the latter having a far more optimistic view than the former. In fact, the bond market appears to be pricing in a significantly longer period of economic disruption, as evidenced by the 30-year yield at 1.32%, than is the stock market, which has already retraced 50% of its initial decline.

One other thing to remember is that recent government actions indicate further delays in reopening economies, rather than any speeding up of the process. This is evidenced by this morning’s German announcement that they will be extending lockdown measures to May 3, from the previously expected April 19. And the Germans have had a measure of success in slowing the spread of the virus, with today being the sixth consecutive day of a lower count of new infections. So, for those nations where the infection rate is not slowing, like the US, it becomes that much more difficult to revert to any sense of normalcy.

History has shown that when the stock and bond markets tell different stories, like they are now, it is more frequent the bond market has things right. I see no reason that this situation is any different and expect that we are coming to the end of the equity market bounce. Risk is far more likely to be shed than added in the next few weeks, and that means that haven assets like the dollar and they yen should resume their climb.

With that in mind, let’s look at markets this morning. The dollar is definitely in the ascendant vs. its G10 brethren with NOK (-1.9%) the leading decliner after the OPEC+ talks led to a disappointing outcome and oil prices have fallen to new lows for the move with WTI touching $19.20/bbl earlier this morning. But Aussie (-1.8%) and Kiwi (-1.7%) are feeling the weight of weaker commodity prices and less confidence in China’s rebound as well. Even JPY, the best performer today is lower by 0.15%, just reinforcing that in the strange new world we inhabit, the dollar remains the single most attractive currency in which to hold assets.

In the Emerging markets, the story is similar with most currencies under pressure led by ZAR (-1.8%), MXN and RUB (both -1.7%) on the back of the weak oil/commodity story. However, we did see two gainers overnight, IDR (+0.45%) and THB (+0.3%). The former seems to be benefitting from the fact that the central bank there surprised markets and did not cut rates yesterday, as well as the positive economic impact of showing a small trade surplus, thus reducing external financing pressures. Meanwhile, the baht seems to be the beneficiary of an announcement of a new fiscal stimulus totaling nearly $31 billion, which is seen as quite substantial there. Otherwise, the bulk of this bloc has seen more modest losses, somewhere between 0.2% and 1.0%.

Having already discussed today’s data, I think the real question for FX markets today will be just how equity markets perform as a better indicator of risk sentiment. Europe has been under pressure all morning, with almost all markets there lower by about 2.0%. Meanwhile, US equity futures are pointing in the same direction, with losses currently pegged between 1.1% (NASDAQ) and 1.7%(S&P 500). Of course, the Retail Sales data will be out before the equity market opening, so there is ample opportunity for either a significantly worse opening in the event the data is even worse than expected, as well as an extension of the recent rally should the data somehow surprise on the high side. I fear the worst.

So be prepared for a risk-off session as we finally start to see just how badly the US economy has been damaged by Covid-19. Ironically, this implies that the dollar is set for further gains as the rest of the world is likely to be even worse off.

Good luck
Adf

 

Until Covid-19 Is Dead

To those who had thought that the Fed
Was finished, Chair Powell just said
There’s nothing that we
Won’t do by decree
Until Covid-19 is dead

Small Caps? Check. Munis? Check. Junk bonds Fallen angels? Check. These are the latest segments in the credit market where the Fed has created new support based on yesterday’s stunning announcements. All told, the Fed has committed up to $2.3 trillion to support these areas, as well as the trillions of dollars they had already spent and committed to support the Treasury market, mortgage market, and ensure that bank finances remained sufficient for their continued operation and provision of loans and services to the economy.

While the breadth of programs the Fed has announced and implemented thus far is stunning, based on the CARES act passed last week, there is still plenty more ammunition available for the Fed to continue to be creative. Of course, the market reaction was highly positive to these announcements and served to cap off a week where the S&P 500 rose more than 12% from last Friday’s closing levels. In fact, a cynic might suggest that the Fed’s sole purpose is to prop up the equity market, but given the extraordinary events ongoing, I suppose that is merely a happy side effect. At any rate, there is no doubt that the Fed has taken its role as the world’s central bank seriously. Between swap lines and repo facilities for other central banks and purchase programs for virtually every type of domestic asset, Chairman Powell will never be able to be accused of fiddling while the economy burned. And while government programs are notoriously difficult to remove once enacted, based on the ongoing economic indicators, like yesterday’s second consecutive 6.6 million print in the Initial Claims data, it is evident that the Fed is being as aggressive as possible.

There will almost certainly be numerous longer-term negative consequences of all this activity and books will be written about all the ways the Fed overstepped its bounds, but right now, the vast majority of people around the world are hugely in favor of their actions. Anything that supports the economy and population through this period of mandated shutdown is appreciated. While they don’t run polls for popularity of central bank chiefs, I’m pretty confident Chairman Jay would be riding high these days.

In the meantime, there were two other noteworthy stories in the past 24 hours with market impact. The first was that the OPEC+ meeting did not come to agreement yesterday for production cuts totaling 10 million bbl/day as Mexico was the lone holdout, insisting that it would only cut 100,000 bbl/day of production, not the 400,000 bbl/day needed. After 16 hours of video conferencing, the energy leaders postponed any decision and decided to allow today’s G20 FinMin video conference to go forward and help try to break the impasse. It strikes me that Mexico will cave soon on this issue, but for now, nothing is agreed. It is hard to determine how oil markets have responded given essentially all cash and futures markets are closed today for the Good Friday holiday. However, oil futures had not fallen on Thursday afternoon which indicates they, too, believe a deal will be done.

And finally, the EU finally came up with a financing package to address the economic impact of the virus on its members. As was to be expected, it was significantly less than initially mooted and the construct of the deal indicates that there has not yet been any agreement by the Teutonic trio of Germany, Austria and the Netherlands to fund the PIGS. A brief overview of the deal shows the headline figure to be €540 billion made up of three pieces; a joint employment insurance fund (€100B), an EIB supported package designed to provide liquidity to impacted companies (€200B) and a ESM credit line (€240B) to backstop national spending. The problem with the latter is that the European Stability Mechanism is anathema to those nations that need it most like Spain and Italy, because it imposes fiscal conditions on the use of the funds. It is an ECB creation from the Eurobond crisis years by Mario Draghi, but it has never been used. Essentially, the rest of Europe has said to Germany, we may need your money, but we will not become your vassal. And this is exactly why the EU, and its subgroup the Eurozone, will remain dysfunctional going forward.

Thus, when compiling the newest information, the one thing that becomes clear is that the US continues to be the nation most willing to increase spending and liquidity to support its economy. And in the end, it cannot be surprising that the dollar will suffer in that scenario. Back in January, my view was the dollar would decline this year as the US was the economy with the most room to ease policy and that eventually, those much easier conditions would result in a weaker dollar. Well, that is exactly what we are seeing occur right now, as the Fed has upped the ante regarding monetary policy easing relative to the rest of the world at the same time that the broad narrative seems to be evolving into ‘the infection peak has passed and things are going to be better in the future than in the recent past’. Hence, the need to hold dollars as a haven has diminished, and the dollar has responded. For instance, this week AUD has rallied 5.7% while NOK is higher by 3.9%. Clearly both have been buoyed by the rise in oil prices as well as the generally better tone on risk. But the entire G10 bloc is higher, although the yen has gained just 0.1% on the week.

In the EMG space, we see a similar picture with MXN the leader, rallying 6.3%, followed closely by ZAR (5.6%) and HUF (5.2%) as virtually the entire bloc has gained vs. the dollar this week. And the story is identical throughout, a better risk tone and more available USD liquidity relieving pressure on USD borrowers throughout the world.

For the time being, this is very likely to remain the trend, but do not dismiss the fact that the global economy is currently in a very severe recession, and that it will take a long time to recover. During the Great Depression in 1929-1932, after a very sharp initial fall in equity markets, there was a powerful rally that ultimately gave way to a nearly 90% decline. We are currently witnessing a powerful rally, but another decline seems likely given the economic damage that will take years to fix. Meanwhile, the dollar, while under pressure right now, is likely to see renewed demand in the next wave.

Good luck, stay safe and have a good holiday weekend
Adf

PS. FX Poetry will return on Wednesday, April 15.

Just an Illusion

It seems there’s a bit of confusion
‘Bout whether this time of seclusion
Will actually end
The virus’ growth trend
Or if this is just an illusion

Markets have a less certain feel about them this morning than we have seen the past several days. Consider, despite continuing increases in both deaths and the caseload in the hardest hit areas, risk has been gathered up pretty aggressively. I realize that the narrative that is trying to be told is that we have passed the peak of infections and that with a little perseverance regarding all the shelter-in-place orders, we can expect the virtual halt in the global economy to end. The problem with this narrative is that the earliest infection sites in Asia; China, South Korea, Hong Kong, Singapore and Japan, have recently seen the infection data turn higher again. At the same time, we continue to hear of daily increases in the fatality count in Spain, Italy, Germany, the UK and New York, with all of those places considering extensions of their lockdowns.

And yet, US and European stock markets are higher by between 8% and 12% so far this week. I continue to be confused by this price action as it appears to imply that investors expect companies to simply pick up where they left off before the lockdowns and disruption began. The problem with that view is it appears to be complete fantasy. Consider, this morning we are going to get our third consecutive Initial Claims number that prints in the millions. Prior to two weeks ago, the largest single data point ever in the series was 695K. The median expectation on Bloomberg this morning is for 5.5M with the range of estimates 2.5M and 7.5M. The thing is, this number has the potential to be much higher than that. In fact, it would not surprise me if we saw a 10.0M print. One of the biggest problems that has consistently been reported is that most states’ employment systems have not been able to handle the crush of applications, although they have been working feverishly to catch up. Add to that the fact that over the past week we have heard an increasing number of states declare that more and more non-essential businesses need to close down for the remainder of the month, while more and more large companies are furloughing employees and only covering health care costs. Prior to the onset of the pandemic, the workforce in the US numbered about 178 million. If 25% of the economy has been shuttered, and I think that is a conservative estimate, that implies some 44 million people will eventually be applying for unemployment insurance. Three plus weeks into this process, we have only heard about 10 million. I fear there are many more to come, so don’t be surprised if today’s number is MUCH higher.

Continuing along this premise, if the claims data turns out to be much worse than expected, will that unravel the narrative that the worst is behind us? Or in fact, will markets begin to understand that even when the infection is well past its peak, economic activity will take a long time to recover. There is a great deal of discussion right now about what shape the recovery will take later this year and next. The first big assumption is that the recovery will start in Q3, which seems brave given we still don’t have an accurate representation of Covid-19’s actual pathology. But let’s work with that assumption. The bulk of the debate is whether the recovery will chart like a ‘V’ or a ‘U’. However, the more pessimistic discuss a ‘W’ or even an ‘L’. Alas, I fear we may see a ‘Harry Potter’ recovery, one that looks more like

We will learn much in a short while. However, until then, let’s take a look at the markets this morning, where the dollar remains under pressure, akin to yesterday, yet government bonds are rallying and equity markets are having a mixed performance. Aside from the Claims data, all eyes are on the tape to see what comes out of the OPEC+ meeting and whether or not they can agree on significant production cuts to help stem the extraordinary build-up in stored oil. Oil traders remain quite bullish as we are seeing Brent crude futures higher by 4.1% and WTI higher by 6.7%. That is clearly helping support the narrative that the worst is behind us. But even if they manage to agree to the mooted 10 million barrel/day production cut, will that be enough to stem the tide? Estimated usage prior to the current situation was 93 million barrels/day, so this represents a nearly 11% production cut. But again, if I go back to my 25% decline in activity, that still means there is a lot of surplus oil being pumped with fewer and fewer places to put it. This price move has all the earmarks of a buy the rumor situation. Just watch out upon the news of an agreement. And especially be careful if they cannot agree production cuts, which is likely to be a significant market negative.

Turning to FX markets, in the G10 space, NOK is the leader today, rallying 0.5% on the back of oil’s gains, and we also see the pound rallying this morning, up 0.4%, after the BOE changed its mind and explained it would be monetizing UK debt, thus expanding the government’s ability to increase stimulus. Meanwhile, a few currencies, CAD, NZD, are a bit softer, but the movement is so small as to be meaningless. Looking at the EMG bloc, IDR is today’s champ, rising 2.3%, after the government issued 50-year dollar bonds and laid out its path to help finance extraordinary stimulus. The rupiah has been under significant pressure since the beginning of March, having fallen nearly 13% before today’s rebound. Allegedly the fundamentals show the currency is still too cheap, but markets may have another take. Beyond the rupiah, RUB has rallied 1.4% on the strength of oil, while HUF and CZK are both higher by a bit more than 1.0% as both currencies seem to be benefitting from large bond financings. However, with the Easter holiday upcoming, there were a number of markets closed last night and we will see many closed tomorrow as well, so price action has been somewhat muted.

On the data front, along with Initial Claims, we see PPI (exp 1.2%, 1.3% ex food & energy), as well as Michigan Sentiment (75.0). However, it is all about the Claims data today. My expectation is that if the print is within the range of expectations, that will not derail the recent equity strength, but if we come out on the high side, especially with Good Friday tomorrow and US equity markets closed, we could easily see a significant risk-off outcome by the end of the day.

Good luck and stay safe
Adf

A Bright Line

In Europe there is a bright line
Twixt nations, those strong, those supine
The Germans and Dutch
Refuse to give much
While Italy wilts on the vine

Once again, the EU has failed to accomplish a crucial task and once again, market pundits are calling for the bloc’s demise. The key story this morning highlights the failure of EU FinMins, after a 16-hour meeting yesterday, to reach a support deal for the whole of Europe. The mooted amount was to be €500 billion, but as always in this group, the question of who would ultimately pick up the tab could not be agreed. And that is because, there are only three nations, Germany, Austria and the Netherlands, who are in a net financial position to do so. Meanwhile, the other twenty-four nations all have their collective hands out. (And you wonder why the UK voted to leave!) Ultimately, the talks foundered on the desire by the majority of nations to mutualize the costs of the support (i.e. issue Eurobonds backed by the full faith and credit of the entire EU), while the Germans, Dutch and Austrians would not agree. Realistically, it is understandable why they would not agree, because in the end, the obligation will fall on those three nations to pick up the tab. But the outcome does not bode well for either the present or the future.

In the current moment, the lack of significant fiscal support is going to hamstring every EU nation, other than those three, in their attempts to mitigate the impacts of shutting down economies to halt the spread of Covid-19. But in the future, this issue is the latest manifestation of the fundamental flaw in the EU itself.

That flaw can be described as follows: the EU is a group of fiercely competitive nations masquerading as a coherent whole. When the broad situation is benign, like it is most of the time, and there is positive economic growth and markets are behaving well, the EU makes a great show of how much they do together and all the things on which they agree. However, when the sh*t hits the fan, it is every nation for themselves and woe betide any attempt by one member to collaborate with another on a solution. This makes perfect sense because, despite the fact that they have constructed a number of institutions that sound like they are democratically elected representatives of each nation, the reality is in tough times, each nation’s political class is concerned first and foremost with its own citizenry, and only when that group is safeguarded, will they consider helping others. At this point, in the virus crisis, no nation feels its own citizens are safe, so it would be political suicide to offer help to others. (Asking for help is an entirely different matter, that’s just fine.) In the end, I am confident that this group will make an announcement of some sort that will describe the fantastic cooperation and all they are going to do to support the continent. But I am also confident that it will not include a willingness by the Teutonic three to pay for the PIGS.

The initial market impact of this failure was exactly as expected, the euro (-0.5%) declined along with the other European currencies (SEK -0.75%, NOK -1.25%) and European equity markets gave back some of their recent gains with the DAX and CAC both falling around 1.5%. Meanwhile, European government bonds saw Italian, Spanish and Greek yields all rise, as hoped for support has yet to come. However, the EU is nothing, if not persistent, and the comments that have come out since then continue to suggest that they will arrive at a plan by the end of the week. This has been enough to moderate those early moves and at 7:00, as New York walks in the door, we see markets with relatively modest changes compared to yesterday’s closing levels.

In the G10 currencies, while the dollar remains broadly stronger, its gains are far less than seen earlier. For example, NOK is the current laggard, down 0.35%, while SEK (-0.3%) and EUR (-0.2%) are next in line. The pound has actually edged higher this morning, but its 0.1% gain is hardly groundbreaking. However, it is interesting to note that the non-EU currencies are outperforming those in the EU.

Emerging market currencies have also broadly fallen, with just a few exceptions. The worst performer today is INR (-0.9%), which seems to be responding to the growth in the number of coronavirus cases there, now over 5,000. But we are also seeing weakness, albeit not as much, from EU members CZK (-0.35%), BGN (-0.3%) and the rest of the CE4. The one notable gainer today is ZAR (+0.5%) which seems to be benefitting from a much smaller than expected decline in a key Business Confidence indicator. However, I would not take much solace in that as the data is certain to get worse there (and everywhere) before it gets better.

Overall, though, the market picture is somewhat mixed today. The FX market implies some risk mitigation, which is what we are seeing in the European equity space as well. However, US equity futures are all pointing slightly higher, about 0.5% as I type, and oil prices are actually firmer along with most commodities. In other words, there is no clear direction right now as market participants await the next piece of news.

The only data point we see today in the US is the FOMC Minutes, but I don’t see them as being that interesting given both how much the Fed has already done, thus leaving less things to do, and the fact they have gone out of their way to explain why they are doing each thing. So I fear today will be dependent on the periodic reports of virus progression. At the beginning of the week, it seemed as though the narrative was trying to shift to a peak in infections and better data ahead. Alas, that momentum has not been maintained and we have seen a weries of reports where deaths are increasing, e.g. in Spain and New York to name two, where just Monday it was thought things had peaked. Something tells me that the virus will not cooperate with a smooth curve of progress, and that more volatility in the narrative, and thus markets, lays ahead. We are not yet near the end of this crisis, so hedgers, you need to keep that in mind as you plan.

Good luck
Adf

Ere Prices Explode

The pace of infection has slowed
In Europe, and thus has bestowed
A signal its clear
To shift to high gear
And buy stocks ere prices explode

In the markets’ collective mind, it appears that the peak of concern has been achieved. At least, that is what the price action for the past two days is indicating as risk is once again being aggressively absorbed by investors. Equity prices in the US soared yesterday, up more than 7.0% and that rally followed through overnight in Asia (Nikkei, Hang Seng and Shanghai all +2%) and Europe (DAX +3.2%, CAC +2.8) as the latest data indicate that the pace of infection growth may have reached an inflection point and started to turn lower. At least, that is certainly the market’s fervent hope. The question that comes to mind, though, is just how badly the global economy has been damaged by the health measures taken to slow the spread of the virus. After all, entire industries have been shuttered, millions upon millions have been thrown out of work, and arguably most importantly, individual attitudes about large crowds and mingling with strangers have been dramatically altered. Ask yourself this: how keen are you to go to watch a baseball game this summer with 50,000 other fans, none of whom you know?

Consider the poor misanthrope
Whose previous role was to mope
‘bout Facebook and Twitter
While growing more bitter
With Covid, his views are in scope

It does not seem hard to make the case that the market has moved far ahead of the curve with respect to the eventual recovery of the economy. If anything, the economic data we have seen has indicated that the depth of the recession is going to be greater, not lesser than previously expected, while the length of that recession remains completely unknown. One thing we have seen from the nations who were the early sites of infection; China, Japan, Singapore and South Korea, is that once they started to relax early restrictions, the pace of infection increased again. In fact, in Japan, PM Abe has declared a state of emergency in 6 prefectures for the next month, to impose restrictions on businesses and crowds. Similarly, Singapore has seen a revival in the infection rate and has imposed tighter restrictions to last through the rest of April.

The point is, a possible inflection point in the pace of growth in cases, while a potential positive, doesn’t seem worthy of a 10% rally in stock prices. The one thing of which we can all be sure is that the recession, when it is eventually measured, is going to be remarkably deep. It is almost certain to be much worse than the GFC as the amount of leverage in the real economy is so much greater and will cause much more damage to Main Street. Recall, the GFC was a financial crisis, and once the Fed supported the banks, things were able to get back to previous operating standards. It is not clear that outcome will be the case this time. So, does it really make sense to chase after risk assets right now? Bear markets historically last far longer than a month, and it is not uncommon for sharp rallies to occur within the longer term bear market. Alas, I see more pain in the future so be careful.

And with that in mind, let us turn our attention to the FX market, where the dollar is lower versus every other currency of note. In the G10 bloc, NOK is today’s leader, +2.2%, as hopes that an OPEC+ agreement will be reached this week have helped oil prices rise more than 3.0%, thus ensuring a benefit to this most petro-focused of currencies. But it’s not just NOK, AUD is higher by 1.5% after the RBA left rates on hold, as expected, and announced that they have purchased A$36 billion of bonds via QE thus far. The rest of the bloc has seen gains ranging from 0.6% (CHF) to 1.1% (SEK) as the overall attitude is simply add risk. The one exception is the yen, which has barely edged higher by 0.1%, ceding earlier gains in the wake of the state of emergency announcement.

Turning to the emerging markets, CZK and ZAR are the frontrunners, with the former up a robust 2.4% while the rand is higher by 2.1%. It seems that the Czech story is merely one of a broad-based positive view of the country’s fiscal house, which shows substantial reserves and the best combined ability to deal with the crisis and prevent capital flight of all EM currencies. Meanwhile, the rand has been a beneficiary of inflows into their government bond market, which are currently competing with the SARB who is also buying bonds. Perhaps the most encouraging sight is that of MXN, where the peso is higher by 1.5% this morning as it is finally receiving the benefit of the rebound in oil prices. In addition, key data to be released this morning includes the nation’s international reserves, a number which has grown in importance during the ongoing crisis. We have already seen some significant drawdowns in EMG reserve data as countries like Indonesia and Brazil seek to stem the weakness in their currencies. That has not yet been the case in Mexico, but given the peso’s phenomenal weakness, it has fallen 25% since March 1, many pundits are questioning when the central bank will be in the market.

Overall, though, it is a risk-on day and the dollar is suffering for it. Data this morning has already shown that the NFIB Small Business Optimism index is not so optimistic, falling 8 points to 96.4, back to levels seen just prior to the 2016 presidential election, which ushered in a significant increase in optimism. We also get the JOLT’s jobs data (exp 6.5M) but that is a February number, and obviously of little value as an economic indicator now.

It appears to me that the market is pricing in a lot of remarkably positive data and a happy ending much sooner than seems likely. Cash flow hedgers need to keep that in mind as they consider their next steps.

Good luck
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Woe Betide Every Forecast

The number of those who have passed
Is starting to slow down at last
The hope now worldwide
Is this won’t subside
But woe betide every forecast

Arguably, this morning’s most important news is the fact that the number of people succumbing to the effects of Covid-19 seems to be slowing down from the pace seen during the past several weeks. The highlights (which are not very high) showed Italy with its fewest number of deaths in more than two weeks, France with its lowest number in five days while Spain counted fewer deaths for the third day running. Stateside, New York City, which given its highest in the nation population density has been the US epicenter for the disease, saw the first decline in fatalities since the epidemic began to spread. And this is what counts as positive news these days. The world is truly a different place than it was in January.

However, as everything is relative, at least with respect to financial markets, the prospects for a slowing of the spread of the virus is certainly welcome news to investors. And they are showing it in style this morning with Asian equity markets having started things off on a positive note (Nikkei +4.25%, Hang Seng +2.2%, Australia +4.3) although mainland Chinese indices all fell about 0.6%. Europe picked up the positive vibe, and of course was the source of much positive news regarding infections, and equity markets there are up strongly across the board (DAX +4.5%, CAC +3.7%, FTSE 100 +2.1%). Finally, US equity futures are all strongly higher as I type, with all three major indices up nearly 4.0% at this hour.

The positive risk attitude is following through in the bond market, with 10-year Treasury yields now higher by 6.5bps while most European bond markets also softening with modestly higher yields. Interestingly, the commodity market has taken a different approach to the day’s news with WTI and Brent both falling a bit more than 3% while gold prices have bounced nearly 1% and are firmly above $1600/oz.

Finally, the dollar is on its back foot this morning, in a classic risk-on performance, falling against all its G10 counterparts except the yen, which is lower by 0.6%. AUD and NOK are the leading gainers, both higher by more than 1% with the former seeming to be a leveraged bet on a resumption of growth in Asia while the krone responded positively to a report that in the event of an international agreement to cut oil production, they would likely support such an action and cut output as well. While oil prices didn’t benefit from this news (it seems that there are still significant disagreements between the Saudis and Russians preventing a move on this front), the FX market saw it as a distinct positive. interestingly, the euro, which was the epicenter of today’s positive news, is virtually unchanged on the day.

EMG currencies are also broadly firmer this morning although there are a couple of exceptions. At the bottom of the list is TRY, which is lower by 0.6% after reporting a 13% rise in coronavirus cases and an increasing death toll. In what cannot be a huge surprise, given its recent horrific performance, the Mexican peso is slightly softer as well this morning, -0.2%, as not only the weakness in oil is hurting, but so, too, is the perception of a weak government response by the Mexican government with respect to the virus. But on the flipside, HUF is today’s top performer, higher by 1.0% after the central bank raised a key financing rate in an effort to halt the freefalling forint’s slide to further record lows. Since March 9, HUF had declined more than 16.5% before today’s modest rally! Beyond HUF, the rest of the space is holding its own nicely as the dollar remains under broad pressure.

Before we look ahead to this week’s modest data calendar, I think it is worth a look at Friday’s surprising NFP report. By now, you are all aware that nonfarm payrolls fell by 701K, a much larger number than expected. Those expectations were developed because the survey week was the one that included March 12, just the second week of the month, and a time that was assumed to be at least a week before the major policy changes in the US with closure of businesses and the implementation of social distancing. But apparently that was not the case. What is remarkable is that the Initial Claims numbers from the concurrent and following week gave no indication of the decline.

I think the important information from this datapoint is that Q1 growth is going to be much worse than expected, as the number indicates that things were shutting down much sooner than expected. I had created a simple GDP model which assumed a 50% decrease in economic activity for the last two weeks of the quarter and a 25% decrease for the week prior to that. and that simple model indicated that GDP in Q1 would show a -9.6% annualized decline. Obviously, the error bars around that result are huge, but it didn’t seem a crazy outcome. However, if this started a week earlier than I modeled, the model produces a result of -13.4% GDP growth in Q1. And as we review the Initial Claims numbers from the past two weeks, where nearly 10 million new applications for unemployment were filed, it is pretty clear that the data over the next month or two are going to be unprecedentedly awful. Meanwhile, none of this is going to help with the earnings process, where we are seeing announcements of 90% reductions in revenues from airlines, while entire hotel chains and restaurant chains have closed their doors completely. While markets, in general, are discounting instruments, always looking ahead some 6-9 months, it will be very difficult to look through the current fog to see the other side of this abyss. In other words, be careful.

As to this week, inflation data is the cornerstone, but given the economic transformation in March, it is not clear how useful the information will be. And anyway, the Fed has made it abundantly clear it doesn’t care about inflation anyway.

Tuesday JOLTS Job Openings 6.5M
Wednesday FOMC Minutes  
Thursday Initial Claims 5000K
  PPI -0.4% (0.5% Y/Y)
  -ex food & energy 0.0% (1.2% Y/Y)
  Michigan Sentiment 75.0
Friday CPI -0.3% (1.6% Y/Y)
  -ex food & energy 0.1% (2.3% Y/Y)

Source: Bloomberg

Overall, Initial Claims continues to be the most timely data, and the range of forecasts is between 2500K and 7000K, still a remarkably wide range and continuing to show that nobody really has any idea. But it will likely be awful, that is almost certain. Overall, it feels too soon, to me, to start discounting a return to normality, and I fear that we have not seen the worst in the data, nor the markets. Ultimately, the dollar is likely to remain THE haven of choice so keep that in mind when hedging.

Good luck and stay safe
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Significant Woe

The data continue to show
A tale of significant woe
Last night’s PMIs
Define the demise
Of growth; from Spain to Mexico

Another day, another set of data requiring negative superlatives. For instance, the final March PMI data was released early this morning and Italy’s Services number printed at 17.4! That is not merely the lowest number in Italy’s series since the data was first collected in 1998, it is the lowest number in any series, ever. A quick primer on the PMI construction will actually help show just how bad things are there.

As I’ve written in the past, the PMI data comes from a single, simple question; ‘are things better, the same or worse than last month?’ Each answer received is graded in the following manner:

Better =      1.0
Same =        0.5
Worse =      0.0

Then they simply multiply the number of respondents by each answer, normalize it and voila! Essentially, Italy’s result shows that 65.2% of the country’s services providers indicated that March was worse than February, with 34.8% indicating things were the same. We can probably assume that there was no company indicating things were better. This, my friends, is not the description of a recession; this is the description of a full-blown depression. IHS Markit, the company that performs the surveys and calculations, explained that according to their econometric models, GDP is declining at a greater than 10% annual rate right now across all of Europe (where the Eurozone Composite reading was 26.4). In Italy (Composite reading of 20.2) the damage is that much worse. And in truth, given that the spread of the virus continues almost unabated there, it is hard to forecast a time when things might improve.

It does not seem like a stretch to describe the situation across the Eurozone as existential. What we learned in 2012, during the Eurozone debt crisis, was that the project, and the single currency, are a purely political construct. That crisis highlighted the inherent design failure of creating a single monetary policy alongside 19 fiscal policies. But it also highlighted that the desire to keep the experiment going was enormous, hence Signor Draghi’s famous comment about “whatever it takes”. However, the continuing truth is that the split between northern and southern European nations has never even been addressed, let alone mended. Germany, the Netherlands and Austria continue to keep fiscal prudence as a cornerstone of their government policies, and the populations in those nations are completely in tune with that, broadly living relatively frugal lives. Meanwhile, the much more relaxed atmosphere further south continues to encourage both government and individual profligacy, leading to significant debt loads across both sectors.

The interesting twist today is that while Italy and Spain are the two hardest hit nations in Europe regarding Covid-19, Germany is in third place and climbing fast. In other words, fiscal prudence is no protection against the spread of the disease. And that has led to, perhaps, the most important casualty of Covid-19, German intransigence on debt and deficits. While all the focus this morning is on the proposed 10 million barrel/day cut in oil production, and there is a modest amount of focus on the Chinese reduction in the RRR for small banks and talk of an interest rate cut there, I have been most amazed at comments from Germany;s Heiko Maas, granted the Foreign Minister, but still a key member of the ruling coalition, when he said, regarding Italy’s situation, “We will help, we must help, [it is] also in our own interest. These days will remind us how important it is that we have the European Union and that we cannot solve the crisis acting unilaterally. I am absolutely certain that in coming days we’ll find a solution that everyone can support.” (my emphasis). The point is that it is starting to look like we are going to see some significant changes in Europe, namely the beginnings of a European fiscal policy and borrowing authority. Since the EU’s inception, this has been prevented by the Germans and their hard money allies in the north. But this may well be the catalyst to change that view. If this is the case, it is a strong vote of confidence for the euro and would have a very significant long-term impact on the single currency in a positive manner. However, if this does not come about, we could well see the true demise of the euro. As I said, I believe this is an existential moment in time.

With that in mind, it is interesting that the market has continued to drive the euro lower, with the single currency down 0.5% on the day and falling below 1.08 as I type. That makes 3.3% this week and has taken us back within sight of the lows reached two weeks ago. In the short term, it is awfully hard to be positive on the euro. We shall see how the long term plays out.

But the euro is hardly the only currency falling today. In fact, the dollar is firmer vs. all its G10 counterparts, with Aussie and Kiwi the biggest laggards, down 1.2% each. The pound, too, is under pressure (finally) this morning, down 1.0% as there seems to be some concern that the UK’s response to Covid-19 is falling short. But in the end, the dollar continues to perform its role of haven of last resort, even vs. both the Swiss franc (-0.35%) and Japanese yen (-0.6%).

EMG currencies are similarly under pressure with MXN once again the worst performer of the day, down 2.1%, although ZAR (-2.0%) is giving it a run for its money. The situation in Mexico is truly dire, as despite its link to oil prices, and the fact that oil prices have rallied more than 35% since Wednesday, it has continued to fall further. AMLO is demonstrating a distinct lack of ability when it comes to running the country, with virtually all his decisions being called into question. I have to say that the peso looks like it has much further to fall with a move to 30.00 or even further quite possible. Hedgers beware.

Risk overall is clearly under pressure this morning with equity markets throughout Europe falling and US futures pointing in the same direction. Treasury prices are slightly firmer, but the market has the feeling of being ready for the weekend to arrive so it can recharge. I know I have been exhausted working to keep up with the constant flow of information as well as price volatility and I am sure I’m not the only one in that situation.

With that in mind, we do get the payroll report shortly with the following expectations:

Nonfarm Payrolls -100K
Private Payrolls -132K
Manufacturing Payrolls -10K
Unemployment Rate 3.8%
Average Hourly Earnings 0.2% (3.0% Y/Y)
Average Weekly Hours 34.1
Participation Rate 63.3%
ISM Non- Manufacturing 43.0

Source: Bloomberg

But the question remains, given the backward-looking nature of the payroll report, does it matter? I would argue it doesn’t. Of far more importance is the ISM data at 10:00, which will allow us to compare the situation in the US with that in Europe and the rest of the world on a more real-time basis. But in the end, I don’t think it is going to matter too much regarding the value of the dollar. The buck is still the place to be, and I expect that it will continue to gradually strengthen vs. all comers for a while yet.

Good luck, good weekend and stay safe
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Prices So Low

Since distancing, social, has spread
Demand for petroleum’s bled
Its price has declined
As less is refined
Is OPEC now near its deathbed?

Well, last night the Chinese explained
They’d not let reserves there be drained
With prices so low
Their stockpile they’ll grow
Thus, Pesos and Rubles have gained

One cannot be surprised by the fact that the sharp decline in the price of oil has prompted some nations to take the opportunity to top up their strategic reserves of the stuff. Last night, the story came out that China was going to do just that. In addition to the mooted plans to purchase upwards of 100 million barrels, there is also discussion that they are going to increase the size of their storage facilities. This serves a twofold purpose; first to allow them more storage, but second it is a clear short-term economic stimulus for the country as well, something they are desperately seeking given the quickly slowing growth trajectories of their major export markets.

The market response to the story has been exactly as would be expected, with oil prices surging (both WTI and Brent are higher by a bit more than 10% as I type) and petrocurrencies NOK, RUB and MXN, all rallying nicely as well. At least, that’s how they started the session. Approaching 7:00am in NY, NOK is by far the leading gainer in the G10 space, jumping 1.6% without the benefit of central bank intervention, as any rebound in oil, no matter how short-lived, is a positive for the country and by extension its currency.

The emerging market petros, though, are having a bit of a tougher time of it. Earlier, both the ruble and Mexican peso were firmer by well more than 1% compared with yesterday’s closing levels, but in the past hour, we have seen both give up the bulk of those gains. It just goes to show how difficult it is going to be for some currencies to rebound in the short run. This is because, a 10% rally in oil still leaves it at $22/bbl or so, far below the cost of production and not nearly enough to stem either nation’s fiscal woes. By the way, this is still far below the cost of shale oil production as well. In fact, the only country that really has a production cost below the current market price is Saudi Arabia. But in FX terms that doesn’t really matter as the riyal is fixed to the dollar.

Away from that story, though, financial and economic stories are thin on the ground, with most simply a rehash or update of ongoing themes. For instance, we already know that virtually every developed country is adding fiscal support to their economies, but there have been no new reports of additional stimulus. We already know that virtually every developed country’s central bank has added monetary support to their economies, but, if anything, the overnight stories were complaints that it wasn’t coming fast enough. To wit, the RBNZ is being chastised for not expanding its QE purchases quickly enough as market participants anticipate a significant increase in debt issuance by the government. That said, however, kiwi is a top performer today, rising 0.65% on the back of the Chinese oil story and the knock-on effects of renewed Chinese growth.

Otherwise, the news is almost entirely about the virus and its impacts on healthcare systems around the world, as well as the evolving story about the Chinese having underreported their caseload and by extension, distorting the medical community’s understanding of key features of the pathogen, namely its level of contagion and lethality. But that is all in the political realm, not the market realm.

Yesterday’s equity market decline has stopped for now with European indices modestly higher at this point, generally less than 1%, although US futures are looking a bit perkier, with all of them up by more than that 1% marker. Bond markets are under a bit of pressure, as investors are tentatively reaching out to acquire some risk, with yields in most government bond markets edging higher by a few bps this morning. Treasuries, which had seen a 4bp rise earlier in the session, though, have now rallied back to unchanged on the day.

And if one wants to look at the dollar more broadly, away from the NOK and NZD, the pound is firmer (+0.5% and it has really been holding up remarkably well lately), and CAD and AUD are both firmer by about 0.3% on the back of the oil/China positive story. On the downside, the euro cannot find a bid, falling 0.4% this morning, as the focus turns back to the rampant spread of Covid-19 in both Italy and Spain, as well as how much the German economy will suffer throughout the crisis.

In the EMG space, TRY (+0.5%) has been the top performer after confirmed FX intervention in the markets, but otherwise, despite what seems to be a modestly better tone to markets this morning, no other currency in the space is more than 0.1% firmer. On the downside, ZAR is the loser du jour, falling more than 1% and reaching a new historic low as interest rates in the country decline thus reducing its attractiveness as an investment destination.

This morning’s data brings Initial Claims (exp 3.7M) which has everybody atwitter given just how uncertain this outcome is. The range of estimates is from 800K to 6.5M which is another way of saying nobody has a clue. The one thing of which we can be certain is that it will be a large number. Interestingly, yesterday’s ADP number showed many fewer job losses than expected, which implies that tomorrow’s payroll data will also not give an accurate picture of the current situation. The survey week came before the real shutdowns began, so we will need to wait until the April data, not released until May 8, to get a better picture. And what’s interesting about that is, if the current timeline of a resumption of more normal activity by the end of April comes to pass, that data, while showing the depths of the problem, will no longer be that informative either. The lesson from this is that it may still be quite some time before data serves as a market driver like in the past, especially the NFP report.

Summing up, despite a modestly better attitude toward risk this morning, the dollar continues to be the place to be. Ultimately, until global dollar liquidity demand ebbs, I expect that we are going to see the greenback maintain its strength.

Good luck and stay safe
Adf

 

Set For a Rout

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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