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The Real Threat

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Around the world, government’s fret
Is it safe to reopen yet?
As growth worldwide slows
Each government knows
Elections are now the real threat

The common theme in markets today, the one that is driving asset prices higher, is that we are beginning to see a number of countries, and in the US, states, schedule the easing of restrictions on activity. Notably, in Italy, the European epicenter of the virus, PM Conte is trying to reschedule the return to some sense of normality with the first relief to occur one week from today in the manufacturing and construction industries, followed by retailers two weeks later. Personal services and restaurants, alas, must wait until June 1 at the earliest. While that hardly seems like an aggressive schedule, the forces arrayed on both sides of the argument grow louder with each passing day, neither of which has been able to convince the other side. (This sounds like the Democrats and Republicans in Congress.) But the reality is, there is no true playbook as to the “right” way to do this as we still know remarkably little about the disease, and its true infectiousness. Of course, collapsing the global economy in fear is likely to result in just as many, if not more, victims.

But it’s not just Italy that is starting. In the US, Georgia is under close scrutiny as it begins easing restrictions as of today. New York’s Governor Cuomo is now talking about a phased in reopening of certain areas, mostly upstate NY, beginning on May 15. And the truth is that many states in the US are preparing to reopen sections of their respective economies. The same is true throughout Europe and Asia, as the rolling lockdowns globally have essentially inflicted as much pain as governments can tolerate.

Of course, the real question is, what exactly does it mean to reopen the economy? I think it is fair to say that the immediate future will not at all resemble the pre-virus situation. Even assuming that most personal financial situations were not completely disrupted (and they truly were), how many people are going to rush out to sit in a movie theater with 200 strangers? How many people are going to jump on an enclosed metal tube with recirculated air for a quick weekend getaway? In fact, how many are going to be willing to go out to their favorite restaurant, assuming it reopens? After all, you cannot eat dinner while wearing an N95 mask!

My point is, the upcoming recovery of this extraordinary economic disruption is likely to be very slow. In fact, history has shown that traumatic events of this nature (think the Depression in the 1930’s) result in significant behavioral changes, especially regarding personal financial habits. The virus has highlighted the fragility of many job situations. It has exposed just how many people worldwide live close to the edge with almost no ability to handle a situation that interrupts their employment cashflow. And these lessons are the type that stick. They will almost certainly result in reduced consumption and increased personal savings. And that is almost the exact opposite of what built the global economy since the end of WWII.

With this in mind, it strikes me that the dichotomy we continue to see in markets, where equity investors are remarkably bullish, while bond and commodity investors seem to be planning for a very long period of slow/negative growth, is going to ultimately be resolved in favor of the bond market. No matter how I consider the next several months, no scenario results in that fabled V-shaped recovery.

But perhaps I am just a doom monger who only sees the negatives. After all, a quick look at markets today shows that the bulls are ascendant. Equity markets around the world are firmer this morning as the combination of prospective reopening of economies and additional central bank stimulus have convinced investors that the worst is behind us. Last night, the BOJ, as widely expected, promised unlimited JGB buying going forward. In addition, they increased their corporate bond buying to ¥20 trillion, essentially following in the Fed’s footsteps from two weeks ago. If their goal was to prop up the stock market, then it worked as the Nikkei closed higher by 2.7% helping the rest of Asia (Hang Seng +1.9%, Australia +1.5%) as well. Europe took the baton, and with more policy ease expected from the ECB on Thursday, has seen markets rise between 1.4% (FTSE 100) and 2.4% (DAX). Meanwhile, the euphoria continues to seep westward as US futures are all higher by roughly 1% this morning.

Bond markets, too, are feeling a bit better with Treasuries and bunds both seeing yields edge higher, 2bp and 1bp respectively, while the risky bonds from the PIGS, all see yields fall sharply. Interestingly, commodity markets don’t seem to get the joke, as oil (-15.8%) is under significant pressure. Finally, the dollar is under pressure across the board, falling against all its G10 counterparts with AUD (+1.4%) leading the way on a combination of today’s positivity and some short-term positive technicals. Even NOK (+0.75%) is firmer today despite oil’s sharp decline, showing just how much the big picture is overwhelming market idiosyncrasies.

In EMG space, pretty much the entire bloc is firmer vs. the dollar with ZAR (+1.15%) and HUF (+0.85%) on top of the list. The rand seems to be the beneficiary of the idea that South Africa is set to receive $5 billion from the IMF and World Bank to help them cope with Covid-19 related disruptions. Meanwhile, the forint is seeing demand driven by expectations of the country easing its lockdown restrictions this week. One quick word about BRL, which has not opened as yet. Last week saw some spectacular movement with the real having fallen nearly 10% at its worst point early Friday afternoon as President Bolsonaro’s most important ally, Justice Minister Moro, resigned amid allegations that Bolsonaro was interfering with a corruption investigation into his own son. The central bank stepped in to stem the tide, and successfully pushed the real higher by nearly 3%, but the situation remains tenuous and as Bolsonaro’s popularity wanes, it seems like there is a lot of room for further declines.

On the data front this week, the first look at Q1 GDP will be closely scrutinized, as well as the FOMC meeting on Wednesday and Thursday’s Claims data.

Tuesday Case Shiller Home Prices 3.13%
  Consumer Confidence 87.9
Wednesday Q1 GDP -3.9%
  FOMC Rate Decision 0.00% – 0.25%
Thursday Initial Claims 3.5M
  Continuing Claims 19.0M
  Personal Income -1.6%
  Personal Spending -5.0%
  Core PCE -0.1% (1.6% Y/Y)
  Chicago PMI 38.2
Friday ISM Manufacturing 36.7
  ISM Prices Paid 28.9

Source: Bloomberg

Obviously, the data will be nothing like any of us have ever seen before, but the real question is just how much negativity is priced into the market. In addition, while the Fed is not expected to change any more policies, you cannot rule out something new to goose things further.

In the end, there is no economic evidence yet that the situation is improving anywhere in the world. And while measured cases of Covid-19 infections may be dropping in places, human behaviors are likely permanently altered. This crisis is not close to over, regardless of what the stock markets are trying to indicate. My money is on the bond market view that things are going to be very slow for a long time to come. And that implies the dollar is going to retain its bid as well.

Good luck and stay safe
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Infinite Buying

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Is infinite buying
Kuroda-san’s new mantra
If so, will it help?

An interesting lesson was learned, for those paying attention, yesterday after a headline hit the tape about the BOJ. The headline, BOJ Considering Unlimited JGB Purchases, had an immediate impact on the yen’s value, driving it lower by 0.7% in minutes. After all, logic dictates that a central bank that will buy all the government debt available will drive rates, no matter where they are, even lower, and that the currency would suffer on the back of the news. But, as is often the case, upon further reflection, the market realized that there was much less here than met the eye, and the yen recouped all those losses by early afternoon. In fact, over the past two sessions, the yen is essentially unchanged overall.

But why, you may ask, would that headline have been misleading. The key is to recognize that the BOJ’s current policy describes their QQE (Qualitative and Quantitative Easing) as targeting ¥80 trillion per year, equivalent in today’s market to approximately $740 billion. But they haven’t come close to achieving that target since 2017, actually only purchasing about ¥15 trillion last year. That’s a pretty big miss, but a year after they created that target, they began Yield-Curve Control (YCC), which states that 10-year JGB’s will be kept at around a 0.0% yield, +/-0.2%. Now, given that the BOJ already owns nearly 50% of all JGB’s outstanding, there is very little actual trading ongoing in the JGB market, so it doesn’t really move very much. The point is, the BOJ doesn’t need to buy many JGB’s to keep yields around 0.0%. However, they have been concerned over the optics of reducing that ¥80 trillion target, as reducing it might seem a signal that the BOJ was tightening policy. But now, in the wake of the Fed’s announcement that they will be executing unlimited QE, the BOJ has the perfect answer. They can get rid of a target that no longer means anything, while seeming to expand their program. At the same time, when pressed, they will point to their successful YCC and claim they are purchasing everything necessary to keep rates low. And in fairness, they will be right.

Next week it’s the central bank three
Who meet and they’ll try to agree
On proper next steps
(Increasing the PEPP?)
And printing cash like it was free

This was merely a prelude to what the next several days are going to hold, anticipation of the next central bank actions as the three major central banks, BOJ, Fed and ECB, all meet next week. At this point, we have already seen all the excitement regarding the BOJ, and as to the Fed, while they may well announce more details on their efforts to get funds flowing to SME’s, they are already at unlimited QE (and they are active, buying $75 billion/day) and so it seems unlikely that there will be anything else new to be learned.

The ECB, however, is the place where all the action is going to be. Remember, Madame Lagarde was a little slow off the mark, when back in March she stated that the ECB’s job was not to worry about spreads in the government bond market. Granted, within two weeks, after the market crushed Italian BTP’s and called into question Italy’s ability to fund its Covid-19 response, she realized that was, in fact, her only role. And so subsequently we got a €750 billion PEPP program that included Greek debt for the first time. But clearly, based on the recent PMI data, as well as things like this morning’s Ifo Expectations Survey (69.4 vs. exp 75.0), more is needed. So, speculation is now rampant that PEPP will be increased by €250 billion, and that the Capital Key will be explicitly scrapped. The latter is important because that is the driver of which nation’s debt they purchase and is based on the relative size of each economy. But the main problem is Italy, and so you can be sure that the ECB is going to wind up with a lot more Italian debt than would be allowed under the old rules.

Turning back to this week, though, we still have a whole day to traverse before the weekend arrives. Overall, markets are beginning to quiet down, with actual volatility a bit softer than we had seen recently. For example, though equity markets in Europe are lower, the declines are between 0.7% (FTSE 100) and 1.1% (Spain’s IBEX), with the CAC and DAX in between. If you recall, we were seeing daily movement on the order of 2%-5% not that long ago. The same was true overnight, with the Nikkei (-0.9%), Hang Seng (-0.6%) and Shanghai (-1.1%) all softer but by less dramatic amounts. As to US futures, while they were negative earlier, they are actually currently higher by about 0.5%, although we have a long way to go before the opening.

Bond markets are uninspiring, with Treasuries basically unchanged. European markets are a bit firmer (yields lower) across the board as investors try to anticipate the mooted increase in PEPP. And JGB’s are yielding -0.026%, right where the BOJ wants them.

The dollar this morning is now ever so slightly softer, with CAD actually the leading gainer up 0.2%, while the rest of the G10 is +/-0.1%. The Ifo data was the only release of note, although we have seen oil prices rebound slightly, currently higher by about 1.0% helping both CAD and NOK. In the EMG bloc, the story is a bit more mixed, although gainers have had a better day than losers. By that I mean, CZK (+1.35%), HUF (+1.1%) and RUB (+1.0%) have seen stronger gains than the worst performers (INR and KRW both -0.5%). As always, there are idiosyncratic drivers, with CZK seeming to benefit from word that lockdowns are about to ease, while HUF is gaining on the imminent beginning of QE purchases by the central bank. As to RUB, the combination of oil’s continuing rally off its worst levels earlier this week, and the Bank of Russia’s 50bp rate cut, to 5.50%, has investors looking for better times ahead. Ironically, that stronger oil seems to be weighing on the rupee, while the won fell as foreign equity selling dominated the market narrative.

Yesterday’s Claims data was pretty much as expected, granted that was 4.4M, still horrific, but the market absorbed the news easily. This morning brings Durable Goods (exp -12.0%, -6.5% ex transport) and then at 10:00 Michigan Sentiment (68.0). Not surprisingly, expectations are for some of the worst readings in history, but the way the market has been behaving, I think the risk is actually for a less negative data print and a sharp risk rally. Eventually, unless there really is a V-shaped recovery, I do see risk being shed, but it doesn’t seem like today is the day to get started.

Good luck, good weekend and stay safe
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Dire Straits

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In Europe, that grouping of states
Now find themselves in dire straits
The PMI data
Described a schemata
Of weakness and endless low rates

In the past, economists and analysts would build big econometric models with multiple variables and then, as new data was released, those models would spit out new estimates of economic activity. All of these models were based on calculating the historic relationships between specific variables and broader growth outcomes. Generally speaking, they were pretty lousy. Some would seem to work for a time, but the evolution of the economy was far faster than the changes made in the models, so they would fall out of synch. And that was before Covid-19 pushed the pace of economic change to an entirely new level. So now, higher frequency data does a far better job of giving indications as to the economic situation around the world. This is why the Initial Claims data (due this morning and currently expected at 4.5M) has gained in the eyes of both investors and economists compared to the previous champ, Nonfarm Payrolls. The latter is simply old news by the time it is released.

There is, however, another type of data that is seen as quite timely, the survey data. Specifically, PMI data is seen as an excellent harbinger of future activity, with a much stronger track record of successfully describing inflection points in the economy. And that’s what makes this morning’s report so disheartening. Remember, the PMI question simply asks each respondent whether activity is better, the same or worse than the previous month. They then subtract the percentage of worse from the percentage of better and, voila, PMI. With that in mind, this morning’s PMI results were spectacularly awful.

Country Manufacturing Services Composite
France 31.5 10.4 11.2
Germany 34.4 15.9 17.1
UK 32.9 12.3 12.9
Eurozone 33.6 11.7 13.5

Source: Bloomberg

In each case, the data set new historic lows, and given the service-oriented nature of developed economies, it cannot be that surprising that the Services number fell to levels far lower than manufacturing. After all, social distancing is essentially about stopping the provision of individual services. But still, if you do the math, in France 94.8% of Service businesses said that things were worse in April than in March. That’s a staggering number, and across the entire continent, even worse than the dire predictions that had been made ahead of the release.

With this in mind, two things make more sense. First, the euro is under pressure this morning, falling 0.6% as I type and heading back toward the lows seen last month. Despite all the discussion of how the Fed’s much more significant policy ease will ultimately undermine the dollar, the short-term reality continues to be, the euro has much bigger fundamental problems and so is far less attractive. The other thing is the ECB’s announcement last evening that they were following the Fed’s example and would now be accepting junk bonds as collateral, as long as those bonds were investment grade as of April 7. This is an attempt to prevent Italian debt, currently rated BBB with a negative outlook, from being removed from the acceptable collateral list when if Standard & Poor’s downgrades them to junk tomorrow. Italian yields currently trade at a 242bp premium to German yields in the 10-year bucket, and if they rise much further, it will simply call into question the best efforts of PM Conte to try to support the Italian economy. After all, unlike the US, Italy cannot print unlimited euros to fund themselves.

Keeping all that happy news in mind, market performance this morning is actually a lot better than you might expect. Equities in Asian markets were mixed with the Nikkei up nicely, +1.5%, but Shanghai slipping a bit, -0.2%. Another problem in Asia is Singapore, where early accolades about preventing the spread of Covid-19 have fallen by the wayside as the infection rate there spikes and previous efforts to reopen the economy are halted or reversed. Interestingly, the Asian PMI data was relatively much better than Europe, with Japanese Services data at 22.8. Turning to Europe, the picture remains mixed with the DAX (-0.3%) and FTSE 100 (-0.3%) slipping while the CAC (+0.1%) has managed to keep its head above water. The best performer on the Continent is Italy (+1.0%) as the ECB decision is seen as a win for all Italian markets. US futures markets are modestly negative at this time, but just 0.2% or so, thus it is hard to get a sense of the opening.

Bond markets are also having a mixed day, with the weakest links in Europe, the PIGS, all rallying smartly with yields lower by between 5bps (Italy) and 19bps (Greece). Treasury yields, however, have actually edged higher by a basis point, though still yield just 0.63%. And finally, the dollar, too, is having a mixed session. In the G10 bloc, the euro and Swiss franc are at the bottom of the list today, with Switzerland inextricably tied to the Eurozone and its foibles. On the plus side, NOK has jumped 1.0% as oil prices, after their early week collapse, are actually rebounding nicely this morning with WTI higher by 12.4% ($1.70/bbl), although still at just $15.50/bbl. Aussie (+0.6%) and Kiwi (+0.75%) are also in the green, as both have seen sharp recent declines moderate.

EMG currencies also present a mixed picture, with the ruble on top of the charts, +1.4%, on the strength of the oil market rebound. India’s rupee has also performed well overnight, rising 0.8%, as the market anticipates further monetary support from the Reserve bank there. While there are other gainers, none of the movement is significant. On the other side of the ledger, the CE4 are all under pressure, tracking the euro’s decline with the lot of them down between 0.3% and 0.5%. I must mention BRL as well, which while it hasn’t opened yet today, fell 2.6% yesterday as the market responded to BCB President Campos Neto indicating that further rate cuts were coming and that QE in the future is entirely realistic. The BRL carry trade has been devastated with the short-term Selic rate now sitting at 3.75%, and clearly with room to fall.

Aside from this morning’s Initial Claims data, we see Continuing Claims (exp 16.74M), which run at a one week lag, and then we get US PMI data (Mfg 35.0, Services 30.0) at 9:45. Finally at 10:00 comes New Home Sales, which are forecast to have declined by 16% in March to 644K.

The big picture remains that economic activity is still slowing down around the world with the reopening of economies still highly uncertain in terms of timing. Equity markets have been remarkable in their ability to ignore what have been historically awful economic outcomes, but at some point, I fear that the next leg lower will be coming. As to the dollar, it remains the haven of choice, and so is likely to remain well bid overall for the foreseeable future.

Good luck and stay safe
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A Huge Threat

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In Europe officials now fret
‘bout dealing with Italy’s debt
If it gets downgraded
It could be blockaded
From PEPP, which would be a huge threat

At home, both the Senate and House
Agreed that it’s time to espouse
More spending is needed
And so, they proceeded
To spend half a trill, thereabouts

While oil prices are still getting press (and still under pressure), the return to positive prices has quickly turned that story into one about supply and demand, and the knock-on economic impacts of lower oil prices, rather than the extraordinary commentary on the meaning of negative prices for a commodity. In other words, it’s just not so exciting any more. Instead, today has seen markets turn their collective attention back toward government and central bank activities with investors trying to determine the next place to take advantage of all the ongoing financial largesse.

Starting in Europe, this evening the ECB will be having a video conference to discuss its next steps. Topic number one is what to do about Italian, and to a lesser extent, the rest of Southern Europe’s debt. Remember, the ECB is precluded from financing government spending by its charter, and the Teutonic trio watch that issue like hawks. So, news from Rome this morning that highlighted PM Conte’s promise to double the stimulus spending to €55 billion in order to better support the economy is at odds with that promise.

The problem is, that much spending will take the budget deficit above 10% of GDP and drive the debt/GDP ratio above 155%. While the latter will still simply be the third highest ratio in the world (Japan and Greece have nothing to fear yet), both the budget and debt numbers are far higher than currently allowed under the Stability and Growth Pact as defined by the EU. (For good order’s sake, the EU demands its members to maintain budget deficits below 3% of GDP and a debt/GDP ratio of 60% or lower).

A potentially larger problem is that Italy’s sovereign debt is currently rated at BBB with a negative outlook, just two notches above junk. Italian interest rates have been rising as BTP’s are no longer seen as a haven, but rather a pure risk trade. Combining all this together puts the ECB in a very tough position. If Italian debt is downgraded to junk, the ECB charter would preclude it from purchasing Italian debt. But if that were the case, you could pretty much bank on a collapse in the Italian bond market, followed by a collapse in the Italian economy, and a very real risk that Italy exits the euro, likely collapsing that as well. Clearly, the ECB wants to prevent that sequence of events. Thus, to successfully sail between the Scylla of financing government spending and the Charybdis of a euro collapse, the ECB is very likely to revise their collateral rules such that sub-investment grade debt is acceptable to purchase. And they will be buying the long-dated bonds which they will hold to maturity, thus effectively funding Italy but being able to technically tell the Germans they are not. It is an unenviable position for Madame Lagarde, but the alternatives are worse. Once again, if you wonder about the euro’s long-term viability, these are the questions that need to be answered.

However, despite the latest drama on the rates side, the market seems to be focusing on the positive stories today, namely the decisions by a number of European governments to gradually reduce the ongoing covid-inspired restrictions on their citizens. Throughout Europe, small shops are gradually being allowed to reopen and there have been discussions of schools reopening as well. The infection data appears to have stabilized overall, with many countries reporting a downtick in the number of new infections. Governments worldwide have the unenviable task of balancing the risk of further damage to their economies vs. the risk of another increase in the spread of the disease. At this time, it seems clear that there is a broad-based move toward getting on with life. And that’s a good thing!

In the meantime, this morning, the House is set to approve the Senate bill to extend further stimulus in the US, this time with a $480 billion price tag. The bulk of this will go to extending the Paycheck Protection Program, but there are various other goodies to support farms and hospitals. As well, the discussion about reopening the US economy continues apace, with the latest updates seeming to show that about half the states, mostly in the Midwest and mountain states, are going to be returning to a more normal footing, as they have been the least impacted. Even parts of western New York are now being considered for a removal of restrictions, given the demographic there is far closer to Wyoming than Manhattan.

Put it all together, and the bulls get to define the narrative today, with a better future ahead and more government spending to support things. It should be no surprise that equity markets are modestly higher this morning, with European bourses up by 1% or so, and US futures higher by a similar amount. Treasuries have seen some supply, with the yield on the 10-year rising 2bps, and the dollar is softer vs. almost all other currencies.

In the G10 bloc, only NOK is weaker today, and by just 0.1% as oil prices continue to slide, but even CAD, also closely linked to oil, is higher today, up 0.5%. Aussie is the biggest winner today, higher by 1.0% after a short-covering spree emerged in the wake of better than expected Retail Sales data. But the dollar’s weakness is broad-based today.

EMG currencies are also faring well today with ZAR (+1.15%) leading the way on the back of a $26 billion stimulus package, and RUB (+0.75%) following up as traders begin to believe the currency markets have oversold the ruble. MXN (+0.55%) is gaining on the same thesis, and, in fact, most of the space is higher due to this more positive feeling in the markets. The one outlier here is KRW (-0.2%) which is coming under pressure as a second wave of Covid infections makes its way through the country.

On the data front this morning, there is nothing of note to be released in the US. Yesterday saw Existing Home Sales fall slightly less than expected, to 5.27M, but just slightly. All eyes are on tomorrow’s claims data, as well as the PMI’s. The only data from Europe showed that UK inflation remains quiescent (and is likely to fall further) while Italian industry continues to shrink with Industrial Orders -2.6% in February, ahead of the worst of the outbreak.

Risk has a better tone this morning, but I fear it has the ability to be a fleeting break. Markets have shown they still like new stimulus, but at some point, questioning the ability to pay for it all is going to overwhelm the short-term benefits of receiving it. Today doesn’t seem like that day, but I assure you it is getting closer.

Good luck and stay safe
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Still Disrespected

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According to data last night
The future in Germany’s bright
While right now, it stinks
Most everyone thinks
By Q3, they’ll all be alright

And yet, markets haven’t reflected
The positive vibe ZEW detected
Stock markets are dire
The dollar is higher
While oil is still disrespected

The one constant in the current market and economic environment is that nothing is consistent. For example, in Germany, the lockdown measures were extended for two weeks the day before Frau Merkel said that they would start to ease some restrictions, allowing small shops to open along with some schools. Then, this morning, the ZEW surveys were released with the Current Situation index printing at a historically low -91.5, well below the already dire forecasts of a -77.5 print. And yet, the Expectations index rose to +28.2, far higher than the median forecast of -42.0. Essentially, the commentary was that while Q1 and Q2 would be awful, things would be right as rain in Q3. But here’s a contradiction to that view, Oktoberfest, due to begin in late September, has just been canceled despite the fact that it is five months away and that it is in the middle of Q3, when things are ostensibly going to be much better there. My point is that, right now, interpreting signals of future activity is essentially impossible. Alas, that is what I try to do each morning.

So, what have we learned in the past twenty-four hours? Arguably, the biggest story was oil where the May WTI futures contract closed at -$37.63/bbl. In other words, the contract buyer is paid to take delivery of oil. And that’s the rub, storage capacity is almost entirely utilized while demand destruction continues daily. The IEA reported that current global production is running around 100 million barrels/day, with current demand running around 70 million barrels per day. In other words, plenty of oil is looking for a temporary home, and more of it is coming out of the ground each day. Arguably, this is a great opportunity for the US government to take delivery for the Strategic Petroleum Reserve, especially since they would be getting paid for the oil. But that would require a nimbleness of action that is unlikely to be seen at any government level. This morning, June WTI futures are under further pressure, down by another 20% at $16.50/bbl as I type, simply indicating that there is limited hope for a rebound in the near term. But the curve remains in sharp contango, with prices at $30/bl in December and higher further out. This price action is simply the oil market’s manifestation of the current economic view; negative growth in Q1 and Q2 with a rebound coming in Q3. However, despite the logic, seeing any commodity, let alone the world’s most important commodity, trading below zero is a strange sight indeed.

With the oil market grabbing the world’s focus, it can be no surprise that the dollar has responded by rallying strongly, especially against those currencies that are seen as tightly linked to the price of oil. So, in the G10 space, NOK (-1.7%) and CAD (-0.7%) are suffering, with the Nokkie the worst performer in the group. But AUD (-0.95%), NZD (-1.25%) and GBP (-0.95%) are all under significant pressure as well. It seems that Kiwi has responded negatively to RBNZ Governor Orr’s musings regarding additional stimulus in May, while Aussie has suffered on the back of the weak pricing in energy markets as well as lousy employment data. Meanwhile, today’s pressure on the pound seems to stem from a renewal of the Brexit discussion, and how a hard exit will be deleterious. In addition, there are still those who claim the UK’s response to the pandemic has been inadequate and the impact there will be much worse than elsewhere. Interestingly, UK employment data released this morning did not paint as glum a picture as might have been expected. While we can ignore the Unemployment Rate, which is February’s number, the March Claims data was surprisingly moderate. I expect, however, that next month’s data will be far worse. And I continue to think the pound has far more downside than upside here.

Turning to the EMG bloc, we cannot be surprised to see RUB as the worst performer in the group, down 1.3%, nor, given the growing risk-off sentiment, that the entire space is lower vs. the dollar. As today is a day that ends in ‘y’, MXN is lower, falling 0.7% thus far, as the market is increasingly put off by both the ongoing oil price declines as well as the ongoing incompetence demonstrated by the AMLO administration. (As an aside here, it seems that many Mexican financial institutions see much further peso weakness in the future as they are actively selling pesos in the market.) The other underperformers are HUF (-0.85%), ZAR (-0.8%) and KRW (-0.75%). Working in reverse order, the won is suffering as questions arise about the health of North Korean leader Kim Jong-un, who according to some reports, is critically ill and close to death. The concern is there is no obvious successor in place, and no way to know what the future will hold. Meanwhile, the rand is under pressure from the weakness throughout the commodity space as well as the realization that the carry that can be earned by holding the currency has diminished to its lowest level since 2008. For a currency that has been dependent on foreign holdings, this is a real problem.

I guess, given that the euro is only lower by 0.2%, it is actually a top performer of the day, so perhaps the German data has been a support to the single currency. The thing is, given the export orientation of the German (and Eurozone) economy, unless things pick up elsewhere, growth expectations will need to be modified lower for Q3. Don’t be surprised if we see this in the survey data going forward.

Elsewhere, equity markets everywhere are in the red, with European indices down between 1.7% and 2.5%. Asian stock markets were also lower, by similar amounts, and after yesterday’s US declines, the futures this morning show losses of between 0.7% for the NASDAQ and 1.5% for the Dow. Bond yields continue to fall, with 10-year Treasuries lower by 3bps this morning, and overall, risk is being sold.

The only data this morning is Existing Home Sales from March, with the median expectation for a 9% decline to 5.25M. As to Fed speakers, the quiet period ahead of next Wednesday’s FOMC meeting has begun so there is nothing to hear there. Of course, given what they have already done, as well as the fact that every act is unanimously accepted, I don’t see any value add from their comments in the near-term.

Last week saw a net gain in the equity markets as the narrative embraced the idea that the infection curve was flattening and that we were past the worst of the impact. This week, despite the ZEW data, I would contend investors are beginning to understand that things will take a very long time to get back to normal, and that the chance for new lows is quite high. In this environment, the dollar is likely to remain well bid.

Good luck and stay safe
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The Absolute Fact

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It’s been one score years and one more
Since prices for oil hit this floor
Despite last week’s pact
The absolute fact
Is there’s no place for, it, to store

Q1 1999 was the last time the price of the front-month oil contract on the Comex was trading as low as it has this morning. As I type, it is currently at $13.55/bbl, down more than $4.70 on the session, which on a percentage basis is more than 25%! And you thought currency volatility was high. At any rate, it seems the major issue is that oil producers have no place left to store the stuff, and since demand has collapsed, the natural response is for the price to collapse as well. Now, in fairness, while this will garner the headlines, the market reality may be slightly different, because the May futures contract, which expires tomorrow, is no longer the active contract, that has moved to June. Now, the June contract is down nearly 10%, but is still trading above $22/bbl, so this morning’s excitement may have less long-term market impact than it seems at first. Nonetheless, it does point to just how disruptive the coronavirus has been to markets all around the world.

Of course, one should not be surprised by the currencies that have felt the repercussions of this oil price decline the most severely; MXN (-1.9%), RUB (-0.45%), NOK (-0.65%) and CAD (-0.7%). The peso has been one of the market’s favorite whipping boys all year, as it has declined nearly 22% thus far. ZAR (-25.7%) and BRL (-23.0%) are the only two currencies to underperform the peso. Thus, this morning’s nearly 2% decline cannot be a surprise. In fact, since March 2, truthfully before Covid was widely understood to be the threat it has become to Western economies, the average daily range in USDMXN has been 3.78% which works out to an annualized volatility of nearly 60%. The remarkable thing is how cheap MXN options are relative to actual movement. For example, this morning, 1-month implied volatility is trading on the order of 25%, clearly far less than the type of movement we have seen in the past seven weeks. And given oil’s extreme volatility, and the peso’s link to the price of oil, I expect that we are going to continue to see the peso trade like this for the foreseeable future. The implication here is that hedgers might want to consider owning some of this optionality to help manage the uncertainties of their exposures during this time.

Away from the oil story, though, we have an entirely different narrative forming regarding the virus and its impact on the broader economy. Despite a number of countries having extended their lockdown procedures into the second week of May, we are also getting the first signs that the peak of infections may have passed, and we are hearing from more and more quarters that reopening the economy is more critical given that fact. This has been a big part of the rationale behind the equity market rally we saw last week, which despite the evidence of just how awful Q1 earnings are going to be, was really remarkably robust.

There continue to be two strong storylines with bulls claiming that this is a temporary hit and given the amount of stimulus, both fiscal and monetary, that has been brought to bear on the problem, the ‘V’ shaped recovery is still a high probability outcome. The bears, on the other hand, continue to highlight that expectations for the economy going forward to look anything like it did three months ago are misguided, and that it will take far longer to achieve any real recovery. Structural changes will have been made resulting in a much higher unemployment rate, considerably less consumption and, thus, much weaker GDP growth. Earnings will suffer and stock prices alongside them. Last week’s price action, with both up and down days, was an excellent depiction of this battle. And this battle will continue until one side’s argument is borne out. In other words, equity market volatility is likely to be with us for many months to come as well.

So, turning to this morning’s session, we have actually seen equity markets somewhat softer, with most of Europe lower by a bit below 1.0% which followed Asia’s similarly modest weakness. US futures, though, are starting to come under more pressure, having only been down 0.5% early in the session, but now looking at 1.5% declines. Interestingly, Treasury yields have barely moved, with the 10-year lower by less than 1 basis point, although in Europe, the weakest economies (PIGS) have all seen their government bond yields rise by more than 8bps, a sign of risk being jettisoned. And finally, gold is little changed on the morning, although given the dollar’s broad rally since the beginning of March, it has held its value extremely well.

As to the rest of the FX market, the dollar is largely, albeit not universally stronger this morning, and has been gaining ground as risk has been selling off. NOK and CAD lead the way lower, but the pound is also feeling stress as Brexit (remember that?) comes back into view with discussions starting up again. There is a big question as to whether PM Johnson will concede to an extension of the current situation given the unprecedented disruption caused by Covid-19. Fears that he won’t, and that the UK will crash out with no deal are likely to start to come back if we don’t hear positive news on this front soon. In the EMG bloc, away from the peso, there were more losers than winners, but the magnitudes of movement this morning have been far less than what we have seen recently. Ultimately, if risk continues to be shed, I expect the dollar to remain well bid against all comers.

On the data front, we start to see a bigger range of March data, which will clearly have been impacted by the virus and response.

Tuesday Existing Home Sales 5.3M
Thursday Initial Claims 4.5M
  Continuing Claims 17.27M
  Markit Mfg PMI 38.0
  Markit Services PMI 31.3
  New Home Sales 644K
Friday Durable Goods -12.0%
  -ex Transport -6.0%
  Michigan Sentiment 68.0

Source: Bloomberg

As we have seen for the past several weeks, the Claims data is likely to be the most important, although the PMI data will be interesting as well. Of course, the question, at this point, is whether the market will have discounted what it perceives to be all the bad news and ignore this data. While we may see that again for another week or two, my sense is that at some point, investors will realize that the future is not quite so bright, and that risk is not where they want to be. That seems to be today’s short-term narrative, but it has not changed the bigger view yet.

Good luck and stay safe
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The First Battlefield

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The data from China revealed
This bug, is in fact, the windshield
It splattered the hope
That ‘war’ was a trope
Instead ‘twas the first battlefield

China released its main grouping of March data last night and the picture was not pretty. Q1 GDP fell 9.8% Q/Q and was 6.8% below Q1 2019. Those are staggeringly large contractions of economic activity and likely portend what we will begin to see throughout the rest of the world over the next several weeks. The other key data points were Retail Sales (-15.8%), Fixed Asset Investment (-16.1%), both with record declines, and then surprisingly, Industrial Production, which fell just 1.1% in March from last year’s results, though has declined 8.4% thus far in 2020. The official spin of the data was that while February was abysmal, given the nation was essentially completely closed that month, things have started to pick up again and the future is bright. While Q2 seems likely to be better than Q1, bright may overstate the case a bit. After all, the Chinese economy remains highly dependent on its export industries, and the last I checked, most of its major western markets like the US and Europe remain closed for business. So even if Chinese factories are restarting and producing goods again, their client base is not yet in the market for consuming most things.

Excitement is starting to build
And President Trump’s clearly thrilled
That plans are afoot
To increase output
In states where Covid has been chilled

But as important as that data is, and despite the harbingers it brings regarding the rest of the world in Q1 and Q2, market focus is clearly on an even more important subject, the timing of the reopening of the US economy. Last evening, in his daily press conference, the President explained that there will be a three-step approach outlined for individual states to follow in order to try to return to more normal conditions. The idea is that when reported infections show a downward trend over a two-week period, that would be an appropriate time to allow certain businesses (e.g. restaurants, movie theaters, gyms and places of worship) to reopen amid strict social distancing guidelines. Assuming no relapse in the data, phase two would include the allowance of non-essential travel with bars and schools reopening, while phase three, also assuming a continued downward slope of the infection curve, would allow the bulk of the remaining economy to reopen, while observing ongoing social distancing.

At least, that is the gist of the idea. Each state will be able to decide for itself when it reaches appropriate milestones to expand allowable activities with the Federal government not imposing any specific restrictions. While the exact timing of these activities remains uncertain, there are likely some states that will be ready to start phase one before the end of April, while others will take much longer to get there.

Investors, though, see one thing only, that the worst is behind us and that if the US is going to reopen, then so, soon, will the rest of the world. After all, Europe was inundated with the virus earlier than the US. Thus, the prospect of restarting economic activity combined with the extraordinary stimulus measures undertaken by governments around the world has encouraged the investment community to race back into equity markets before they get too rich! At least that is what it seems like this morning.

Fear has taken a back seat to greed and stock markets around the world are higher. So, we saw Asian markets (Nikkei +3.1%, Hang Seng +1.6%, Shanghai +0.7%) all perform well despite the Chinese data. Europe has been even better, with the DAX +4.2%, CAC +4.0% and FTSE 100 + 3.4%, and US futures are closely following Europe with all three indices up well more than 2.0% at this point in the session. In other words, earnings collapses are now seen to be one-time impacts and will soon be reversed. At the same time, pent-up demand will restore much of the luster to so many beaten down stocks, especially in the retail and consumer space.

This seems a tad aggressive for two reasons. First, though undoubtedly reopening the economy will result in better outcomes, it is not clear that the future will resemble the past that closely. After all, are we going to see a much greater use of telecommuting, thus less need for daily transport? Will restaurant and bar business pick up in the same way as prior to the virus’s onset? Will shopping malls ever recover? All these questions are critical to valuations, and answers will not be known for many months. But second, the one thing of which we can be pretty certain, at least in the short run, is that share repurchase programs are going to be thin on the ground for quite a while, and given the more than $1 trillion of spending that we have been seeing in that space, it seems that a key pillar of equity market support will have gone missing. So, while today is clearly all about risk being acquired, it will be a bumpy ride at best.

Speaking of risk-on, a quick look at the FX market shows that the dollar, for the first time in a week is under pressure this morning, having fallen against all its G10 peers. NZD is the leading gainer today, up 0.75%, as kiwi appears to be the highest beta currency in the group and is responding to the US reopening story. Aussie is next on the list, +0.45%, with its beta second only to kiwi, and then the rest of the bloc is higher but in a more limited fashion.

EMG currencies, too, are showing life this morning with IDR in the lead, having rallied 1.1% alongside TRY up a similar amount. The rupiah seems to be the beneficiary of the announcement by the central bank there that they are going to begin direct purchases of government bonds, i.e. monetizing the debt, on Monday, which is apparently a positive statistic in the beginning of the process. Meanwhile, on this risk-on day, Turkey’s 8%+ yields remain extremely attractive for investors, drawing funds into the country. But essentially, the entire bloc is firmer today, even the Mexican peso, which has been one of the absolutely worst performing currencies around. It has rallied 0.25%, its first gain in more than a week.

Today’s narrative is clearly that whatever damage has been incurred by Covid-19, the worst is behind us. Investors are looking forward and anxious to take part in the next up cycle. Alas, the curmudgeon in me sees a scenario where it will take far longer to regain previous levels of activity than the market currently seems to be pricing, and so risk attitudes have room to reverse, yet again, in the not too distant future. But as long as the narrative is the future is bright, the dollar should soften while equity markets rally.

Good luck, good weekend and stay safe
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New Aspirations

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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
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Covid’s Attacks

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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
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Until Covid-19 Is Dead

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