Tag Archives: #china

Feeling the Heat

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As tensions continue to flare
Twixt China and Uncle Sam’s heir
The positive feelings
In equity dealings
Could easily turn to a bear

Meanwhile down on Threadneedle Street
The Old Lady’s fairly downbeat
Thus negative rates
Are now on their plates
With bank stocks there feeling the heat

A yoyo may be the best metaphor for market price action thus far in May as we have seen a nearly equal number of up and down days with the pattern nearly perfect of gains followed by losses and vice versa. Today is no different as equity markets are on their back foot, after yesterday’s gains, in response to increasing tensions between Presidents Trump and Xi. Realistically, this is all political, and largely for each President’s domestic audience, but it has taken the form of a blame game, with each nation blaming the other for the instance and severity of the Covid-19 outbreak. What is a bit different this time is that President Trump, who had been quick to condemn China in the past, had also been scrupulous in maintaining that he and President Xi had an excellent working relationship. However, last night’s Twitter tirade included direct attacks on Mr Xi, a new tactic and one over which markets have now shown concern.

Thus, equity markets around the world are lower this morning with modest losses seen in Asia (Nikkei -0.2%, Hang Seng and Shanghai -0.5%) and slightly larger losses throughout the Continent (DAX -1.6%, CAC -1.1%, FTSE 100 -1.0%). US futures are pointing in the same direction with all three indices currently down about 0.7%. Has anything really changed? Arguably not. After all, both broad economic data and corporate earnings numbers remain awful, yet equity market prices, despite today’s dour mood, remain within sight of all-time highs. And of course, the bond market continues to point to a very different future as 10-year Treasury yields (-1bp today) continue to trade near historically low levels. To reiterate, the conundrum between a bond market that is implying extremely slow economic activity for the next decade, with no concomitant inflation seems an odd companion to an equity market where the median P/E ratio has once again moved above 20, well above its long-term average. This dichotomy continues to be a key topic of conversation in the market, and one which history has shown cannot last forever. The trillion-dollar question is, which market adjusts most?

With the increasing dissent between the US and China as a background, we also learned of the specter of the next country to move toward a negative interest rate stance, the UK. When Mark Carney was governor there, he categorically ruled out negative interest rates as an effective tool to help support the economy. He got to closely observe the experiment throughout Europe and concluded the detriments to the banking community outweighed any potential economic positives. (This is something that is gaining more credence within the Eurozone as well although the ECB continues to insist NIRP has been good for the Eurozone.) However, Carney is no longer governor, Andrew Bailey now holds the chair. And he has just informed Parliament, “I have changed my position a bit,” on the subject, and is now willing to consider negative rates after all. This is in concert with other members of the MPC, which implies that NIRP is likely soon to be reality in the UK. It should be no surprise that UK banking stocks are suffering after these comments as banks are the second victims of the process. (Individual savers are the first victims as their savings no longer offer any income, and in extreme cases decline.)

The other natural victim of NIRP is the currency. As discussed earlier this week, there is a pretty solid correlation between negative real rates and a currency’s relative value. Now granted, if real rates are negative everywhere, then we are simply back to the relative amount of negativity that exists, but regardless, this potential policy shift is clearly new, and one would expect the pound to suffer accordingly. Surprisingly, it is little changed this morning, down less than 0.1% amid a modest trading range overnight. However, it certainly raises the question of the future path of the pound.

When the Eurozone first mooted negative interest rates, in 2014, the dollar was already in the midst of a strong rally based on the view that the Fed was getting set to start to raise interest rates at that time. Thus, separating the impact of NIRP from that of expected higher US rates on the EUR/USD exchange rate is no easy task. However, there is no question that the euro’s value has suffered from NIRP as there is limited incentive for fixed income investment by foreigners. It should therefore be expected that the pound will be weaker going forward as foreign investment interest will diminish in the UK. Whether negative rates will help encourage foreign direct investment is another story entirely, and one which we will not understand fully for many years to come. With all this in mind, though, the damage to the pound is not likely to be too great. After all, given the fact that negative real rates are widespread, and already the situation in the UK, a base-rate cut from 0.1% to -0.1% doesn’t seem like that big a deal overall. We shall see how the market behaves.

As to the session today, FX markets have been as quiet as we have seen in several months. In the G10 space, Aussie and Kiwi are the underperformers, but both are lower by a mere 0.35%, quite a small move relative to recent activity, and simply a modest unwind of yesterday’s much more powerful rally in both. But away from those two, the rest of the bloc is less than 0.2% different from the close with both gainers (EUR, DKK) and losers (GBP, JPY) equidistant from those levels.

On the EMG side, there is a bit more constructive performance with oil’s continued rally (+2%) helping RUB (+0.4%) while the CE4 are also modestly firmer simply following the euro higher. APAC currencies seem a bit worse for wear after the Twitter spat between Trump and China, but the losses are miniscule.

Data this morning showed the preliminary PMI data from Europe is still dire, but not quite as bad as last month’s showing. In the US today we see Initial Claims (exp 2.4M), Continuing Claims (24.25M) and Existing Home Sales (4.22M). But as I have been writing all month, at this point data is assumed to be dreadful and only policy decisions seem to have an impact on the market. Yesterday we saw the Minutes of the Fed’s April 29 meeting, where there was a great deal of discussion about the economy’s problems and how they can continue to support it. Ideas floated were firmer forward guidance, attaching rate moves to numeric economic targets, and yield curve control, where the Fed determines to keep the interest rate on a particular tenor of Treasury bonds at a specific level. Both Japan and Australia are currently executing this, and the Fed has done so in its history, keeping long-term yields at 2.50% during WWII. My money is on the 10-year being pegged at 0.25% for as long as necessary. But that is a discussion for another day. For today, the dollar seems more likely to rebound a bit rather than decline, but that, too, is one man’s view.

Good luck and stay safe
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Terribly Slow

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From Germany data did show
That Q1 was terribly slow
As well, for Q2
Recession’s in view
Their hope remains Q3 will grow

Meanwhile last night China revealed
‘twill be a long time ere its healed
Despite what they’ve said
‘bout moving ahead
Consumers, their checkbooks, won’t wield

While the market has not yet truly begun to respond to data releases, they are nonetheless important to help us understand the longer-term trajectory of each nation’s economy as well as the overall global situation. So, despite very modest movement in markets overnight, we did learn a great deal about how Q1 truly fared in Europe. Remember, Covid-19’s impact really only began in the second half of March, just a small slice of the Q1 calendar. And yet, Q1 GDP was released early this morning from Germany, with growth falling at a 2.2% quarterly rate, which annualized comes in somewhere near -9.0%. In addition, Q4 data was revised lower to -0.1%, so Germany’s technical recession has already begun. Remember, prior to the outbreak, Germany’s economy was already in the doldrums, having printed negative quarterly GDP data in three of the previous six quarters. Of course, those numbers were much less dramatic, but the point is the engine of Europe was sputtering before the recent calamity. Forecasts for Q2 are even worse, with a quarterly decline on the order of 6.5% penciled in there despite the fact that Germany seems to be leading the way in reopening their economy.

For the Eurozone as a whole, GDP in Q1 fell 3.8% in Q1 as Germany’s performance was actually far better than most. Remember, Italy, Spain and France all posted numbers on the order of -5.0%. The employment situation was equally grim, as despite massive efforts by governments to pay companies to keep employees on the payroll, employment fell 0.2%, the first decline in that reading since the Eurozone crisis in 2012-13. One other highlight (lowlight?) was Italian Industrial Activity, which saw both orders and sales fall more than 25% in March. Q2 is destined to be far worse than Q1, and the current hope is that there is no second wave of infections and that Q3 sees a substantial rebound. At least, that’s the current narrative.

The problem with the rebound narrative was made clear, though, by the Chinese last night when they released their monthly statistics. Retail Sales there have fallen 16.2% YTD, a worse outcome than forecast and strong evidence that despite the “reopening” of the Chinese economy, things are nowhere near back to normal. Fixed Asset Investment printed at -10.3% with Property Investment continuing to decline as well, -3.3%. Only IP showed any improvement, rising 3.9% in April, but the problem there is that inventories are starting to build rapidly as consumers are just not spending. Again, the point is that shutting things down took mere days or weeks to accomplish. Starting things back up will clearly take months and likely years to get back close to where things were before the outbreak.

However, as I mentioned at the top, market reactions to data points have been virtually nonexistent for the past two months. At this point, investors are well aware of the troubles, and so data confirming that knowledge is just not that interesting. Rather, the information that matters now is the policy response that is in store.

The one thing we have learned over the past decade is that the stigma of excessive debt has been removed. Japan is the poster child for this as JGB’s outstanding represent more than 240% of Japan’s GDP, and yet the yield on 10-year JGB’s this morning is -0.01%. Obviously, this is solely because the BOJ continues to buy up all the issuance these days, but in the end, the lesson for every other nation is that you can issue as much debt and spend as much money as you like with few, if any consequences. Central bank reaction functions have been to support the economy via market actions like QE whenever there is a hint of a downturn in either the economy or the stock market. Both the Fed and ECB have learned this lesson well, and look set to continue with extraordinary support for the foreseeable future.

But the consequence of this in the one market that is not directly supported (at least in the case of the G10), the FX market, is what we need to consider. And as I observe central bank activity and try to discern its economic impacts, I have become persuaded that the medium-term outlook for the dollar is actually much lower.

Consider that the Fed is clearly going to continue its QE programs across as many assets as they deem necessary. Not merely Treasuries and Agencies, but Corporates, Munis and Junk bonds as well. And as is almost always the case, these ‘emergency’ measures will evolve into ordinary policy, meaning they will be doing this forever. The implication of this policy is that yields on overall USD debt are going to decline from a combination of continued reductions in Treasury yields and compression of credit spreads. After all, don’t fight the Fed remain a key investment philosophy. Thus, nominal yields are almost certain to continue declining.

But what about real yields? Well, that is where we get to the crux of the story and why my dollar view has evolved. CPI was just released on Tuesday and fell to 0.3% Y/Y. Thus, strictly speaking, 10-year Treasuries show a +0.31% real yield this morning (nominal of 0.61% – CPI of 0.3%). The thing is, while current inflation readings are quite low, and may well fall for another few months, the supply shock we have felt in the economy is very likely to raise prices considerably over time. Inflation is not really on the market’s radar right now, nor on that of the Fed. If anything, the concern is over deflation. But that is exactly why inflation remains a far more dangerous concern, because higher prices will not only crimp consumer spending, it will create a policy conundrum for the Fed of epic proportions. After all, Paul Volcker taught us all that raising interest rates was how to fight inflation, but that is directly at odds with QE. The point is, if (when) inflation does begin to rise, the Fed is certain to ignore the evidence for as long as possible. And that means we are going to see increasingly negative real rates in the US. History has shown that when US real rates turn negative; the dollar suffers accordingly. Hence the evolution in my medium- and long-term views of the dollar.

A quick look at this morning’s markets shows that yesterday’s late day equity rally in the US has largely been followed through Asia and Europe. Bonds are also in demand as yields throughout the government sector are mostly lower. And the dollar this morning is actually little changed overall, with a smattering of winners and losers across both G10 and EMG blocs, and no truly noteworthy stories.

We do see a decent amount of US data this morning led by Retail Sales (exp -12.0%, -8.5% ex autos). We also see Empire Manufacturing (-60.0), IP (-12.0%), Capacity Utilization (63.8%), JOLTs Job Openings (5.8M) and finally Michigan Sentiment (68.0). Only the Empire number is truly current, but to imply that a rise from -78.2 to -60.0 is progress really overstates the case. As I’ve pointed out, the data has not been a driver. Markets are exhausted after a long period of significant volatility. My expectation is for the dollar to do very little today, and actually until we see a new narrative evolve. So modest movement should be the watchword.

Good luck, good weekend and stay safe
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Trade is the Word

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Remember last year when Phase One
Was all that was needed to run
The stock market higher,
Light bears’ hair on fire
And help all the bulls to have fun?

Well, once again trade is the word
Investors are claiming has spurred
Their risk appetite
Both morning and night
While earnings and growth are deferred

Another day, another rally in equity markets as the bulls now point to revamped conversations between the US and China regarding trade as the critical feature to return the economy to a growth stance. Covid-19 was extremely effective at disrupting the phase one trade deal on two fronts. First, given a key part of the deal was the promise of substantial agricultural purchases by China, the closure of their economy in February and corresponding inability to import virtually anything, put paid to that part of the deal. Then there was the entire issue about the origin of Covid-19, and President Trump’s insistence on ascribing blame to the Chinese for its spread. Certainly, that did not help relations.

But yesterday, the White House described renewed discussions between senior officials to help ensure that the trade deal remains on track. Apparently, there was a phone conversation including Chinese Premier, Liu He, and both Treasury Secretary Mnuchin and Trade Rep Lighthizer last night. And this is the story on the lips of every buyer in the market. The thesis here is quite simple, US economic output will be goosed by a ramp up by the Chinese in buying products. Recall, they allegedly promised to purchase in excess of $50 billion worth of agricultural goods, as well as focus on the prevention of IP theft and open their economy further. Covid slowed their purchases significantly, so now, in order to meet their obligations, they need to dramatically increase their buying pace, thus supporting US growth. It’s almost as though last year’s news is driving this year’s market.

Nonetheless, that is the situation and yesterday’s US performance has carried over through Asia (Nikkei +2.6%, Hang Seng +1.0%, Shanghai + 0.8%) and on into Europe (DAX +0.9%, CAC + 0.8%). Not to worry, US futures are right in line, with all three indices currently higher by just over 1.0%.

Bond markets are rallying today as well, which after yesterday’s rally and the broader risk sentiment seems a bit out of place. But 10-year Treasury yields are down 10bps in the past two sessions, with this morning’s price action worth 3bps. Bunds have seen a similar, albeit not quite as large, move, with yields falling 5bps since Wednesday and down 1.5bps today. In the European market, though, today’s big story is Italy, where Moody’s is due to release its latest credit ratings update this afternoon. Moody’s currently has Italy rated Baa3, the lowest investment grade rating, and there is a risk that they cut Italy to junk status. However, we are seeing broad optimism in markets this morning. In fact, Italian BTP yields have fallen (bonds rallied) 8bps this morning and 14bps in the past two sessions. In other words, it doesn’t appear that there is great concern of a downgrade, at least not right now. Of course, that means any surprise by Moody’s will have that much larger of a negative impact.

Put it all together and you have the makings of yet another positive risk day. Not surprisingly, the dollar is under pressure during this move, with most G10 and EMG currencies in the black ahead of the payroll data this morning. And pretty much, the story for all the gainers is the positive vibe delivered by the trade news. That has helped oil prices to continue their recent rally and correspondingly supported CAD, RUB, MXN and NOK. And the story has helped renew hopes for a return to a pickup in international trade, which has fallen sharply during the past several months.

The data this morning is sure
To set records that will endure
For decades to come
As depths it will plumb
And question if hope’s premature

Here are the most recent median expectations according to Bloomberg:

Nonfarm Payrolls -22.0M
Private Payrolls -21.855M
Manufacturing Payrolls -2.5M
Unemployment Rate 16.0%
Average Hourly Earnings 0.5% (3.3% Y/Y)
Average Weekly Hours 33.5
Participation Rate 61.0%
Canadian Change in Employment -4.0M
Canadian Unemployment Rate 18.1%

Obviously, these are staggeringly large numbers in both the US and Canada. In fact, given the US economy is more than 12x the size of Canada, the situation north of the border looks more dire than here at home. Of course, the market has likely become somewhat inured to these numbers as we have seen Initial Claims numbers grow 30M in the past six weeks. But that does not detract from the absolute carnage that Covid-19 has caused to the economy. The question at hand, though, is whether the confirmation of economic destruction is enough to derail the idea that a V-shaped recovery is in the cards.

Once again, I look at the dichotomy of price action between the equity markets and the Treasury market in an effort to find an answer. The anticipated data this morning is unequivocal evidence of destruction of huge swathes of the US economy. We are looking at a decade’s worth of job growth disappearing in one month. In addition, it does appear likely that a significant proportion of these jobs will simply not return as they were. Instead, we are likely to see major transformations in the way business is carried out in the future. How long will it be before people are comfortable in large crowds? How long before they want to jostle each other in a bar to watch a football game? Or just go out on a Thursday night? The point is, equity markets don’t see the glass half full, they see it overflowing. However, 10-year Treasury yields at 0.60% are hardly an indication of strong economic demand. In fact, they are the opposite, an indication that future growth is going to be extremely subdued when it returns, and the fact that the entire term structure of rates is so low tells me that return is likely to take a long time. Much longer than a few quarters. To complete the analogy, the bond market sees that same glass as virtually emplty. So, stocks continue to point to a V and bonds to an L. Alas, history has shown the bond market tends to get these things right more often than the stock market.

The point is that the current robust risk appetite seems unlikely to have staying power, and that means that the current dollar weakness is likely to be fleeting. The bigger picture remains that the dollar, for the time being, will remain the ultimate haven currency. Look for its bid to return.

Good luck, good weekend 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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Prices So Low

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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
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Gone Astray

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There once was a banker named Jay
Who, for a few weeks, had his way
Stock markets rose nicely
But that led precisely
To things that have now gone astray

Protagonists now can’t discern
What’s safe or what assets to spurn
Their hunt for more yield
Has finally revealed
That risk is attached to return

Apparently, when the Fed cuts rates, it is not a guarantee that stock prices will rally. That seems to be yesterday morning’s lesson in the wake of the Fed’s “surprise” 50bp rate cut. After a brief rally, which lasted about 15 minutes, the bottom fell out again as investors and traders decided that things were actually much worse than they feared. In addition, Chairman Jay did himself no favors by opening the kimono a bit and admitting that there was nothing the Fed could do to directly address the current issues.

This is a real problem for the global central bank community because the Fed was the player with the most ammunition left, and they just used one-third of their bullets with a disastrous outcome. Ask yourself what more the ECB can do, with rates already negative and QE ongoing. They have no more bullets left, just the whispering of sweet nothings from Madame Lagarde to Eurozone FinMins to spend more money. If the data turns further south in Europe, which seems almost guaranteed, I would look for a suspension of the Eurozone rules on financing and deficits. After all, Covid-19 was not part of the bargain, and this is clearly an emergency…just ask Jay. Japan? They are already printing yen as fast as they can to buy more assets, and will not stop, but are unable to achieve their goals.

Arguably, the only central bank left that matters, and that has room to move is the PBOC, which has already been active adding liquidity and trying to steer it to SME’s. But if the pressure continues on both the Chinese economy and its markets, they will do more regardless of the long-term debt problems they may exacerbate. We have clearly reached a point where every central bank is all-in to try to stop the current stock market declines. And you thought all they cared about was money supply!

So, what about a fiscal response by the major economies? After all, to a man, every central bank has explained that monetary policy is not the appropriate tool to address the current economic and market concerns. As Chairman Jay explained in his press conference, “A rate cut will not reduce the rate of infection. It won’t fix a broken supply chain. We get that, but we do believe that our action will provide a meaningful boost to the economy.” A cynic might conclude that central banks were trying to force the fiscal authorities’ collective hands, but in reality, I think the issue is simply that, at least in the G7, fiscal issues are political questions that by their very nature take longer to answer. Getting agreement on spending money, especially in the current fractious political environment, is extremely difficult short of a major crisis like the financial market meltdown in 2008. And for now, despite all the press, and some really bad data releases, Covid-19 has not achieved that level of concern.

Is that likely to change soon? My impression based on what we have seen and heard so far is that unless there is another significant uptick in the number of infections, and especially in the mortality rate, we are likely to see relatively small sums of money allocated to this issue. Of course, if economic activity is impeded by travel restrictions and supply chains cannot get back in business by the end of March, we are likely to have a change of heart by these governments, but for now, its central banks or bust.

So, this morning, after yesterday’s rout in US markets, things seem to have stabilized somewhat with most Asian equity markets flat to slightly higher, European markets ahead by about 1% and US futures currently sitting ~2% stronger. Part of the US showing is undoubtedly due to yesterday’s Super Tuesday primaries which showed former VP Joe Biden build on his recently recovered momentum to actually take a slight delegate lead. There is certainly some truth to the idea that part of the US markets’ recent malaise was due to a concern that Senator Sanders was poised to become the Democratic nominee, and that his policy platforms have been extremely antagonistic to private capital.

But despite the equity market activity, which on the whole looks good, there is no shortage of demand for Treasuries, which implies that there is still a great deal of haven demand. Yesterday, the 10-year yield breached 1.00% for the first time in its 150-year history, trading as low as 0.90% before rebounding ahead of the close. But here we are this morning with the yield down a further 5bps, back to 0.95%, and quite frankly there is nothing to indicate this move is over. In fact, futures markets are pricing in another Fed rate cut at their meeting 2 weeks from today, and another three cuts in total by the end of 2020! While German bunds have not seen the same demand, the rest of the European government bond market has rallied with yields everywhere falling between 1bp and 8bps. And don’t forget JGB’s, which have also seen yields decline 2bps, heading further into negative territory despite the BOJ’s efforts to steepen their yield curve. Certainly, a look at the bond market does not inspire confidence that the all clear has been sounded.

And finally, in the FX markets, the dollar remains under general pressure as the market continues to price in further Fed activity which is much greater than anywhere else. Yesterday’s cut took US rates to their narrowest spread vs. Eurozone rates since 2016, when the Fed was in the process of raising rates. It is no coincidence that the euro has recovered to levels seen back then as well. The thing about the dollar’s current weakness, though, is that it seems to be running its course. After all, if the interest rate market is pricing for US rates to fall back to the zero-bound, and there is no indication that the US will ever go negative, how much more room does the euro have to rally? While yesterday’s peak at just above 1.12 may not be the absolute top, I think we are much nearer than further from that point.

A quick look at the EMG bloc shows that today’s winners have largely centered in Asia as those currencies respond belatedly to yesterday’s Fed actions, although we have also seen commodity focused currencies like ZAR (+0.8%), MXN (+0.7%) and RUB (+0.5%) perform well on the rebound in oil and metals prices. I expect that CLP, BRL and COP will also open well on the same thesis.

While yesterday was barren in the US on the data front, this morning we see ADP Employment (exp 170K) and ISM Non-Manufacturing (54.9) as well as the Fed’s Beige Book at 2:00pm. Monday’s ISM Manufacturing data was a touch weak, but it is getting very difficult to read with the Covid-19 situation around. Was this weakness evident prior to the outbreak? I think that’s what most investors want to understand. Also, I would be remiss if I didn’t mention that Chinese auto sales plunged 80% in February and the Caixin PMI data was also disastrous, printing at 27.5.

For now, uncertainty continues to reign and with that comes increased volatility. We have seen that with a substantial rebound in the equity market VIX, and we have seen that with solid rebounds in FX option volatility, which had been trading at historically low levels but are now, in G7 currencies, back to levels not seen since December 2018, when equity markets were correcting and fear was rampant. My take there is that implied vols have further to rally as there is little chance we have seen the end of the current crisis-like situation. Hedgers beware!

Good luck
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At Loggerheads

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While yesterday there was no hope
The global economy’d cope
With Covid-19
Today what we’ve seen
Is those fears were just a mere trope

Meanwhile as the virus still spreads
Investors are at loggerheads
Should bulls buy the dip?
Can bears get a grip?
I guess it’s all up to the Fed(s)

This morning there is a tentative truce in markets between those terrified of a global pandemic and those who have been trained to BTFD (Buy the f***ing dip). Of course, the dip buyers have been the big winners over the past decade, which drives the real question, is this time different? The difficulty in answering this question is due to the fact that the last time there was truly a global pandemic, the Spanish flu of 1918; central banks did not control the economy. In fact, the Fed was just 5 years old at the time, and still coming to terms with its role in the US economy. Ultimately, the problem is that despite the extraordinary information dissemination capabilities that exist in the modern world, where every type of news is available in multiple formats almost instantly, nobody really has any idea what is actually happening in China. Do the infection and fatality numbers they release each day have any resemblance to reality? Can’t really tell. What we do know is that large portions of China remain essentially under lockdown, with Hubei province at a virtual standstill. The tension between preventing the spread of the disease and preventing a collapsing economy is extreme in Beijing. Alas, it is not hard to believe that in the end, President Xi will choose growth over health.

Nonetheless, yesterday’s proximate cause of the market rout seemed to be the sudden uptick in cases in Italy, which was a clear demonstration that the situation was not nearly under control. Although all markets remain tentative this morning, there have been no major dislocations…yet. Even so, for the time being, Covid-19 is going to be the primary story driving daily market activity.

One thing we learned yesterday was that there is growing dissention at the Fed as the hawks, led by Loretta Mester, are nowhere near convinced that cutting interest rates will do anything to solve a medical problem, while the doves, led by Neel Kashkari, think a 25bp cut, at least, is appropriate right now. With the next FOMC meeting slated for March 18, we still have nearly 3 weeks for this conversation to play out. And of course, so much will depend on just what happens with Covid-19. Wider disruption of economic activity due to further quarantines and lock-downs will almost certainly see further monetary policy easing, whether it is useful or not, as central bankers will not want to be seen doing ‘nothing’.

Another interesting thing to watch for is this week’s February Chinese PMI data, due to be released on Thursday night. It is quite interesting that Manufacturing PMI is currently forecast to fall only to 45.1 given the near total shutdown of Chinese activity since the Lunar New Year. Consider that the PMI questions ask if activity levels were “higher, the same or lower than in the prior month.”1 Can anyone asked those questions in China claim that activity was higher than the previous month? It beggars belief that the index can be anywhere near 45. Rather one would expect it to approach zero! My point is that depending on what gets released, it will help us further understand the reliability of the Chinese economic data.

Keeping this in mind, it is extremely difficult to have a strong view on anything right now. Generally speaking, haven assets remain better bid, although this morning’s price action is nowhere near as impressive as yesterday’s. For example, Treasury yields are little changed, still just below 1.37% (and just above the record low of 1.34% set in 2016), although German bund yields have fallen a further 3bps this morning and are sitting at -0.51%. We have also seen a bit of discrimination in the European government bond markets as the PIGS see their bond yields rise this morning, clearly not feeling the haven love of bunds or Treasuries. Also on the haven front, gold prices, which rallied sharply yesterday, trading up nearly 3% at one point, have given back about 0.75% this morning.

In equity land, the Nikkei, which had been closed Monday, fell 3.3% in a catchup move, but the rest of APAC markets had a more mixed performance. Australia’s ASX 200 fell 1.6%, but the Kospi in Korea rallied 1.2%. Even China had mixed results with Shanghai falling 0.6% while Shenzhen rose 0.5%. All told, fear was not quite as rampant overnight. But this morning, European shares, which had started the session in the green, have since turned lower led by Spain’s IBEX (-1.15%), but closely followed by the FTSE 100 (-0.85%), CAC (-0.7% and DAX (-0.6%). In other words, fear is once again creeping into investor’s minds. At this point in the session, US futures are pointing slightly higher, but only about 0.2%. Obviously we will be watching US markets closely when they open.

In the FX world, it has also been a bit of a mixed picture, with the pound actually today’s big winner, +0.3%, as it appears cable options traders are driving the move higher after getting paid out of substantial amounts of short-dated volatility by the leveraged community. The yen has also gained today after a very impressive move yesterday. When I wrote, the yen had just edged higher by 0.25%, but it was in great demand during the NY session and closed nearly a full percent stronger. On the down side, NZD and SEK are the leading decliners, down 0.3% and 0.2% respectively with the former reacting to a story about the RBNZ easing policy further while the latter suffers as a cross play SEKJPY with punters viewing the krone as the most vulnerable currency to the virus.

In the EMG space, KRW (+0.85%) is today’s big winner, following the Kospi higher on hopes that the worst aspects of the virus have passed. On the flipside, RUB is down by 2.0% in a catch up move after being closed yesterday for a bank holiday. Otherwise, the rest of the bloc is +/- 0.2%.

On the data front this morning we see Case-Shiller Home prices (exp 2.8%) and Consumer Confidence (132.1), neither of which seems likely to impact FX. Arguably, this is still a virus and equity driven market, and that is where to look to get the fear barometer and consider where the dollar may move for the rest of the day.

Good luck
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1. https://cdn.ihs.com/www/pdf/1218/IHS-Markit-PMI-Introduction.pdf

 

All Stressed

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It started in China’s Great Plains
Where factories for supply chains
Were built wall to wall
But now they have all
Been shuttered to stop Covid’s gains

However, the sitch has regressed
While China, their data’s, repressed
Thus Covid’s now spreading
And everywhere heading
No shock, stocks worldwide are all stressed

I know each and every one of you will be incredulous that the G20 meeting of FinMins and central bankers this weekend in Saudi Arabia was not enough to stop Covid-19 in its tracks. I certainly was given the number of statements that we have heard in recent weeks by central bankers explaining that if the virus spreads, they will save the day!

But clearly, whatever power monetary or fiscal power has, it is not well placed to solve a healthcare crisis that is rapidly spreading around the world. This weekend may well have been the tipping point that shakes equity investors out of their dream-induced state. While the steady growth in numbers of infections and fatalities in China remains constant, something which seems to have been accepted by investors everywhere, the sudden jump in Covid cases in South Korea and, even more surprisingly, in Italy looks to have been just the ticket to sow doubt amongst the bullish investment set. And just like that, as markets are wont to do, fear is the primary sentiment this morning.

A quick market recap shows that equity markets worldwide have been decimated, although Europe (DAX -3.5%, CAC -3.5%, FTSE 100 -3.2%, FTSE MIB (Italy) -4.6%) has felt the brunt more than Asia (Nikkei -0.4%, Hang Seng -1.8%, Kospi -3.9%, Shanghai -0.3%). And US futures? Not a pretty picture at this point, with all three down more than 2.5% as I type.

Benefitting from the risk-off sentiment are Treasury bonds (yields -8bps to 1.39%) and bunds (-6bps to -0.50%), while the barbarous relic itself is up 2.4% to $1682/oz. And you thought gold was no longer important!

Finally, in the currency markets, the dollar is king once again, gaining against all comers but one, quite sharply in some cases. The yen has regained some of its haven status, rallying 0.25% this morning, although it remains far lower than just last Thursday. But the rest of the G10 is under pressure with NOK (-1.0%) falling the most as oil prices (WTI -4.0%) are getting crushed today. By contrast, CAD (-0.45%) seems almost strong in the face of the weakness in oil. But aside from the yen, the rest of the bloc is lower by at least 0.25%, and there is nothing ongoing in any of these nations that is driving the story, this is pure risk aversion.

In the EMG space, the story is more of the same, with the entire space lower vs. the dollar today although the biggest losers may be a bit of a surprise. Pesos are feeling the heat with both Mexico (-1.2%) and Chile (-1.1%) the worst performers in the space. The latter is a direct response to the weakness in copper prices, while the former has multiple problems, with oil’s decline just the latest. In fact, since last Thursday morning, the peso has fallen nearly 3.0% as we are beginning to see the very large long MXN carry position start to be unwound. It seems that long MXN had the same perception amongst currency investors as long the S&P had for equity investors. The thing is, at least according to the CFTC figures from last week, there is still a long way to go to reach neutrality. We are still more than 12% from the peso’s all-time lows of 22.03 set in early 2017, but if Covid continues to evade control, look for that level to be tested in the coming months (weeks?).

And that’s today’s story really. There are some political issues in Germany, as the ruling CDU finds itself in the middle of a leadership contest with no clear direction, while Italy’s League leader, Matteo Salvini, is hurling potshots at the weakened Giuseppe Conti government. But even under rock solid leadership, the euro would be lower this morning as would each nation’s stock market. Perhaps of more concern is the news that China, despite the ongoing spread of Covid-19, was relaxing some of its quarantine restrictions as it has become clearer by the day that the economic impact on the mainland is going to be quite substantial. President Xi cannot afford to have GDP growth slow substantially as that would break his tacit(?) deal with the people of more government control for continued material improvement. It has been a full month since virtually anything has been happening with respect to manufacturing throughout China and we are seeing more and more factories elsewhere (South Korea, Eastern Europe) shut down as supply chains have broken. Shipping rates have collapsed with more than 25% of pre-Covid activity having disappeared. This will not be repaired quickly I fear.

Turning to the data, which is arguably still too early to really reflect the impact of the virus, this week brings mostly secondary numbers, although we do see core PCE, which is forecast to have increased by a tick.

Tuesday Case-Shiller Home Prices 2.85%
  Consumer Confidence 132.1
Wednesday New Home Sales 715K
Thursday Q4 GDP 2.1%
  Durable Goods -1.5%
  -ex transport 0.2%
  Initial Claims 211K
Friday Personal Income 0.4%
  Personal Spending 0.3%
  Core PCE 0.2% (1.7% Y/Y)
  Chicago PMI 46.0
  Michigan Sentiment 100.7

Source: Bloomberg

Of course, the Fed has made it quite clear that they have an entirely new view on inflation, namely that 2.0% is the new 0.0%, and that they are going to try to force things higher for much longer to make up for their internally perceived failures of reaching this mythical target. We all know that the cost of living has risen far more rapidly than the measured inflation statistics, but that does not fit into their models, nor does it given them an excuse to continue to pump more liquidity into markets. In fact, it would not be that surprising to see them double down if today’s declines continue for several days. After all, that would imply tightening financial conditions.

But for now today is the quintessential risk-off day. Look for the dollar to remain king while equities fall alongside Treasury yields.

Good luck
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Set For Stagnation

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When thinking of every great nation
Regarding its growth expectation
The US alone
Is like to have grown
While others seem set for stagnation

The upshot of these circumstances
Is regular dollar advances
Within the G10
It’s euros and yen
That suffer on policy stances

Another day, another dollar rally. This simple sentiment pretty well sums up what we have been seeing for the past several weeks. And while there may be a multitude of catalysts driving individual currency movements, the reality is they all point in the same direction, a stronger dollar. Broadly speaking, data from around the world, excluding the US, has been consistently weaker than expected while the US continues to hum along nicely. Now, if China’s economy remains in its current catatonic state for another month, one has to believe that US numbers are going to suffer, if only for supply chain reasons. But right now, it is difficult for anyone to make the case that another currency is better placed than the dollar.

For example, last night we saw Australian Unemployment unexpectedly rise to 5.3% as the first measured impacts of Covid-19 make themselves felt Down Under. Traders wasted no time in selling Aussie and here we are this morning with the currency lower by 0.75%, trading to new lows for the move and touching its lowest level since March 2009. Perhaps the Lucky Country has run out of luck.

The yen keeps falling
Like ash from Fujiyama
Is an end in sight?

At this point in the session, the yen has seen its largest two-day decline since November 2016, in the immediate wake of President Trump’s election, and has now fallen more than 2.0% since Tuesday morning. It has broken through a key technical level at 111.02, which represented a very long-term downtrend line. This has encouraged short-term traders to add to what is believed to be significant outflows from Japanese investors, notably insurance companies. One of the other interesting things is that Japanese exporters, who are typically sellers of USDJPY, seem to be sitting this move out, having filled orders at the 110 level, and are now apparently waiting for 115. While it is unlikely that we will see the yen continue to decline 1% each day, I have to admit that 115 seems quite realistic by the end of the Japanese fiscal year next month.

And those are just two of the many stories that seem to be coming together simultaneously to encourage dollar buying. Other candidates are ongoing weak Eurozone economic data (Eurozone Construction output falling and reduced forecasts for tomorrow’s flash PMI data), rate cuts by EMG central banks (Indonesia cut by 25bps last night), and more confusion from China regarding Covid-19 and its spread. Last night, they changed the way they count infections for the second time in a week, and shockingly the result was a lower number indicating the spread of the disease is slowing. However, at this point, the virus count seems to be having less of a market impact than little things like the announcement that Hubei province is keeping all factories shuttered until at least March 10. Now I don’t know about you, but that hardly seems like the type of thing that indicates things are getting better there.

There is a new tacit contest in the market as well, trying to determine just how big a hit the Chinese economy is going to take in Q1. If you recall two weeks ago, the initial estimates were that GDP would grow at a 4%-5% rate in Q1. At this point 0.0% seems a given with a number of analysts penciling in negative growth for the quarter. And folks, I don’t know why anyone would think there is going to be a V-shaped recovery there. It is going to take a long time to get things anywhere near normal, and there has already been a lot of permanent demand destruction. On top of that, one of the things I had discussed last week, the idea that even if companies aren’t generating revenue, they still need to pay interest on their debt, is starting to be seen more publicly. The news overnight that HNA Group, a massively indebted conglomerate that had acquired trophy assets all around the world (stakes in Hilton Hotels and Deutsche Bank amongst others) is unable to pay interest on its debt and seems to be moving under state control. While the PBOC cut rates slightly overnight, the one-year loan prime rate is down to 4.05% from 4.15% previously, it appears that the Chinese government is going to be fighting the Covid-19 fight with more fiscal measures than monetary ones. That said, the renminbi has been falling along with all other currencies and has traded back through 7.00 to the dollar after a further 0.35% decline overnight.

The point is that you can essentially look at any currency right now and it is weaker vs. the dollar. Each may have its own story to tell, but they all point in the same direction.

I would be remiss to ignore other markets, which show that other than Chinese equity markets (Shanghai +1.85%), which rallied last night after news of further stimulus measures, risk is mostly on its back foot today. European equity markets are generally lower (DAX -0.1%, CAC -0.1%) although not by much. US futures are pointing lower by 0.2% across the board, again, not significant, but directionally the same message. Treasury yields continue to fall, down another 2bps this morning to 1.54%, and gold continues to rally, up another 0.3% this morning.

Yesterday’s FOMC Minutes explained that the Fed was pretty happy with current policy settings, something we already knew, and that they are still unsure how to change their ways to try to be more effective with respect to achieving their inflation target as well as insuring that there are no more funding crises. On the data front, yesterday’s PPI data was much firmer than expected, although most people pretty much ignore those numbers. Today we see Philly Fed (exp 11.0), Initial Claims (210K) and Leading Indicators (0.4%). Monday’s Empire Mfg data was stronger than expected and the forecasts for Philly Fed are for a solid increase. Yet again, the data picture points to a better outcome in the US than elsewhere, which in the current environment will only encourage further USD buying. For now, don’t get in front of this train, but if you need to hedge receivables, sooner is better than later as I think we could see this run for a while.

Good luck
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Simply Too Fraught?

Posted on by

The question whose answer is sought
‘Bout what should be sold or be bought
Is will GDP
Rebound like a V
Or are things just simply too fraught?

Risk is neither on nor off this morning as investors and traders continue to sift through both the recent changes in coronavirus news from China and the economic releases and choose a direction. Thus far this morning, that direction is sideways.

In one way, it is a bit surprising there is not a more negative viewpoint as on top of the surge in reported cases of Covid-19 (the coronavirus’s official name), we have heard of more companies closing operations outside of China for lack of parts. The latest is Fiat Chrysler, which closed a manufacturing facility in Serbia due to its inability to source parts that are built in China. While the Chinese government is seemingly trying to get everyone to believe that things are going to be back to normal soon, manufacturers on the ground there who have reopened, are running at fractions of capacity due to an inability of workers to get to the plant floor. Huge swaths of the country remain in effective lockdown, and facemasks, which are seen as crucial to getting back to work, are scarce. Apparently, the capacity to make face masks in China is just 22 million/day. While that may sound like a lot, given everyone needs a new one every day, and that there are around 100 million people under quarantine (let alone 1.3 billion in the country), there just aren’t enough to go around. I remain skeptical that this epidemic will come under any sense of control for a number of weeks yet, and that ultimately, the hit to global economic growth will be far more severe than the market is currently pricing.

Another sign of trouble came from Germany this morning, where Q4 GDP was released at 0.0% taking the annual growth rate to 0.6% in 2019. Eurozone GDP turned out to be just 0.9% in 2019, and that was before the virus was even discovered. In other words, it appears that both those numbers are going to be far worse in Q1 as the Eurozone remains highly reliant on exports to grow, and as the Fiat news demonstrates, exports are going to be reduced.

Keeping this in mind, it is easy to understand why the euro remains under so much pressure. While its decline this morning is just 0.1%, to 1.0830, the euro is trading at its lowest level vs. the dollar since April 2017. The single currency has fallen in 9 of the past 10 sessions and is down 2.4% this month. And let’s face it, on the surface; it is awfully difficult to make a case for the euro to rebound on its own. Any strength will require help from the dollar, meaning either weaker US economic data, or more aggressive Fed policy ease. At this point, neither of those looks likely, but the impact of Covid-19 remains highly uncertain and can easily derail the US economy as well.

But for now, the narrative remains that Chinese GDP growth in Q1 will be hit, but that by Q2 things will be rebounding and this will all fade from memory akin to the SARS virus in 2003. Just remember, China has effectively been closed since January 23, three full weeks, or 6% of a full year. While manufactured goods demand will certainly rebound, there are many services that simply will never be performed and cannot be recouped. The PBOC is already tweaking leverage policies on property lending in an effort to help further support growth going forward, and there is discussion of allowing banks to live with a greater proportion of non-performing loans that are due to the coronavirus. One can only imagine all the garbage loans that will receive that treatment!

Switching to a view of the markets, equity markets are +/- 0.2% generally speaking with US futures in a similar position. Treasury yields have fallen back a few bps, giving up yesterday’s modest gains, and the FX market, on the whole, is fairly benign. Away from the euro’s small decline this morning, we are seeing slight weakness in the pound, Aussie and Kiwi, with the rest of the G10 doing very little. The one gainer today is CAD, +0.15%, which seems to be benefitting from WTI’s ongoing bounce from Monday’s low levels, with the futures contract there higher by 1.4%.

In the EMG space, ZAR is today’s big winner, up 0.65%, in response to President Cyril Ramaphosa’s State of the Nation speech, where he outlined steps to help reinvigorate growth and fix some of the bigger problems, like the state-owned power producer Eskom’s debt issues. Of course, speeches are just that and the proof will be in what policies actually get implemented. The other key gainers here are BRL (+0.6%), which saw the central bank (finally) intervene yesterday to try to stop the real’s dramatic recent plunge (it had fallen more than 4% in the past 10 days and nearly 10% in 2020 so far). After announcing $1 billion in swaps, the market turned tail and we are seeing that continue this morning. HUF also continues to benefit, rallying a further 0.55% this morning, as the market continues to price in growing odds of a rate hike to help rein in much higher than expected inflation.

On the data front, this morning brings Retail Sales (exp 0.3%, 0.3% ex autos) as well as IP (-0.2%), Capacity Utilization (76.8%) and Michigan Sentiment (99.5). Yesterday’s CPI data was a touch firmer than forecast, simply highlighting that the Fed’s measure of inflation does not do a very good job. Also yesterday, we heard from NY Fed President Williams who told us the economy is in a “very good place”, while this morning we hear from uber-hawk Loretta Mester. This week the doves have all cooed about letting inflation run hot and cutting if necessary. Let’s hear what the hawks think.

So as we head into the weekend, I expect traders to reduce positions that have worked as the potential for a weekend surprise remains quite large, and nobody wants to get caught. That implies to me that the dollar can soften ever so slightly as the day progresses.

Good luck
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