Tag Archives: #china

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?

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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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Burdened With Shame

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There once was a president, Xi
Who ruled with a fist of F E
But there’s now a nit
That cares not a whit
‘Bout politics while running free

So mandarins now take the blame
For playing along with Xi’s game
Their jobs they have lost
And soon they’ll be tossed
In jail, as they’re burdened with shame

Apparently, at least some of the rumors of undercounting coronavirus infections seem to have been true as last night the latest data showed an extraordinary jump in total cases to nearly 60,000 with a regrettable mortality rate of 2.3%, meaning more than 1350 people have passed away from its effects. Last week, much was made about how this was not very different than the simple flu, but that is just not the case. The mortality rate of the flu is 0.1%, an order of magnitude lower. At any rate, officials in Hubei Province revised the way they were calculating cases (i.e. they started admitting to higher numbers) and suddenly there were nearly 15,000 more cases just like that. In typical dictatorial fashion, the previous Hubei leadership, whose job was to prevent the truth from escaping, has been summarily sacked, and President Xi has a new man on the job, with a clean(er) slate. Talk about a thankless job!

At this point, what has become clear is that the dynamics of the spread of the virus remain uncertain and despite significant efforts by the Chinese, it appears premature to declare the situation under control. Recent market activity, where risk assets were aggressively acquired leading to record high stock prices, may now need to be rethought. Consider that the narrative that had been developing, especially after it appeared the growth of the virus was slowing, was that any impact would be temporary and confined to Q1. If that were the case, then it certainly was reasonable to think that ongoing central bank largesse would continue to push risk assets ever higher. But today it seems as though the definition of temporary may need to be adjusted somewhat, and investors are treading more cautiously. This is a terrible human tragedy and the most concerning aspect is that due to the politics in China, efforts to address it using the broadest array of expertise from the WHO and CDC is not being utilized. The likely outcome of these decisions is that many more will die from the coronavirus’s effects, and economic growth worldwide will be pretty significantly impacted.

And that is the background for this morning’s market across all assets. Risk is very definitely off today as can be seen in equity markets in Europe (DAX -1.1%, CAC -1.2%, FTSE100 -1.6%) and US equity futures, all of which are down between 0.7% and 0.9%. Treasury bonds have been in demand, rising half a point with yields falling 4bps to 1.59% while gold is higher by 0.5%. In the FX markets, the yen is today’s top performer, rallying 0.35% while the dollar outperforms virtually every other currency. And finally, oil prices have been slumping again as the IEA has just issued a report estimating that oil demand would actually shrink in 2020, the first time that has happened since the financial crisis and global recession of 2008-09. The latter certainly makes sense given that China has been the largest user of petroleum and its products. Consider that not only has travel to and from China fallen dramatically, over 100 million people are on lockdown in the country, and industrial output has slowed dramatically given there are no factory workers available to get to the factories.

The initial estimates of Chinese Q1 GDP were reduced to 4.5%-5.0%, but lately I have seen estimates falling to 0.0% for Q1 which would have a pretty severe impact on the global economy. And one of the problems is that data from China doesn’t come out quite as regularly as it does here in the US or in Europe, so there are long periods with no new information. Consider also that the Chinese simply didn’t release the January trade figures (they must be AWFUL) and it would not be surprising if they delay the release of much important data going forward. My point here is that we will have an increasingly difficult time understanding the actual situation on the ground in China, although it will become more apparent as those companies and countries that do the most business there report their data. The greater the deterioration of that data, the greater the problem on the mainland.

Turning to individual currency movers this morning, RUB and NOK, the two currencies most closely linked to the price of oil, are the biggest laggards in the EMG and G10 spaces respectively. Aside from the yen’s gains, the pound just jumped 0.3% after reports that Chancellor of the Exchequer, Sajid Javid, has resigned. Apparently the market was unimpressed with his performance. Boris is actively reshuffling his cabinet today, so there are other moves as well, but this was the only one that moved the market. But elsewhere in the G10, the dollar reigns supreme.

In the EMG space, HUF is today’s biggest winner, rising 0.45% after January’s CPI data jumped to 4.7% annually, well above their 3.0% target, and the central bank said they are ready to use all tools to rein it in. Clearly that implies rate hikes are coming to Hungary. (As an aside, I wonder if Powell, Lagarde or Kuroda are going to be ringing up the central bank there asking how they were able to create inflation.) But away from HUF, any gainers have moved so little as to be effectively unchanged, while the rest of the space, notably LATAM, is under pressure on the back of the weaker China story.

Data this morning brings Initial Claims (exp 210K) and CPI (2.4%, 2.2% ex food & energy), with the latter likely to be closely watched. Weakness in this print will only increase the odds of a rate cut here in the US, likely driving the market to price one in by July (currently a 72% probability). Chairman Powell didn’t teach us anything new yesterday, simply rehashing Tuesday’s testimony and no Senators raised anything noteworthy. Today we get two more Fed speakers, Kaplan and Williams, with Kaplan needing to be closely watched. After all, he is the only FOMC member who has admitted that the growth of the Fed’s balance sheet is having an impact on markets, and could prove to be problematic over time.

But it is a risk off day, which means that further yen strength is likely, and the dollar should continue to perform well overall.

Good luck
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Rate Cuts They May Soon Espouse

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The Chairman explained to the House
The virus could truthfully dowse
Their growth expectation
As well as inflation
Thus rate cuts they may soon espouse

Chairman Powell testified before the House Financial Services Committee yesterday and there were absolutely no surprises. According to him, the economy remains in a “good place” and current policy settings are appropriate. He did, however, explain that the coronavirus outbreak in China did pose a new risk to their forecasts and has added significant uncertainty overall. He also left no doubt that in the event the economic data started to turn lower due to virus linked issues (or arguably any other issues), the Fed was ready to act as appropriate to support the economy. In other words, they will cut rates in a heartbeat if they think their targets are in danger of being missed. In the meantime, they continue to buy $60 billion of T-bills each month and will do so at least until April, and they continue to expand the balance sheet further via term repos, pumping ever more liquidity into the system and ultimately supporting global equity markets.

If you think about it, that is really what defines the market these days. It is the battle between questions and fears over the spread of the coronavirus and its negative impacts on Chinese and global economic activity vs. central bank largesse and the positive impacts of ever more cash being created and seeking a home by investors. And let’s face it, up until now; except for two days in late January, bookending the Lunar New Year when equity markets fell sharply, the central banks have been dominant.

Will they continue to have success? At this point, there is no reason to believe they won’t in the short run, but ultimately, it will depend on just how deep the shock to China’s economy actually turns out to be. Remember, a key discussion point about China prior to the virus outbreak was the fragility of a large swathe of Chinese industries given their highly leveraged stance. While I imagine we will never learn the true extent of how much the economy there slows, analysts will infer a great deal based on how many companies wind up failing, or at least restructuring their debt. As I have said before, interest remains due even when revenues cease to occur. But for now, the market is backing Powell and his central bank comrades and thus risk appetite continues to grow.

Thus, turning out attention to this morning’s market activity, equity markets are in the green everywhere after solid overnight performance in Asia. Haven assets, notably Treasuries and the yen, are under pressure, and overall, the dollar is on its back foot.

Last night, the RBNZ left rates on hold at 1.0% and explained that while the virus could well have a longer term negative impact, for now, they see no reason to cut rates any time soon. Interest rate markets, which had been pricing in a 40% probability of a rate cut this year, rebalanced to no rate changes and the kiwi dollar jumped 1.2%. Not surprisingly, Aussie is also performing well, up 0.5%, as investors recognize that the two nations are inextricably linked economically, and if New Zealand is feeling better, odds are Australia will be soon as well.

Last night the Swedish Riksbank also left rates on hold, at 0.0%, as widely expected, despite lowering their inflation expectations. You may recall Sweden raising rates by 25bps in December as they sought to exit the NIRP world after concluding it was doing more harm than good. While lowered inflation expectations might seem a reason to reduce rates, the fact that the catalyst for that has been the sharp decline in energy prices due to the virtual closure of China’s economy, allows Riksbank members to cogently make the case that this is a temporary shock, and they need to look through it. This morning, SEK is firmer by 0.2% vs. the dollar after the Riksbank announcement. NOK is higher by 0.4% as oil prices firm up again on a more positive general tone, and the pound is higher by 0.2% as it continues its rebound from last week’s sharp decline, and there was nothing new from the PM regarding a hard Brexit.

You may have noticed that I failed to mention the euro, which is essentially flat on the day, arguably the second biggest underperformer vs. the dollar. Early in the session, it too was firmer as the dollar has few friends during a risk-on session, but then they released Eurozone IP at -2.1%, worse than expected and the worst print in four years. Subsequent trade saw more sellers emerge, weighing on the single currency, which has been under pretty steady pressure for the past week and a half. Madame Lagarde testified to the European Parliament yesterday and basically begged countries to step up their fiscal response as it becomes ever clearer that the ECB has no more bullets.

In the emerging markets, the Russian ruble is the leader of the pack, up 0.5%, also benefitting from oil’s rebound from the lows seen earlier this week. Away from this, there are far more gainers in the space (CLP +0.4%, THB +0.35%, ZAR +0.3%) than losers (TRY -0.4%, HUF -0.3%), but as you can see by the magnitude of the movements, there is not much of interest ongoing. Ultimately, as long as the risk-on attitude prevails, I expect the higher yielding currencies (ZAR, MXN, INR, etc.) should perform well as investors continue to hunt for yield.

There is no data to be released today, but we do hear Chairman Powell in front of the Senate, as well as some comments from Philly Fed President Patrick Harker, arguably one of the more centrist FOMC members. Yesterday’s comments from the bevy of doves who were on the tape were just as expected. Things are fine, but more accommodation is available and if inflation were to rise, they would be comfortable with letting it run hot for a while before acting.

And that’s really all there is. I see no reason for the dollar to change its current trajectory, which is modestly lower this morning. And since we already know what Powell is going to say, unless some Senator pins him down on something, I suspect we will see yet another day of limited movement overall.

Good luck
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Til All Is Clear

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There’s certainly no need to fear
A global pandemic is here
Cause central banks will
Continue to fill
Their balance sheets ‘til all is clear

Once again, investors and traders (and algorithms) have surveyed the landscape, read the government reports, and determined that there’s nothing to see in China and that any impact on economic output from the still spreading coronavirus is diminishing and unimportant in the long run. And who knows, maybe that is the correct attitude. Perhaps all the worrywarts are just that, hanging their hat on the latest potential problem while ignoring how fantastic things are right in front of them.

Or…maybe things are not quite as rosy as government officials would have you believe and the impact on economic output is going to be much more severe than anyone is willing to admit at this time. In fairness, ruling governments are pretty unlikely to release bad news to their constituents for obvious reasons. In fact, this is what causes cover-ups all the time, and why the fallout, when the truth eventually does reveal itself, is so devastating for that government. Added to this reality is that the veracity of information that emanates from China has been called into question for many years, so it is quite easy to believe that the official coronavirus figures are not accurate.

With that in mind, I urge everyone to read the attached link (https://www.epsilontheory.com/body-count/) as Dr. Ben Hunt does a very effective job (far more effective than I ever could) of explaining just how the numbers can be massaged to indicate a slowing rate of infection that ‘seems’ believable, but is in fact complete hogwash. However, as long as this is the official line, and it defines the data that is reported, then trading algorithms will utilize the data and trade accordingly. Right now, any slowdown in reported deaths is clearly seen as a sign that the worst is behind us and with all the monetary stimulus still sloshing around the system, risk needs to be acquired. And that is what we are seeing again today. Clearly, last Friday was an aberration, though when it comes to equities these days, caveat emptor!

Taking this into account, let’s take a tour of markets this morning to see how things are doing. Risk is clearly in favor as equity markets around the world continue to rally following yesterday’s record-setting session in the US. While Japan was closed for National Foundation Day, the rest of Asia rallied pretty nicely with the Hang Seng rising 1.25% and Shanghai + 0.4%. European markets have followed suit (DAX +0.85%, CAC +0.45%, FTSE100 +0.85%) and US futures are all pointing higher as well. Bond markets are on the soft side, although hardly collapsing as 10-year yields in the US are trading at 1.58% as I type, and the dollar is arguably a bit softer rather than firmer this morning. In fact the only two currencies weaker than the dollar this morning are the Swiss franc and Japanese yen, although each has declined by less than 0.10%.

The UK has been the source of the most new information as there was a significant data dump, almost all of which was seen as a positive for the UK, and by extension the pound. Q4 GDP printed at 0.0%, as expected, but the December number was a better than expected 0.3% and the Y/Y number did not fall as expected, but instead printed unchanged at 1.1%. Now, while these are hardly stellar numbers in the broad scheme of things, they are substantially better than the Eurozone story, and more importantly, better than expectations. Exports rose 4.1%, the Trade Balance ticked into a ₤845M surplus, which is actually the largest surplus in the series’ history dating back to 1955! While IP was a little softer than expected at +0.1%, the overall picture was of a UK that is prepared to weather Brexit quite well. And the pound is slightly higher on the day, but just 0.15%.

Rather, the two biggest gainers in the G10 today are NOK (+0.4%) and AUD (+0.3%). The former is benefitting from the rebound in oil on the back of the idea that the coronavirus problem has passed its peak, and the latter is benefitting on the same idea. In fact, all the currencies that have been negatively impacted by the coronavirus story, mostly commodity exporting countries like Australia, Brazil and South Africa, are higher this morning on this idea that things are going great in China. I sure hope that’s the case, but I remain a skeptic.

Today’s other noteworthy event will be the testimony by Chairman Powell to the House Financial Services Committee, starting at 10:00. I’m sure his prepared remarks will simply rehash that the economy is in a good place and that the Fed remains vigilant. He is also likely to mention that the virus is a potential risk to the economy, but one that they feel confident they can handle. (After all, cutting rates and printing money seems to be the cure for everything under the sun.) However, given the distinct lack of financial and economic nous that our duly elected Representatives have continuously shown they possess, I think the Q&A will be more interesting, although ultimately I imagine that Powell will simply have to explain his opening statement in more simplistic terms for them to understand.

We have already seen the NFIB Small Business Optimism Index rise to 104.3, a better than expected outcome and certainly a positive fillip to the risk attitude. Right when Powell begins to speak we will see the JOLTs Jobs Report as well (exp 6.925M) which many see as an important indicator of labor market conditions. In addition to Powell, we will hear from SF Fed President Daly as well as Quarles, Bullard and Kashkari, amongst the most dovish of all Fed members, and so be prepared for more discussion of allowing inflation to run hot and the need for quick action in the event the currently reported Chinese data is not complete.

Overall, the dollar is under very modest pressure today, but it would be fair to call it unchanged in the broad scheme of things. Unless Powell makes a gaffe, something which seems less and less likely given his experience now, as long as risk is being acquired, I think EMG currencies are likely to perform well, but vs. the G10, the dollar may maintain its recent momentum.

Good luck
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Sanguinity Reigns

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Despite growth in Chinese infections
And turmoil in Irish elections
Sanguinity reigns
As Powell takes pains
To help prevent any corrections

Once upon a time, people used to describe the President of the United States as ‘the most powerful man in the world’, on the back of the idea that he oversaw the richest and most powerful nation in the world. But these days, it has become pretty clear that the most powerful man in the world is Fed Chairman Jerome Powell. After all, not only is he in command of the US economy, but he is tasked with shielding us all from the impacts of non-financial issues like the coronavirus and climate change. And many people believe, not only can he do that, but it is imperative that he stops both of those things in their tracks.

And yet, the coronavirus continues to spread as virologists and doctors learn more about it each day and seemingly continue to fall further behind the curve. For example, initially, it had been believed that the incubation period for the virus was 14 days, implying that was an appropriate amount of time for any quarantine of suspected cases. But now, the data is showing it may be as long as 24 days, which means that formerly quarantined individuals who were cleared, may actually be infected, and thus the spread of the disease accelerated. As of this morning, more than 40,000 cases have been documented with more than 900 deceased. The human toll continues to rise, and quite frankly, shows no signs of abating yet. Stories of complete lockdowns of cities in Hubei province, where people were literally welded shut inside their homes to enforce the quarantine, and videos showing large scale disinfectant spraying are remarkable, as well as horrifying. And none of this leads to greater trust in the official information that is published by the Chinese government. In other words, this situation is by no means coming to an end and the impacts on economies worldwide as well as financial markets are just beginning to be felt.

From an economic perspective, China has largely been shut for nearly three weeks now, since the beginning of the Lunar New Year holiday in January, which means that all those companies that had built supply chains that run through China while implementing just-in-time delivery have found themselves with major problems. Hubei province is a key center for automotive, technology, pharmaceutical and chemical production. Major global firms, like Foxconn, PSA (Peugeot), Honda and others have all seen production elsewhere impacted as parts that come from the area are no longer being delivered. In fact, Hyundai Motors has closed its operations in South Korea for lack of parts supply. My point is, the economic impact is going to be very widespread and likely quite significant. While there is no way to accurately assess that impact at this time, simple math implies that the fact China will have essentially been closed for 25% of Q1, at least, means that GDP data will be severely impacted, arguably by at least a full percentage point. And what about highly leveraged companies? Interest is still due even if they are not selling products and earning revenue. Trust me; things will get worse before they get better.

And yet…financial markets remain remarkably nonplussed over the potential ultimate impact of this. Yes, equity markets slipped on Friday, but a 0.5% decline is hardly indicative of a significant amount of fear. And overnight, while the Nikkei (-0.6%) and Hang Seng (-0.6%) both fell, somehow the Shanghai Composite rose 0.6%. Yes, the PBOC injected more stimulus, but there is a remarkable amount of faith that the impact of this virus is going to be completely transitory. That seems like a big bet to me, and one with decidedly ordinary odds.

European markets are in the same space, with very modest declines (DAX -0.25%, CAC -0.3%, FTSE -0.15%) and US futures are now little changed to higher. Apparently, economic growth is no longer an important input into the valuation of equities.

And that is the crux of the matter. Since the financial crisis in 2008-09, central banks around the world have, in essence, monetized the entire global economy. If growth appears to be slowing they simply print more cash. If things are going well, they also simply print more cash, although perhaps not quite as much as in the case of a slowdown. And companies everywhere, at least large, listed ones, borrow as much as possible to restructure their balance sheets, retiring equity and increasing leverage. Alas, that does not foster economic activity, and ultimately, that is the gist of the disconnect between financial market strength and the ongoing growth of populist and nationalist political parties. Welcome to the 2020’s.

So, with all that said, risk is modestly off this morning, but by no means universally so. Yes, Treasury yields are lower, down another basis point to 1.57%, but that does not speak to unmitigated fear. And in the currency market, the impact of the overnight story has been largely muted. In fact, the biggest mover today has been Norwegian krone, which has rallied 0.75% after its inflation data surprised on the high side (CPI +1.8% Y/Y in January) which has helped convince traders that Norway may be inclined to tighten policy going forward. While I don’t see that outcome, it likely takes any rate cuts off the table for the immediate future. But elsewhere in the G10, the pound’s modest 0.3% rally is the next largest move, and that has all the earmarks of a simple trading rebound after a 2.5% decline last week. Otherwise, this space has been dull, and looks set to remain so. In the EMG bloc, the picture is mixed as well, with CLP weakening furthest, -0.55% on the open, as traders bet on policy ease by the central bank, while we have seen a series of currencies, notably CNY, rally a modest 0.3%, as fears abate over a worsening outcome from the virus.

This week’s upcoming highlight is likely to be Fed Chair Powell’s testimony to the House and Senate, but we do see both CPI and Retail Sales data late in the week as well.

Tuesday NFIB Small Biz Optimism 103.3
JOLTS Job Openings 6.85M
Powell House Testimony
Wednesday Powell Senate Testimony
Thursday CPI 0.2% (2.4% Y/Y)
-ex food & energy 0.2% (2.2% Y/Y)
Initial Claims 211K
Friday Retail Sales 0.3%
-ex autos 0.3%
IP -0.2%
Capacity Utilization 76.8%
Michigan Sentiment 99.3

Source: Bloomberg

Aside from Powell’s two days in the spotlight, there will be eight other Fed speakers as well, with my guess being that all the interest will be regarding the impact of the virus. So far, there is no indication that the Fed is ready to react, but it also seems abundantly clear that they will not hesitate to cut rates again in the event that things rapidly deteriorate on that front. Ultimately, the dollar remains extremely well bid as the bid for Treasuries continues to drive flows, but nothing has changed my medium term view that the dollar will eventually weaken on the back of Not QE4.

Good luck
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Despite Cash

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In China the stock market sank
Despite cash from its central bank
But elsewhere it seems
The narrative deems
Investors, the Kool-Aid, have drank

So, it can be no surprise that after a one and a half week hiatus, the Chinese equity markets sold off dramatically (Shanghai -7.8%) when they reopened last night. After all, equity markets elsewhere in the world had all been under pressure for the entire time as the novel coronavirus spread seemed to accelerate. Of course, since Chinese markets closed for the Lunar New Year holiday, major global markets in the west had fallen only between 3.5% and 4.0%. But given China is the country whose economy will be most impacted, the ratio doesn’t seem wrong.

What we learned over the weekend, though, is that the acceleration has not yet begun to slow down. The latest data shows over 17,000 infected and over 300 deaths are now attributable to this illness. Most epidemiological models indicate that we have not reached the peak, and that it would not be surprising to see upwards of a quarter of a million cases within the next month or two. Remember too, this assumes that the information coming from China is accurate, which given the global reaction to the situation, may be a big ask. After all, I’m pretty sure President Xi Jinping does not want to be remembered as the leader of China when it unleashed a global pandemic. You can be sure that there will be a lot of finger-pointing in China for the rest of 2020, as some heads will need to roll in order to placate the masses, or at least to placate Xi.

But in what has been a classic case of ‘sell the rumor, buy the news’, equity markets in the rest of the world seem to have gotten over their collective fears as we see modest strength throughout Europe (DAX +0.2%, CAC +0.2% FTSE +0.4%) and US futures are all pointing higher as well. So at this point in time, it appears that the market’s modest correction last week is seen as sufficient to adjust for what will certainly be weaker growth globally, at least in Q1 2020. Something tells me that there is further repricing to be seen, but for now, the default belief is that the Fed and other central banks will do “whatever it takes” as Signor Draghi once said, to prevent an equity market collapse. And that means that selling risk would be a mistake.

With that as prelude, let’s turn our attention to what is happening away from the virus. The biggest FX mover overnight has been the pound, which has fallen 1.1% after tough talk from both PM Boris Johnson and EU Brexit negotiator Michel Barnier. The market’s concern seems to be that there will be no agreement reached and thus come December, we will have a Brexit redux. I am strongly in the camp that this is just posturing and that come June, when the decision for an extension must be made, it will be done under the guise of technical aspects, and that a deal will be reached. Neither side can afford to not reach a deal. In fact, one of the key discussion points in Europe this morning is the fact that the EU now has a €6 billion hole in its budget and there is nobody able to fill the gap.

On the data front, Eurozone Manufacturing PMI data was modestly better than forecast, with the bloc-wide number at 47.9, still contractionary, but Italy, France and Germany all edging higher by a tenth or two. However, despite the modestly better data and the modest uptick in equity markets, the single currency is under some pressure this morning, down 0.25%, as the market adjusts its outlook for Fed activity. It remains pretty clear that the ECB is already doing everything it can, so the question becomes will the Fed ease more aggressively as we go forward, especially if we start to see weaker data on the back of the coronavirus situation. Friday’s market activity saw futures traders reprice their expectations for Fed rate cuts, with the first cut now priced for July and a second for December. And that rate change was what undermined the dollar during Friday’s session, as it suddenly appeared that the US would be stepping on the monetary accelerator. In fairness, if the quarantine in China continues through the end of Q1, a quick Fed rate cut seems pretty likely. We shall see how things evolve. However, this morning sees a bit less fear all over, and so less need for Fed action.

The other main mover in the G10 was NOK (-0.7%), which given how much oil prices have suffered, seems quite reasonable. There is a story that Chinese oil demand has fallen 20% since the outbreak, as the combination of factory closures and quarantines reducing vehicle traffic has taken its toll. In fact, OPEC is openly discussing a significant production cut to try to rebalance markets, although other than the Saudis, it seems unlikely other producers will join in. But away from those currencies, the G10 space is in observation mode.

In the emerging markets, it should be no surprise that CNY is much weaker, falling 1.1% on-shore (catching up to the offshore CNH) and trading below (dollar above) 7.00. Again, that seems pretty appropriate given the situation, and its future will depend on just how big a hit the economy there takes. Surprisingly, the big winner today is ZAR, which has rebounded 1.0% after Friday’s sharp decline which took the currency through the 15.0 level for the first time since October. In truth, this feels more like a simple reaction to Friday’s movement than to something new. If anything, this morning’s PMI data from South Africa was much worse than expected at 45.2, which would have seemingly undermined the currency, not bolstered it.

On the data front, this week will be quite active as we see the latest payroll data on Friday, and a significant amount of new data between now and then.

Today ISM Manufacturing 48.5
  ISM Prices Paid 51.5
  Construction Spending 0.5%
Tuesday Factory Orders 1.2%
Wednesday ADP Employment 158K
  Trade Balance -$48.2B
  ISM Non-Manufacturing 55.1
Thursday Initial Claims 215K
  Unit Labor Costs 1.2%
  Nonfarm Productivity 1.6%
Friday Nonfarm Payrolls 160K
  Private Payrolls 150K
  Manufacturing Payrolls -4K
  Unemployment Rate 3.5%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.3
  Participation Rate 63.2%
  Consumer Credit $15.0B

Source: Bloomberg

Obviously, all eyes will be on the payrolls on Friday, although the ISM data will garner a great deal of attention as well. Last Friday’s core PCE data was right on the screws, so the Friday rate movement was all about coronavirus. With the FOMC meeting behind us, we get back to a number of Fed speakers, although this week only brings four. Something tells me there will be a lot of discussion regarding how they will respond to scenarios regarding China and the virus.

In the end, short term price action is going to be all about the virus and its perceived impact on the global economy. Any indication that the outbreak is slowing down will result in an immediate risk grab-a-thon. If it gets worse, look for havens to get bid up quickly.

Good luck
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