Set For a Rout

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
Adf

Outrageous

The ECB’s fin’lly decided
That limits were badly misguided
So, starting today
All bonds are in play
To purchase, Lagarde has confided

As well, in the Senate, at last
The stimulus bill has been passed
Amidst all its pages
The Fed got outrageous
New powers, and hawks were aghast

Recent price action in risk assets demonstrated the classic, ‘buy the rumor, sell the news’ concept as equity market activity in the past two sessions had been strongly positive on the back of the anticipated passage of a huge stimulus bill in the US. And last night, the Senate finally got over their procedural bickering and hurdles and did just that. As such, it should be no great surprise that risk assets are under pressure today, with only much less positive news on the horizon. Instead, we can now look forward to death tolls and bickering about government responses to the quickly evolving crisis. If that’s not a reason to sell stocks, I don’t know what is!

But taking a break from descriptions of market activity, I think it is worthwhile to discuss two other features of the total government response to this crisis. And remember, once government powers are enacted, it is extremely difficult to remove them.

The first is from the US stimulus bill, where there is a $500 billion portion of the bill that is earmarked for support of the business community. $75 billion is to go to shore up airlines and the aerospace infrastructure, but the other $425 billion is added to the Treasury’s reserve fund which they can use to backstop, at a 10:1 leverage ratio, Fed lending. In other words, all of the programs about which we have been hearing, including the CP backstop, the primary dealer backstop, and discussion of purchases of municipal and corporate bonds as well as even equities, will now have the funding in place to the tune of $4.25 trillion. This means that we can expect the Fed balance sheet to balloon toward at least $9 trillion before long, perhaps as quickly as the end of the year. Interestingly, just last year we consistently heard from mainstream economists as well as Chairman Powell and Secretary Mnuchin, how Modern Monetary Theory (MMT) was a crock and a mistake to consider. And yet, here we are at a point where it is now the best option available and about to effectively be enshrined in law. It seems this crisis will indeed be quite transformational with the death of the Austrian School of economics complete, and the new math of MMT at the forefront of the dismal science.

Meanwhile, Madame Lagarde could not tolerate for Europe to be left behind in this monetary expansion and so the ECB scrapped their own eligibility rules regarding purchases of assets to help support the Eurozone member economies. This means that the capital key, the guideline the ECB used to make sure they didn’t favor one nation over another, but rather executed their previous QE on a proportional basis relative to the size of each economy, is dead. This morning the ECB announced that they can buy whatever they please and they will do so in size, at least €750 billion, for the rest of this year and beyond if they deem it necessary. This goes hand in hand with the recent German repudiation of their fiscal prudence, as no measure is deemed unreasonable in an effort to fight Covid-19. In addition to this, the OMT program (Outright Monetary Transactions) which was created by Signor Draghi in the wake of the Eurozone bond crisis in 2012 but never utilized, may have a new lease on life. The problem had been that in order for a country (Italy) to avail themselves of the ECB hoovering up their debt, the country needed to sign up for specific programs aimed at addressing underlying structural problems in said country. But it seems that wrinkle is about to be ironed out as well, and that OMT will finally be utilized, most likely for Italian bonds.

While neither the Fed nor ECB will be purchasing bonds in the primary market, you can be sure that is not even remotely a hindrance. In fact, buying through the secondary market ensures that the bank intermediaries make a profit as well, another little considered, but important benefit of these programs.

The upshot is that when this crisis passes, and it will do so at some point, governments and central banks will have even more impact and control on all decisions made, whether business or personal. Remember what we learned from Milton Friedman, “nothing is so permanent as a temporary government program.”

Now back to market behavior today. It is certainly fair to describe the session as a risk-off day, with equity markets have been under pressure since the beginning of trading. Asia was lower (Nikkei -4.5%, Hang Seng -0.75%), Europe has been declining (DAX -2.3%, CAC -1.8%, FTSE 100 -2.1%) and US futures are lower (SPU’s -1.4%, Dow -1.0%). Meanwhile, Treasury yields have fallen 6bps, and European government bonds are all rallying on the back of the ECB announcement. After all, the only price insensitive buyer has just said they are coming back in SIZE. Commodity prices are soft, with WTI falling 2%, and agriculturals softer across the board although the price of gold continues to be a star, as it is little changed this morning but that means it is holding onto its recent 11% gain.

And finally, in the FX markets, while G10 currencies are all looking robust vs. the dollar, led by the yen’s 1.2% gain and Norway’s continued benefit from recent intervention helping it to rally a further 0.75%, EMG currencies are more mixed. ZAR is the worst of the day, down 0.9% as an impending lockdown in the country to fight Covid-19, is combining with its looming credit rating cut to junk by Moody’s to discourage buying of the currency. We’ve also seen weakness in an eclectic mix of EMG currencies with HUF (-0.35%), KRW (-0.25%) and MXN (-0.2%) all softer this morning. In fairness, the peso had a gangbusters rally yesterday, jumping nearly 3.5%, so a little weakness is hardly concerning. On the plus side, APAC currencies are the leaders with MYR, IDR and INR all firmer by 1.2% on the strength of their own stimulus (India’s $22.6 billiion package) or optimism over the impact of the US stimulus.

Perhaps the biggest thing on the docket this morning is Initial Claims (exp 1.64M) which would be a record number. But so you understand how uncertain this forecast is, the range of forecasts is from 360K to 4.40M, so nobody really has any idea how bad it will be. My fear is we will be worse than the median, but perhaps not as high as the 4.4M guess. And really, that’s the only data that matters. The rest of it is backward looking and will not inform any views of the near future.

We have seen two consecutive days of a risk rally, the first two consecutive equity rallies in more than a month, but I expect that there are many more down days in our future. The dollar’s weakness in the past two sessions is temporary in my view, so if you have short term receivables to hedge, now is a good time. One other thing to remember is that bid-ask spreads continue to be much wider than we are used to, so do not be shocked when you begin your month-end balance sheet activity today.

Good luck and stay safe
Adf

 

Hawks Acquiesce

In Germany and the US
The crisis made hawks acquiesce
To spending more dough
Despite and although
Things ultimately will be a mess

There is only one story of note this morning, at least from the market’s collective perspective, and that is the news that the Senate has agreed the details of a stimulus package in the US. The price tag is currently pegged at $2.0 trillion, although it would not surprise me if when this bill gets to the House, they add a bit more lard. Fiscal hawks have been set aside and ignored as the immediate concerns over the virtual halt in the US (and global) economy has taken precedence over everything else. The package offers support for small and medium sized businesses, direct cash payments to individuals and increased allocations to states in order to help them cope with Covid-19. But overall, what it does is demonstrate that the US is not going to sit by and watch as the economy slides into a deep recession.

And that seems to be the signal that markets were awaiting. We have already seen Germany discard decades of fiscal prudence in their effort to address the collapse in business activity there. In fact, their social demands are even greater than in the US, with no groups of more than 2 people allowed to congregate together. While it cannot be a surprise that the IFO indicator was revised lower this morning, with the Expectations Index falling to within a whisker of its financial crisis lows of 79.2. The real question is if the measures invoked to stop the spread of the virus continue for another month, just how low can this reading go? The one thing that is clear is that we are going to continue to see some unprecedented damage to economic statistics as the next several months evolve.

But none of that matters today, at least in the world of finance. The promise of more money being spent has led to some spectacular rallies in equity markets in the past twenty-four hours. By now you are all aware of yesterday’s late day melt-up in the US, where the Dow closed higher by 11.4%, outpacing even the NASDAQ (+8.1%). And overnight, the Nikkei rocketed 8% higher as a follow-through on the US news and despite the news that the 2020 Tokyo Olympics are now going to be the 2021 Tokyo Olympics. The rest of Asia rose as well (Hang Seng +3.8%, Shanghai +2.7%, Australia +5.5%) and Europe started out on fire. But a funny thing happened in the past hour, it seems that more sober heads took over.

European equity indices, which had exploded higher at the opening (DAX +4.4%, CAC +4.9%) have given back most of those early gains and are now mixed with the DAX lower by 0.4% although the CAC clinging to +0.9% gain. US futures, which were similarly much higher earlier, between 2% and 3%, have now erased all those gains and are now marginally lower on the session. In fact, I suspect that this is going to continue to be the situation in equity markets as each piece of new news will need to be absorbed into the pricing matrix. And for now, there is just as much bad news as good, thus driving significant volatility in this asset class going forward.

Bond markets are seeing similar style moves, alternating between risk-on and risk-off, although with much of the leverage having already been wiped out of these markets, and central banks around the world directly supporting them through massive QE purchases, the magnitude of the moves are much smaller. Early this morning, we saw Treasuries under pressure, with yields higher by as much as 4bps, but now they have actually rallied, and the 10-year yield is lower by 1bp. There is similar price action in European government bond markets although the recent rally has not quite reversed all the early losses. Of course, the ECB’s €750 billion program is dwarfed by the Fed’s QE Infinity, so perhaps that should not be a great surprise.

And finally, turning to the FX markets, the dollar remains under pressure, as we have seen all week, as fears over the availability of dollars has diminished somewhat in the wake of the Fed’s actions. This has led to NOK once again being the leader in the clubhouse, rallying a further 2.1% this morning which takes its movement this week to 7.5%! It seems that the first batch of weekly FX flow statistics from the Norgesbank confirm that they did, indeed, intervene earlier this week, which given the price action, can be the only explanation. (I am, however, proud of them for not publicly blaring it, rather simply doing the job and allowing markets to respond.) And given the oil price collapse and the damage that will do to the Norwegian economy, it makes sense that they would want to manage the situation. But most currencies are firmer so far this week, with AUD (+3.8%) and SEK (+2.75%) recouping at least a part of what had been devastating recent losses. As to today’s session, aside from NOK, the pound is the next best performer, rallying 0.9% on the strength of a new liquidity program by the BOE as well as what appears to be hope that recent government pronouncements regarding social distancing and shelter in place rules, seems to demonstrate Boris is finally going to come into line with the rest of the world’s governments on the proper containment strategy.

EMG currencies are also performing well this morning as the broad-based dollar decline lifts most of them. KRW is the best performer today, +1.6%, which is in line with last night’s euphoria over the US stimulus bill. MXN had been sharply higher early but has since given up some of its gains and is now higher by only 1% as I type. The market is not pleased with AMLO’s attitude toward the virus, nor it seems are the Mexican people based on the erosion in his approval ratings. Meanwhile, the other major LATAM economy, Brazil, is poised to see its currency weaken even further as President Bolsonaro also ignores the current protocols of self-quarantine or shelter-in-place and encourages his nation to ignore the virus and go about their lives. I have a feeling that President Bolsonaro is going to be a one-term president. BRL hasn’t opened yet but has fallen more than 2% this week already. I expect more will come.

On the data front, yesterday’s PMI data while awful, was actually not nearly as bad as the data seen in Europe or Asia. This morning brings Durable Goods (exp -1.0%, -0.4% ex transport) although these are February numbers, so will not really tell us much about the current state of the economy. Rather, all eyes are turning to tomorrow’s Initial Claims data, to see just how high that number will climb. There are numerous stories of state employment websites crashing from the overflow in volumes.

In the end, while the stimulus bill is good news, the proof remains in the pudding, as it were, and we need to see if all of that spending will help stabilize, then lift the US economy back to its prior trajectory. If this virtual lockdown lasts past Easter, the economic damage will become much more difficult to reverse and will make the hoped for V-shaped recovery that much harder to achieve. For now, though, we can only watch and wait. The one thing that remains clear is that in the end, the US dollar remains the haven of all havens, no matter the fiscal situation in the US. It will always be preferred to the alternative.

Good luck and stay safe
Adf

 

No Respite

This weekend, alas, brought no respite
As markets are still in the cesspit
A worrying trend
While govs try to end
The panic, is that they turn despot

Well, things have not gotten better over the weekend, in fact, arguably they continue to deteriorate rapidly. And I’m not talking markets here, although they are deteriorating as well. More and more countries have determined that the best way to fight this scourge is to lockdown their denizens and prevent gatherings of more than a few people while imposing minimum distance restrictions to be maintained between individuals. And of course, given the crisis at hand, a virulently contagious disease, it makes perfect sense as a way to prevent its further spread. But boy, doesn’t it have connotations of a dictatorship?

The attempt to prevent large groups from gathering is a hallmark of dictators who want to prevent a revolution from upending their rule. The instructions to maintain a certain distance are simply a reminder that the government is more powerful than you and can force you to act in a certain manner. Remember, too, that governments, once they achieve certain powers, are incredibly loathe to give them up willingly. Those in charge want to remain so and will do almost anything to do so. Milton Friedman was spot on when he reminded us that, “nothing is so permanent as a temporary government program.” The point is, while the virus could not be foreseen, the magnitude of the economic impact is directly proportional to the economic policies that preceded it. In other words, a decade of too-easy money led to a massive amount of leverage, which under ‘normal’ market conditions was easily serviceable, but which has suddenly become a millstone around the economy’s neck. And adding more leverage won’t solve the problem. Both the economic and financial crisis have a ways to go yet, although they will certainly take more twists and turns before ending.

None of this, though, has dissuaded governments worldwide from trying every trick suggested to prevent an economic depression. At the same time, pundits and analysts are in an arms race, to make sure they will be heard, in forecasting economic catastrophe. Q2 US GDP growth is now being forecast to decline by anywhere from 5% to 50%! And the high number ostensibly came from St Louis Fed President James Bullard. Now I will be the first to tell you that I have no idea how Q2 will play out, but I also know that given the current circumstances, and the fact that the virus is a truly exogenous event, it strikes me that any macroeconomic model built based on historical precedents is going to be flat out wrong. And remember, too, we are still in Q1. If the draconian measures implemented are effective, recovery could well be underway by May 15 and that would result in a significant rebound in the second half of Q2. Certainly, that’s an optimistic viewpoint, but not impossible. The point is, we simply don’t know how the next several quarters are going to play out.

In the meantime, however, there is one trend that is becoming clearer in the markets; when a country goes into lockdown its equity market gets crushed. India is the latest example, with the Sensex falling 13.1% last night after the government imposed major restrictions on all but essential businesses and reduced transportation services. Not surprisingly, the rupee also suffered, falling 1.2% to a new record low. RBI activity to stem the tide has been marginally effective, at best, and remarkably, it appears that India is lagging even the US in terms of the timeline of Covid-19’s impact. The rupee has further to fall.

Singapore, too, has seen a dramatic weakening in its dollar, falling 0.9% today and trading to its lowest level since 2009. The stock exchange there also tumbled, -7.3%, as the government banned large gatherings and limited the return of working ex-pats.

These are just highlights (lowlights?) of what has been another difficult day in financial markets around the world. The one thing we have seen is that the Fed’s USD swap lines to other central banks have been actively utilized around the world as dollar liquidity remains at a premium. Right now, basis swaps have declined from their worst levels as these central bank activities have reduced some of the worst pressure for now. A big concern is that next Tuesday is quarter end (year end for Japan) and that dollar funding requirements over the accounting period could be extremely large, exacerbating an already difficult situation.

A tour around the FX markets shows that the dollar remains king against most everything although the yen has resumed its haven status, at least for today, by rallying 0.3%. Interestingly, NOK has turned around and is actually the strongest currency as I type, up 0.8% vs. the dollar after having been down as much as 1.3% earlier. This reversal appears to be on the back of currency intervention by the Norgesbank, which is the only thing that can explain the speed and magnitude of the movement ongoing as I type. What that tells me is that when they stop, NOK will resume its trip lower. But the rest of the G10 is on its heels, with kiwi the laggard, -1.25%, after the RBNZ jumped into the QE game and said they would be buying NZD 30 billion throughout the year. AUD and GBP are both lower by nearly 1.0%, as both nations struggle with their Covid responses on the healthcare front, not so much the financial front, as each contemplates more widespread restrictions.

In the emerging markets, IDR is actually the worst performer of all, down 3.7%, as despite central bank provision of USD liquidity, dollars remain in significant demand. This implies there may be a lack of adequate collateral to use to borrow dollars and could presage a much harsher decline in the future. But MXN and KRW are both lower by 1.5%, and remember, South Korea has been held up as a shining example of how to combat the disease. Their problem stems from the fact that as an export driven economy, the fact that the rest of the world is slowing rapidly is going to be devastating in the short-term.

Turning to the data, this week things will start to be interesting again as we see the first numbers that include the wave of shut-downs and limits on activity.

Today Chicago Fed Activity -0.29
Tuesday PMI Manufacturing 44.0
  PMI Services 42.0
  New Home Sales 750K
Wednesday Durable Goods -1.0%
  -ex transport -0.4%
Thursday Initial Claims 1500K
  Q4 GDP 2.1%
Friday Personal Income 0.4%
  Personal Spending 0.2%
  PCE Deflator core 0.2% (1.7% Y/Y)
  Michigan Sentiment 90.0

Source: Bloomberg

Tomorrow’s PMI data and Thursday’s Initial Claims are the first data that will have the impact of the extraordinary measures taken against the virus, so the real question is, just how bad will they be? I fear they could be much worse than expected, and that is not going to help our equity markets. It will, however, perversely help the dollar, as fear grows further.

Forecasting is a mugs game at all times, but especially now. The only thing that is clear is that the dollar continues to be in extreme demand and is likely to be so until we start to hear that the spread of Covid-19 has truly slowed down. That said, the dollar will not rally forever, so payables hedgers should be thinking of places where they can add to their books.

Good luck and stay well
Adf

Risk Assets Betray

There once was a time in the past
Ere Covid, when risk was amassed
But now every day
Risk assets betray
That fear is still growing quite fast

It is awfully hard to find the bright side of the current situation, whether discussing markets, the economy or the general state of the world. Volatility remains the watchword in markets as yesterday saw the largest US equity decline since Black Monday in October 1987. Globally, economic data that is remotely current continues to show the disastrous impact of Covid-19. The latest print is this morning’s German ZEW Survey where the Expectations reading fell to -49.5, its lowest level since the middle of the Eurozone crisis in 2011. And finally, one need only listen to the number of government pronouncements and edicts including border closures, business closures and curfews to recognize that it will be quite some time before our lives, as we knew them just a few months ago, return to some semblance of normal.

And while it is virtually certain that this situation will ebb over time, we continue to get estimates that are further and further into the future as to when that time will arrive. What had been assumed to be a six-week process is now sounding an awful lot like a six-month process.

But consider this, it is events of this nature that change the zeitgeist and will have much further reaching effects on every industry. For example, given how much of the US (and global) economy has become service oriented, outside of things like food service, I expect that we will see a much greater reliance on telecommuting going forward. Even in bank dealing rooms, a place that I always considered the last bastion of the importance of proximity of workers, we are seeing a pretty effective adjustment to working from remote locations. And you can be sure that whatever issues are currently still impeding the workflow, they will be addressed by technological fixes in short order.

But what does that do to automobile manufacturers and all their supply chains? And while fossil fuels aren’t going to disappear anytime soon, in fact given how much cheaper they have become, they will be able to supplant alternatives for now, at some point, all those industries are going to suffer as well. Ironically, the move toward urbanization that we have seen during the last decade may find itself halted as people decide that not cramming themselves into small apartments with hundreds of other people (mostly strangers) in close proximity, is really a healthier way to live. And certainly, leisure activities are likely to change their nature as well. While the future remains unknown, it certainly does appear that it will look very little like the recent past. Food for thought.

Turning to the markets more specifically, we continue to see a combination of central bank and government activity in increasingly strident efforts to ameliorate the negative economic impacts of Covid-19. So last night the BOJ bought a record amount (¥121.6 billion) of equity ETF’s to help support the stock market. To their credit, the action was able to prevent a further decline in prices there, as the Nikkei closed unchanged on the day. However, it is still lower by 32% since early February’s recent high. In addition, we have seen equity short-selling bans by France, Italy, Spain, South Korea and Belgium as of this morning in an effort to prevent further market declines. Spain is the only market that seems happy about it, rising 2.6% this morning, with the rest of Europe little changed generally. Risk assets are still on the block for sale, its simply a question of the available liquidity for positions to be unwound.

Of greater interest to me are global government bond markets, which are quickly losing their status as haven assets. Despite rate cuts from all over the globe, yields are rising virtually everywhere, even in the US this morning with 10-year Treasuries seeing a 9bp jump. But Bunds have been underperforming for more than a week, with yields on the 10-year there up nearly 50bps in that time. While it makes perfect sense that the PIGS are seeing yields rise in this environment, what I think we are seeing is a combination of two things for ‘safer’ bonds. First, when yields fall this low, a key haven characteristic, limited probability of losing principal, is put at risk, because any reversal in yields will result in very sharp price declines. And second, with the spending commitments that are being made by governments on a daily basis, I think bond investors are starting to price in the idea that there is going to be a massive increase in the supply of bonds starting pretty soon. And asset managers don’t want to get caught in that blitz either. It is the second of these reasons that will continue to drive central banks to promulgate QE measures, and you can be sure we will continue to see those programs coming. In fact, I think the MMTer’s have won the debate, as that is likely to be a very accurate description of monetary policy in the future.

Finally, this morning the dollar has regained its crown and is, by far, the strongest currency around. It has rallied vs. all the G10, and pretty sharply as well. For instance, CAD is the best performer of the bunch today, and it is lower by 0.75%, having found a new home with the dollar above 1.40. SEK and AUD are the worst performers, both down around 1.7%, as the krona is seeing increased speculative betting that they will be forced to go back to negative rates, while Down Under, the Lucky Country has run out of luck with a collapsing Chinese economy crushing commodity prices, and the RBA promising to do more to stop the economy’s slowdown.

In the EMG space, the dollar is also reigning supreme this morning with EEMEA currencies under the most pressure. Given their relative outperformance lately, it cannot be too surprising that we are seeing this type of price action. HUF is today’s laggard, down 2.1%, but PLN (-2.0%), RON (-1.6%) and BGN (-1.2%) are all feeling the pain. Asian currencies are also lower, but generally not by quite as much, although IDR and KRW are both lower by around 1.5%.

Ultimately, the dollar’s strength today is probably best attributed to the absolute blowout in the basis swaps market, where borrowing dollars vs. other currencies has become hugely expensive. Given the way economic activity is contracting so rapidly, and so revenues everywhere are shrinking, all those non-US companies that need to repay dollar debt are desperate to get hold of the buck. Once financing charges rise high enough, the next step is generally outright purchases of dollars on the FX market. And that is what we are seeing this morning. Look for more of that going forward.

It’s ironic, Retail Sales is released this morning (exp 0.2%, 0.1% ex autos) on the same day I received emails that Nordstrom is closing its stores for the next two weeks along with a myriad of other smaller retailers. We also see IP (0.4%), Capacity Utilization (77.1%) and the JOLT’s Jobs Report (6.40M). But again, this data looks backward and in the quickly evolving world today, I doubt it will have an impact. Rather, while risk stabilized somewhat overnight, my sense is this is a temporary situation, and that we are going to see another wave of risk reduction, certainly before the week is over. So, for now, the dollar will continue to find a lot of demand.

Good luck
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Times of Trouble

In times of trouble
The yen continues to be
Mighty like an oak

Pop quiz! What percentage of the workforce is working at their primary site vs. home or an alternate site? Please respond with where you’re working and your guesstimates. Will publish results of this (completely unscientific) survey on Monday, March 16.

As markets around the world continue to melt down, investors everywhere are looking for a haven to retain capital. For the past 100 years, US Treasuries have been the number one destination in markets. Interestingly, the past two days saw Treasuries sell off aggressively. I think the move was initially based on the relief rally seen on Tuesday, but at this point, the fact that Treasury prices fell alongside yesterday’s stock rout can only be explained by the idea that institutions that need cash are selling the only liquid assets they have, and Treasuries remain quite liquid. And to be clear, 10-year yields are lower by 18bps this morning as that bout of selling seems to have passed and the haven demand has returned in spades.

But since the financial crisis, the second most powerful haven asset has been the Japanese yen. Despite the fact that the nation has basically been in an economic funk for two decades, it continues to run a significant current account surplus. As a consequence, Japanese external investment is huge and when fear is in the air, that money comes running back home. The evolution of the coronavirus spread can be seen in the yen’s movement as in the middle of February, when Japan itself was dealing with the growth in infections, the yen weakened to a point not seen in nearly a year. Since then, however, the yen has strengthened 7.5% (with a peak gain of 9.8% seen Monday) as flows have been decidedly one way. This morning the yen has appreciated 0.7% from yesterday’s close and quite frankly, until the pandemic starts to ebb, I see no reason for it to stop appreciating. Par will pose a short-term psychological support for the dollar, but if this goes on for another two months, 95 is in the cards. With that in mind, though, for all yen receivables hedgers, zero premium collars are looking awfully good here. Let’s talk, at the very least you should be apprised of the pricing.

Interestingly, the Swiss franc has had a somewhat less impressive performance despite its historic haven characteristics. While it has appreciated 4.5% in the same time frame, it has been having much more trouble during the latest equity market decline. And I think that is the reason why. Famously, the Swiss National Bank has 20% of its balance sheet invested in individual equities. This is a very different investment philosophy than virtually every other central bank. The genesis of this came about when the SNB was intervening on a daily basis while trying to cap the franc and ultimately needed a place to put the dollars and euros they were buying. I guess the view was stocks only go up, so let’s make some money too. Whatever the reason, as of December 31 the USD value of their equity portfolio was about $97.6 billion. I’m pretty confident that number is a lot lower today, and perhaps the idea about Swiss franc strength is being called into question. The franc is unchanged today and has been generally unimpressive for the past week.

Meanwhile, all eyes this morning are on Madame Lagarde and the ECB who will be announcing their latest policy initiatives shortly. While it is clearly expected they will do something, other than a 10bp cut in the deposit rate, to -0.60%, there is a great deal of uncertainty. Expectations range from expanding the TLTRO program with much more aggressive rates, as low as -2.00%, to a significant increase in QE to capping government bond yields. All of that would be remarkably dramatic and likely have a short-term positive impact on markets. But will it last? My sense is that until the Fed announces next week, and at this point I think they cut 100bps, markets will still be on edge. After all, the world continues to revolve around USD funding, and in times of crisis, foreign entities need access to USD liquidity. Look for more repo, more swap lines and maybe even a lending scheme although I don’t think the Fed can do something like that within their mandate.

Overall, the dollar is performing as the number two currency haven, after the yen, and has rallied sharply against commodity currencies in both the G10 and EMG spaces. For example, with oil down 5% this morning, NOK has fallen 3.6%, but both AUD and SEK are lower by 1.5% as well. In the emerging markets, Mexican peso continues to be the market’s whipping boy, falling a further 3.2% as I type, which takes its decline since the beginning of the month to 12.2%. meanwhile, the RUB is in similarly dire straits (-2.75% today, -11.5% in March) and we are seeing every single EMG currency lower vs. the dollar today. These are the nations that are desperate for USD liquidity and you can expect their currencies to continue to decline for the foreseeable future.

At this point, data is an afterthought, but it is still being released. Yesterday saw CPI rise a tick more than expected but the more interesting data point was Mortgage Applications, which jumped 55.4% as mortgage rates collapse alongside Treasury yields. This morning brings Initial Claims (exp 220K) and PPI (1.8%, 1.7% core) with far more interest in the former than the latter. Consider, given the enormous economic disruptions, it would be easy to see that number jump substantially, which would just be another signal for the Fed to act as aggressively as possible.

At this point, as the equity meltdown continues, the dollar should remain well supported vs. everything except the yen.

Good luck
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All Screens Are Red

Last week it was how Covid spread
That filled most investors with dread
This weekend we learned
The Russians had spurned
The Saudis, now all screens are red

Wow!! It has been more than a decade since we have seen market activity like this across the entire spectrum of asset classes, dating back to the Lehman Brothers bankruptcy in September 2008 and the ensuing six months of activity. And just like then, the only thing that is going to change the current investor dynamic is a series of policy responses that are broadly seen as being effective. Unfortunately for most policymakers in the G10, they don’t have nearly enough tools available to be instantly effective. In other words, my sense is that while we will certainly get a series of announcements in the next several days, even coordinated announcements, investors and traders are going to need to actually see that deeds follow the words, and that the deeds have a chance to be effective. After all, as we have already discussed, cutting the Fed funds rate will not slow the spread of the coronavirus, nor will it patch things up between OPEC and Russia. Oftentimes, passage of time is a critical feature of any solution, but that just means that we will live with the current volatility that much longer.

A brief recap shows that markets, which were already fragile due to the unknown ultimate impact of the spread of the coronavirus, received one negative catalyst too many this weekend when the, always suspect, alliance of OPEC and Russia broke down regarding production cuts to shore up the price of oil. The Russians walked out of the negotiations and the Saudis responded by cutting their prices dramatically and opening the taps fully on production thus driving WTI lower by more than 34% at one point earlier this morning, although as I type at 6:35am it is “only” down by 29% to $32.50/bbl.

The financial market response was exactly as one would expect with fear rising exponentially and risk assets sold at any price. Meanwhile, haven assets are bid through the roof. So, stock markets around the world are all lower by at least 3.0% with the worst performers (Australia -7.3%, Thailand -7.9%, Italy -9.4%) down far more. US futures hit their 5.0% circuit breakers immediately upon opening and have been quiet all evening pinned at limit down. Cash market circuit breakers in the US are 7.0% for 15 minutes, 13.0% for 15 minutes and then if we should decline by 20%, trading is halted for the rest of the day. It certainly appears that we will trigger at least the first one around the opening, but after that I hesitate to speculate.

The other thing that is almost certainly going to happen is we are going to get a policy statement, at least from the Fed, if not a joint statement from G7 central bankers, or the Fed and the Treasury or all of the above, as they make every effort to try to assuage investor confidence. But in this environment, it is hard to come up with a statement that will do that. As I said, passage of time will be required to calm things down.

Regarding the bond market, by now you are all aware of the historic nature of the movement with the entire US yield curve now below 1.0%. The futures market is pricing in a 75bp cut next week by the Fed and another 25bps by June. Thursday, we hear from the ECB with the market anticipating a 10bp cut and analysts looking for additional stimulus measures, perhaps widening further the assets they are willing to purchase. And next week, the BOJ meets as well as the Fed, with the market looking for a 10bp cut there as well.

All this leads us to the FX markets, where the dollar is having a mixed day. Mixed but violent! It should be no surprise that the yen is dramatically higher this morning, currently by 3.0% although at its peak it was nearly 4.0% stronger. As we flirt with the idea of par on the yen, we need to go back to 2013 to see a time when the currency was stronger, which was driven by the 2011 Tohoku earthquake and tsunami. The Swiss franc and euro are also firmer this morning, both by about 1.25% as the former sees haven flows while the latter, in my estimation, is seeing the last of the benefits of the Fed’s ability to ease policy more aggressively than the ECB.

On the flip side, NOK has been devastated, down 2.8%, with CAD falling 1.5%, both on the back of oil’s sharp decline. Aussie, Kiwi and the pound are all trading within 0.4% of Friday’s close, although Aussie did see a 5.0% decline early in the session as lack of liquidity combined with algorithmic stop-loss orders to lead to a significant bout of unruliness.

In the EMG space, the champion is MXN, which has fallen 8.5%! This is a new historic low in the currency which is getting decimated by the coming economic slowdown and now the collapse in oil prices. Let’s just say that all those investors who took comfort in the higher interest rate as a cushion are feeling a lot less sanguine this morning. But we have also seen a sharp decline in ZAR (-2.4%) and a number of Asian currencies fell around 1.0% (MYR, IDR and KRW). And we are awaiting the opening in Sao Paolo as my sense is BRL, which has been falling sharply for the past week, down nearly 5.0%, seems likely to weaken much further.

My advice for those with cash flow programs is to pick a level and leave an order as bid-ask spreads will be much wider today and liquidity will be greatly impaired.

Looking ahead to the week, the ECB meeting on Thursday is clearly the highlight. At home, we only get a bit of data, and given what’s going on it doesn’t seem likely to be very impactful. But here it is:

Tuesday NFIB Small Biz Optimism 102.9
Wednesday CPI 0.0% (2.2% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Thursday Initial Claims 219K
  PPI -0.1% (1.8% Y/Y)
  -ex food & energy 0.1% (1.7% Y/Y)
Friday Michigan Sentiment 95.0

Source: Bloomberg

The thing about this week’s data is that it mostly predates both the onset of the spread of Covid as well as this weekend’s OPEC fiasco. In other words, it is unlikely to be very informative of the current world. We already know that going into these problems, the US economy was in pretty decent shape. The $6.4 trillion question is: How will it look in eight months’ time when the nation heads to the polls?

Remember, orders are likely to be the best execution methodology on a day like today.

Good luck
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