Tag Archives: #riskon

The Real Threat

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

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

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

Good luck and stay safe
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A Huge Threat

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
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The First Battlefield

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

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

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

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

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

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

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

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

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

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

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

Good luck, good weekend and stay safe
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Ere Prices Explode

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

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

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

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

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

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

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

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

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

Good luck
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Woe Betide Every Forecast

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

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

Good luck and stay safe
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Prices So Low

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
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Hawks Acquiesce

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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
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Truly a Beast

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The PMI data released
Showed just how fast growth has decreased
Tis services that
Have fallen so flat
This virus is truly a beast

But yesterday two bits of news
May help prevent any more blues
The Fed started things
By spreading their wings
And buying all debt that accrues

As well, in a break from the past
The Germans decided at last
To open the taps
As well as, perhaps
Support debt Italians amassed

And finally, where it began
The virus, that is, in Wuhan
Two months from their dawn
Restrictions are gone
Defining the lockdown’s lifespan

Markets have a much better tone this morning as traders and investors react to two very important responses to the ongoing Covid-19 crisis. The first thing that is getting a positive, albeit delayed, response is the Fed’s enactment of a series of new programs including support for CP, mortgage-backed securities, primary dealers and money market funds as well as embarking on QE Infinity, buying $75 billion of Treasuries and $50 billion of mortgage-backed securities every day this week, and then on into the future. Previous concerns about the size of the Fed’s balance sheet relative to the US economy have been completely dismissed, and you can bet that we will soon see a Fed balance sheet with $10 trillion in assets, nearly 50% as large as the economy. But the announcement, while at first not getting quite the positive impact desired, seems to be filtering through into analysis and is definitely seen in a more positive light this morning than yesterday at this time.

The second piece of news was that not only is Germany going to embark on a €750 billion spending program to help the economy, but, more importantly, they are willing to support Italy via European wide programs like the European Stability Mechanism, and even jointly issued coronaviru bonds, to prevent a further catastrophe there. In truth, that seems to be a bigger deal than the Fed, as the long-term implications are much greater and point to a real chance that the European experiment of integration could eventually work. If they move down the path to jointly issue and support debt available to all members, that is a massive change, and likely a long term positive for the single currency. We have to see if they will actually go forward, but it is the most promising structural comment in Europe in years, perhaps even since the euro was formed.

However, we cannot forget that the current reality remains harsh, and were reminded of such by this morning’s Flash PMI data, which, unsurprisingly, fell to record lows throughout Europe and the UK. Services were hit much harder than Manufacturing with readings of 29.0 in France, 34.5 in Germany, 31.4 in the Eurozone and 35.7 in the UK. Japan also released their data, which was equally dismal at 32.7 for Services PMI there. And they added to the story by releasing Department Store Sales, which fell a healthy 12.2%. Of course, everyone knows that the data is going to be awful for the time being, and since we saw China’s PMI data last month, this was expected. Granted, analysts had penciled in slightly higher numbers, but let’s face it, everybody was simply guessing. Let’s put it this way, we are going to see horrific data for at least the next month, so it will have to be extraordinarily bad to really garner a negative market reaction. This is already built into the price structure. While the US has historically looked far more closely at ISM data, to be released next week, than PMI data, we do see the US numbers later this morning, with forecasts at 42.0 for Services and 43.5 for Manufacturing.

So the data is not the driver today, which has seen a more classic risk-on framework, rather I think it is not only the absorption of the Fed and German actions, but also, perhaps, the news from Wuhan that the restrictions on travel, imposed on January 23, are being lifted, nearly two months to the day after imposition. Arguably, that defines the maximum lockdown period, although yesterday President Trump hinted that the US period will be much shorter, with 14 or 15 days mooted. If that is the case, and I would place the start date as this week, we are looking at heading back to our offices come April 6. If the Fed is successful in preventing financial institution collapse, and Congress finally passes a stimulus bill to address the massive income dislocation that is ongoing, (which they will almost certainly do in the next two days), there is every chance that while Q2 GDP will be hit hard, the panic inducing numbers of -30% GDP growth (Morgan Stanley’s forecast) or -50% GDP growth (St Louis Fed President Bullard’s forecast), will be referred to as the height of the panic. We shall see.

But taking a look at markets this morning, we see the dollar under pressure across the board, with the Norwegian krone today’s champion, rallying 5.4% as a follow on to yesterday’s reversal and ultimate 1.2% gain. But the pound has bounced 2.0% this morning along with SEK and AUD is higher by 1.7%. It is entirely possible that what we are seeing is a relief in the funding markets as the Fed’s actions have made USD available more widely around the world and reduced some of that pressure.

EMG markets are seeing similar strength in their currencies, led by MXN (+2.6%) and HUF (+2.3%), but every currency in both blocs is higher vs. the greenback today. Equity markets are all green as well, with major rallies in Asia (Nikkei +7.1%, Hang Seng +4.5%, Shanghai +2.7%) and Europe (DAX +6.25%, CAC +5.25%, FTSE 100 +4.0%) with US equity futures limit up in all three indices. Bonds, meanwhile, have sold off slightly, with yields higher in both the US and Germany by 2bps. I think given the overall backdrop, bonds are unlikely to sell off sharply anytime soon, especially given the central bank promises to buy unlimited quantities of them.

And I would be remiss if I didn’t mention gold, which is up 2.5% today and 6.2% since Friday’s close as investors realize that all the money printing and fiscal stimulus is likely to lead to a much different view on inflation, namely that it is going to rise in the future.

Volatility remains the watchword as 5% daily moves in the equity market, even when they are up moves, remain extremely taxing on all trading activities. Market liquidity remains suspect in most markets, with bid-ask spreads still far wider than we’ve come to expect. Forward FX spreads of 5-10 pips for dates under 1 year are not uncommon in the majors, let alone in things like MXN or BRL. Keep that in mind as you prepare for your balance sheet rolling programs later this week.

Good luck and stay safe
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Has Panic Subsided?

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This morning a look at the screen
Shows everything coming up green
Has panic subsided?
Or is it misguided
To think that a bottom’s been seen?

It certainly feels less frightening in markets this morning as assets of all nature, equity, commodity and fixed income, are rallying nicely and the panic buying of dollars seems to have ended for the time being. Of course, this is an interesting outcome if one reads the news, given that virus stories have not only continued apace, but the statistics and government responses are getting more draconian. Arguably, the biggest story is that the entire state of California, with its population of 40 million, has been put on lockdown, with stay-at-home restrictions imposed by the Governor. By itself, California is, famously, the fifth largest economy in the world, just ahead of the UK, so the idea that economic activity there is going to come screeching to a halt cannot be seen as a positive. At least not in the short term. In addition, virus related deaths in Italy have now surpassed those from China, and further personal restrictions are being contemplated by PM Conte in order to get a handle on the situation. Thus, the fact remains that Italy is in dire straits from an economic perspective, again at least in the short term. Yet the FTSE MIB (the main Italian stock market index) is higher by 3.8% as I type this morning.

This all begs the question, why are markets reversing course from what has been several hellacious weeks of price declines? Let’s consider a few possible reasons:

It could be that the combination of expanded central bank and government activity around the world has finally achieved a point where investors believe that apocalyptic scenarios overstate the case.

While this is possible, it seems a bit far-fetched to believe that in the course of 36 hours, investors have suddenly decided to accept all the actions, and there have been many, have done the job.

A recap of the major actions shows:
• ECB creates €750 billion PEPP as additional QE measures
• Fed extends USD swap lines to 9 additional central banks to allow USD liquidity to reach all G10 nations and several more developed EMG nations like South Korea
• Fed creates money market fund liquidity backstop to insure that CP issuance by US corporates is able to continue and companies are able to fund operations
• BOJ added ¥5.3 trillion in liquidity to markets while snapping up ¥201 billion of new ETF’s
• RBA cut rates by 0.25%, added new liquidity to markets and started a QE program to control the 3-year AGB at a rate of 0.25%

There is no question that this is an impressive list of actions put into place in very short order which demonstrates just how seriously governments are taking the Covid-19 outbreak. And this doesn’t include any of the fiscal stimulus packages which either have been enacted or are on the cusp of being so. In fact, a total of 31 central banks around the world have cut rates, added liquidity or started QE programs in the past week in order to stem the tide. (I have to add that the Danish central bank actually raised its base rate by 0.15%, to -0.60%, yesterday morning in a truly shocking move. Apparently there was growing concern that with the ongoing problems in Italy, investors were flocking to DKK from EUR and driving that cross, which the central bank uses as its monetary benchmark, strongly in favor of the krona. In this instance, strongly represents a 3.5 basis point move, which has since been reversed.) And perhaps the market is telling us, they’ve done enough. But I doubt it.

Remember, the problem is not financial at its heart, it is a medical issue and efforts to contain the virus remain only partially effective thus far. The medical news, however, continues to get worse, at least in Europe and the US, as the caseload continues to increase rapidly, as well as the death toll, and governments are imposing stricter and stricter regulations on the population. So along with California’s action, New York has mandated that no more than 25% of a company’s workforce is allowed to work at the office (at SMBC we are below 15%), while New Jersey has closed all personal service businesses, like hair salons, exercise facilities and tattoo parlors. And these are just the most recent ones that I have seen because of where I live and work. I know there are countless measures throughout the US and Europe. And all of those measures inflict significant pain on the economy.

Yesterday’s Initial Claims number jumped to 281K, significantly higher than model forecasts, but just a fraction of what we are likely to see going forward as small service businesses like restaurants and hair salons and so many others are forced to close for now and cannot afford to continue paying their staff. Hence I’ve seen estimates that we could see those numbers jump as high as 2 million! So while it is not an economic or financial condition at its heart, it is certainly having that impact.

A second thought, one which I think has more substance to it is that during the past three weeks we have seen a substantial amount of position liquidation by highly leveraged fund managers who were forced to sell assets (or cover shorts) at ANY price due to margin calls. The only way to get market movements of 5%-10% or more is to have market participants be price insensitive. In other words, sales (short covers) were mandated, not by choice. However, once those positions are closed, and the evidence is that most have been so, markets revert to price discovery in the normal fashion, with buyers and sellers putting their money to work based on views of the asset. So while there is still significant trepidation by investors, my gut tells me that we have seen the worst of the financial market activity and volatility. It will still be quite a while before things truly settle down, and there is every chance that as the economic data comes over the next weeks and months and shows just how badly things were impacted, we will see sharp market downdrafts. So I am not calling a bottom per se, but think that going forward it will be less dramatic than we have seen during the first three weeks of March.

A quick recap of this morning’s markets shows equity markets around the world higher, with many substantially so (CAC +5.1%, DAX +4.2%, Hang Seng +5.0%); government bond markets also rallying nicely with yields almost everywhere falling (Treasuries -14bps, Gilts -14bps, Bunds -9bps); commodity prices rallying virtually across the board (WTI +2.4%,Copper +1.7%, Gold +2.3%); and finally, the dollar selling off virtually universally, with some of the worst recent performers regaining the most. So KRW (+3.0%), AUD (+2.6%) and GBP (+2.3%) are all unwinding some of the excess movement we saw in the past weeks. If I am correct and the worst has passed, I expect the dollar will cede more of its recent gains. However, given my timeline of May, I expect it will be another month before we see that in any material way. So, if you are a payables hedger, these are likely to be some of the best opportunities you are going to see for quite a while. Don’t miss out!

Good luck, good weekend and please all stay safe and socially distant
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All Stay at Home

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While yesterday was, for most, scary
It seems the moves were temporary
This morning we’ve seen
Our screens filled with green
On hopes of response monetary

Meanwhile, as the virus expands
And spreads across multiple lands
The word out of Rome
Is, ‘all stay at home’
And please don’t go round shaking hands!

What a difference a day makes! After what was a total obliteration of risk on Monday, this morning we have seen equity markets around the world rebound sharply as well as haven assets lose some of their luster. While net, risk assets are still lower than before the oil war broke out, there is a palpable sense of relief in trading rooms around the world.

But is anything really different? Arguably, the big difference this morning is that we have begun to hear from governments around the world about how they are planning to respond to the Covid-19 pandemic epidemic, and more importantly, that they actually do have a response. The most dramatic response is arguably from Italy, where the government has locked down the entire nation. Schools and businesses are closed and travel within as well as in and out of the country is banned save for a dire emergency. Given how badly hit Italy has been hit by Covid, nearly 500 deaths from more than 9,000 cases, and the fact that the case load is increasing, this should be no surprise. At the same time, given the demographics in Italy, only Germany and Japan have older populations, and given the fact that the virus is particularly fatal for elderly people, things are likely to continue to get worse before they get better. I have seen two different descriptions of how dire the situation is there, with both calling the health infrastructure completely overwhelmed. Look for Germany to impose more restrictions later this week as well, given the growing spread of the virus there.

But from a market perspective, what is truly turning things around is the discussion of combined monetary and fiscal response that is making the rounds. Last night President Trump explained the administration was considering payroll tax cuts as well as direct subsidies to hourly workers via increased support for paid sick leave. In addition, the market is certain the Fed will cut at least 50bps next week, and still essentially pricing in 75bps. So, the twin barrels of monetary and fiscal policy should go a long way to helping regain confidence. Of course, neither of these things will solve the problems in the oil patch as shale drillers find themselves under extraordinary financial pressure with oil prices still around $34/bbl. While that is a 10% rebound from yesterday, most of the shale drillers need oil to be near $45-$50/bbl to make a living. But there is very little the government can do about that right now.

And we are hearing about pending support from other governments as well, with the UK, France and Japan all preparing or announcing new measures. However, as long as the virus remains as contagious as it is, all these measures are merely stop-gaps. Lockdowns have serious longer-term consequences and there will be significant lost output that is permanently gone. Recession this year seems a highly likely event in many, if not most, G10 countries, so be prepared.

And with that as a start, let’s take a look around the markets. As I mentioned, equities rebounded in Asia (Nikkei +0.85%, Hang Seng +1.4%, Shanghai +1.8%) and are much higher in Europe (DAX +3.6%, CAC +4.4%, FTSE 100 +4.2%). Of course, that was after significantly larger declines yesterday. US futures are sharply higher as I type, with all three indices more than 4% higher at this time. Meanwhile, bond markets are seeing the opposite price action with 10-year Treasury yields rebounding to 0.71% after touching a low of 0.31% yesterday. Bunds have also rebounded 12bps to -0.74%, and more importantly, both Italian and Greek bonds have rallied (yields falling) sharply. Make no mistake, the bonds of those two nations are not considered havens in any language.

In the FX market, yesterday saw, by far, the most volatile trading we have experienced since the financial crisis in 2008-09. And this morning, along with other markets, much of that is reversing. So we are looking at the yen falling 2.4% this morning, by far the worst performer in the G10, but also seeing weakness in the euro (-0.85%), pound Sterling (-0.7%) and Swiss franc (-0.85%). On the plus side, NOK is higher by 1.05% and CAD has regained a much less impressive 0.35%.

Emerging markets have also seen significant reversals with MXN, yesterday’s worst performer, rebounding 1.8%, ZAR +1.65% and KRW +0.95%. On the downside, RUB is today’s loser extraordinaire, falling 3.5% after Saudi Aramco said they would increase production to a more than expected 12.3 million bbls/day. But the CE4 currencies, which rallied with the euro yesterday, are all softer this morning by roughly 0.8%.

The one thing that seems clear is that volatility remains the base case for now, and although market implied volatilities have fallen today, they remain far higher than we had seen just a week ago. I think there will also be far more market liquidity to be involved in this market as well.

On the data front, the NFIB Small Business Optimism report has already been released at 104.5, rising from last month and far better than expected. Now this survey covers February which means that there had to be at least some virus impact. With that in mind, the result is even more impressive. The thing is that right now, data is just not a market driver, so the FX markets have largely ignored this along with every other release.

Looking ahead to today’s session, the reversal of yesterday’s moves is clearly in place and unless we suddenly get new information that the virus is more widespread, or that there is pushback on support packages and they won’t be forthcoming, I expect this morning’s moves to continue a bit further.

Longer term, we remain dependent on the spread of Covid-19 and government responses as the key driver. After all, the oil news seems pretty fully priced in for now.

Good luck
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