Good Morning.. Blimey! That was some bounce and reportedly on the back of Trump promising tax break help but really? He is dealing with the symptom and not the cause. If we take a step back, not much has changed and this fragile market will still respond very badly to any bad news. The issue for me is that there is still stress in the repo/funding and credit space and we need to monitor that closely. History shows us that in steep falls, we often see steep rebounds within a broader sell-off. The question is, has the capitulation and vol unwind now been done or are we in the eye of the storm? To be honest, I am not sure but be careful chasing this up here. I am keeping the long EUR recommendation but due to uncertainties, I am bringing the stop up to 1.1310ish. There is a danger that the funding squeeze is a sign of a USD shortage so I am happy with a profit stop just in case. USDJPY is back to following stocks around. But vols remain elevated and this is still going to be a tough week. Keep it small and keep it tight.

Keep the Faith..

Data.. All Times GMT

10:00.. Italy Industrial Production mom Jan Cons: 1.6% Prev -2.7%

11:00.. EU GDP yoy Q4 Prelim Cons: 0.9% Prev 1.2%

EU GDP QOQ Q4 Prelim Cons: 0.1% Prev 0.3%

Speakers:..

None

Details 10/03/20

Maybe not a Black Monday but it was dark but just look at the aggressive reversal overnight; Blimey!

I guess we will hear words like retracement or bounce for the moves last night but they do not even come close to describe the aggressive rejections of what could be capitulation lows. What we don’t know here is if this is a bounce in the middle of a more elongated sell-off or if a low is now in place. The virus is not cured and still spreading but there are signs that quarantines in China and S. Korea may be slowing the little blighter down somewhat. Italy unfortunately is still struggling and the whole country is in lock-down; but goodness knows how you police that! The rejection of the lows in USDJPY, Stocks and the 11% rise in oil is breath-taking and on little good news really. Is FOMO back now that the capitulation and the vol suppression has been completed? I think we may find out in the next couple of session and I, for one, will on the back, seemingly, of rump promising tax breaks. He is dealing with the be looking to see if things settle down in the repo/funding and credit space later. But goodness me the volatility is staggering but a word of caution here as history shows us that in very large selloffs, there can be days of steep and aggressive rallies. The jury is out.

The 7.6 per cent fall in the S&P 500 was its biggest single day fall since the global financial crisis and the oil fall was momentous and to be honest, the Saudi/Russia oil war is on-going too. But last night the reversal was broad with 30yr yields in the US jumping 20bps to 1.13% and 10s are up 17bps EUR lower 100 pips and USDJPY rallied from 101.50 to 105.02. Often when we get aggressive rejections of levels, a low is established so we may be moving to a buy the dip scenario BUT it is EARLY DAYS. I think we need more good news and not just tax break plasters as we need to fix the cause. It will only take some more bad news and stocks and oil may be tumbling again. I am sorry to sound vague but there just is a lack of good concrete reasons to get all bulled up. This is still looking like a fragile rally despite its large move as the fundamentals have not changed much. Tax breaks are not going to help Italy which remain in lockdown but markets suffered the double hit yesterday with the Saudi oil move and that was the last straw for some. Again the big question is; has the capitulation and vol unwind finally passed or are we in the eye of the storm?

The decision by Saudi Arabia and Russia to start an oil price war promises a lot of pain for both sides, a huge amount of collateral damage, and no assurance that a clear winner will emerge. This is NOT done yet despite the oil rally last night. It is also clear that there is further stress in the repo area. The New York arm of the Fed said it would boost the size of its overnight and short-term operations in the repo market “to support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus”. The Fed will offer at least $150bn in overnight loans — a $50bn increase from what was originally on offer — until March 12. It will also raise the limit on the amount of cash it will lend into the market over a two-week period from at least $20bn to at least $45bn. The banks are still squeezing the Fed to expand its balance sheet and for that, they need rates down. It will be interesting to see if this bounce, if it holds, shifts pricing for a further 50bps of cuts at this month’s FOMC meeting. Central bankers were visibly absent yesterday. The Fed is clearly concerned of a funding shock and we still do not know if monetary policy will make any difference at all and if no one goes out shopping, then tax breaks may not help either.

Markets are pricing about 60bps of cuts for March Fed and about 80bps by May which clearly pushes the Fed to a further round of cuts towards zero. The question is, does the Fed want to do as much as possible as soon as possible or spread this out. Cutting aggressively could spook markets again. But it does seem as if the yield differentials are certainly set to collapse further and this may yet weigh heavily on the USD and especially against the JPY and EUR. This rally in USDJPY may be a gift but right now, it is back following stocks around. I am square JPY at present and recommended running a long in EUR which has been beaten back from 1.1500 aggressively as stocks/risk rallied last night but I do think we may see EUR above 1.1500 when the Fed cuts and so may keep this but would bring my stop up tight to 1.1310 ish. We need to hold near here (chart below).

If the Fed does 50 in March and alludes to more in April, then yield differentials will matter; they always do eventually. Again, I still have issues surrounding the credit and funding space in the US so this stock market rise may also be a “head-fake”.

I am yet to see any evidence that much has changed really. I am not really sure about the USD here to be honest (which is the reason for the tight stop in EUR), as the funding crisis, if indeed that is what it is, may suggest a USD shortage out there. The blow out in FRA/OIS means that dollar funding is becoming increasingly problematic, and absent a sharp tightening in the Libor-OIS and FRA-OIS spread, while bank credit concerns may not have been the catalyst for the sharp spike, it will be banks that are eventually impacted by what is increasingly emerging as an acute tightening in short-term funding markets and/or a global dollar shortage. We need to keep an eye on this. Also, can Treasuries fall much further if the Fed is thinking of expanding the balance sheet again? Have we seen the spike in vols now and can we please calm down? The Bank of America Merrill Lynch MOVE Index, which measures price swings in Treasuries, jumped to the highest level since 2009 Monday.

I am not sure how all those passive investment funds are doing but ETFs live in a universe of their own and we are now seeing the damage they can do. The problem with passive investing is that while it propels market dutifully higher, when stocks crash, ETFs reverse, and a painful selling liquidation commences, one which takes a long time to stop, or as Bloomberg puts it, “when the market goes into freefall, they are required to sell the underlying asset, prompting a frantic search for anyone who will buy it.” Mind the gap! The issue now is if this is all done now. I am not sure it is as this fragile market is not going to take any bad news at all well.

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Strategy:

Macro:.

Short USDJPY @ 107.31.. Stop above 108.55 Taken Profits at 101.90

Long Gold @ 1639.00 Stop below $1590.

Long EUR @ 1.1060.. Stop below 1.1310.

Macro Long FTSE250 20,900

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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