Good Morning.. Another rout taking place as Trump “fiddles while Rome burns”. He is going to lose the election with this if he is not very careful and the danger here is we get knee-jerk reactions. Could he close markets down in the US? The only precedent for that was 911. Let’s hope not but the fact is that we are now in a bear market and that impacts the big boys. Gold as a hedge is not working for those late to the party but it is not collapsing. Oil is down again and is adding a lot to the problem but it is good news for the likes of India and China. The UK had a massive spending budget and Australia followed; this is going to spread but what will we get from Lagarde today? Just how tied are her arms with a split on the committee and rate cuts damaging to already fragile banks. TLTRO’s seem a likely focus for the ECB but with negative rate and a balance sheet that dwarfs the Fed’s, it may not be enough as it is fiscal policies that investors want to see. What is not clear in the rout, is where the USD goes. Historically an event like this and a run into US bonds would see the USD rise. But the Fed is cutting more than most and that is the problem with yield differentials set to collapse. There is clear stress in the funding markets still and the Fed will probably go very large on March 18th as there is a real danger of a credit shock now. These are dangerous markets; trade accordingly or not at all. I am square right now (which is a position) apart from a small long in gold; waiting for opportunities with dry powder.
Keep the Faith..
Data.. All Times GMT
10:00.. EU Industrial Production mom Jan Cons: 1.4% prev -2.1%
12:30.. US Initial Jobless Claims Cons: 218k Prev 216k
US PPI Feb mom Cons: -0.1% Prev 0.5%
12:45.. ECB rate decision
Speakers:.
13:30.. ECB Lagarde Press conference
Details 12/03/20
A Tsunami of fiscal spending coming. Trump blames the world; could he close US markets?
The UK Chancellor yesterday announced £30bls package to help boost small businesses, shore up the NHS and help keep the economy on the right path; this just hours after an emergency 50bps cut from the BoE. That is a lot of stimulus and when all this dies down, the UK is likely to run pretty hot and house prices may never look back over the next 2-3 years. Whether or not a lot of this can ever be reversed is unclear but the UK is not going to be alone with this type of fiscal spending. Australia followed last night, announcing A$17b economic stimulus plan to combat C-19, measures will end Jun 30 next year. Not that it helped US stocks much as both the Dow and S&P slipped into a bear market last night, falling 20% from the highs just before the usual ramp into the close. The US is realising (finally) that they have a problem and I am pretty sure they will throw what they can at this fiscally and the Fed, as I said yesterday, may go further than 50bps by committing to balance sheet expansion. The massive wave of fiscal and monetary stimulus is about to take shape with global rates close or below zero and government debt piled to the rafters. If the central banks are this scared, then maybe we all should be.
But what really worries me is that Trump is blaming the world for this virus and I fear what he may do to stop it and stop markets from falling as he knows it may dent his chances of re-election. The fact is, that every time he talks on the subject, stocks fall further. He and his team were all very good at taking the bows for the market rising but are in a panic as to what to do as they dump and dump, they have. His relaxed attitude to the virus and nurturing the idea that it will pass was a sign of a man and his administration unwilling to listen to the experts. He is paying for that now. He blamed allies for not adopting tough immigration measures that he said had prevented a wider outbreak in the U.S. Trump is struggling to deal with this and pushed into a corner may react poorly. His speech last night was the ramblings of an idiot and he strays off-piste all the time with crass ad-libs. He overstated the European travel restrictions, saying he was “suspending all travel” from the continent, and suggested they would also apply to trade. EU airlines are due to open about 15% lower this morning! He tweeted later that trade wouldn’t be affected, and the Department of Homeland Security clarified that the restriction applies generally to foreigners who’ve been in Europe within 14 days. Italy has locked down the whole nation for goodness sake. This is NOT the time for blame and the US will struggle to contain this.
Investors correctly expected more from Trump and futures took another 4% dive after his appearance and we are now firmly in a bear market and that impacts the bigger investors like asset managers. If Trump can close American borders, there is a danger that he closes US financial markets to try and stem the carnage on Wall St. Who knows what knee-jerk reaction they will come up with but vols are probably headed higher while we wait and see? It was Trump’s election to lose and it may well be slipping away now. Biden is due to make a speech today and he is going to lean heavily on experts for references to the virus I am sure. Trump gambled that this would pass but his arrogance has finally caught him out but he will go down fighting and that makes him dangerous. Trump does not seem to know what he is dealing with here. That, in itself, is a massive concern.
Next up today, we get to hear exactly what the ECB can do with this issue with rates already negative and a balance sheet which dwarfs the Fed’s. I think they may make a gesture and cut 10bps (100% priced) but that will do more harm than good for the already fragile banks but it is targeted loans that they may focus on. TLTROs at ultra-low rates looks a possibility with a shift to SME’s and if they really want to go all in then they could suggest looking at the Capital Key ratios. Lagarde will make a lot of soothing noises but it is the actions that will be focused on. Something big has to happen and the last thing they need right now as the Fed cuts to zero is a massive rally in the EUR. This is going to be a real test for Lagarde and remember this committee is split on what methods should be used. It is all very well her screaming at governments to help but the ECB got themselves into this mess; did Draghi leave at the right time or what? The crisis the economic world faces are becoming clear to see and goodness knows what the consumer is thinking but spending on non-essentials is not on their minds; the data is about to collapse. Right in the middle of all this we have an on-going oil price war. For those with dry powder looking for opportunities still, on a macro basis, maybe look to India or China, two of the world’s largest oil importers as this will help a lot.
The danger here with 60-40 equity/bond ratios on many portfolios is that the bond move is way ahead of equities and if investors start taking off the bond leg, then the equity leg is naked; exposed and will have to be sold. The bigger guys are now having to look at this now that we have fallen 20%. There is also still stress in the repo and funding markets and I am sorry but I am struggling to find much good news to bring; a credit event seems more than likely.
The Fed has increased the size of its daily bailout facility and is the second time this week after ramping up their facility from $100 billion to $150 billion on Monday. Something is wrong or broken here, as this continuing liquidity crunch is not only bizarre, but increasingly concerning, as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE. To get that the Fed needs rates near zero again.
All this as it has been made clear that a mountain of easing and spending is coming. Merkel suggested possibly 60-70% of the German population could get infected and the WHO has finally admitted this is now classified as a Pandemic. Is there any good news out there? (It’s getting lighter in the mornings). Will Germany start spending?
Again it seems like there is a huge stress in the corporate debt world as companies face both a supply and demand shock and the margins just are not there to cope with this. The cost to stave off a global recession is going to be massive. Earnings forecasts are going to have to be slashed along with growth outlooks for H1 as millions of workers are sent home and travel is banned. We have seen 20% market drawdowns in the past but have any been this swift? (This is the fastest drawdown from a peak into bear market in history, and worst start to a year since 2009.) The oil situation has exacerbated the stress in credit markets as following Monday’s plunge in oil prices, more than $140 billion of bonds issued by North American energy companies are at risk of losing their investment grade status. A high number of bonds from high grade rated oil producers already trade with credit spreads approaching distressed levels. Worse, according to recent data, a prolonged downturn could affect an additional $320 billion of triple-B rated midstream debt. There must be real stress there and lenders must be wondering how safe those loans are.
The FT noted that almost 12% of the $936BN of bonds issued by US oil and gas companies are were trading on Monday with a yield more than 10% points above Treasuries — a commonly used definition of distress. Among junk-rated borrowers, issuers with ratings below triple-B, which account for $175bn of the total, the proportion of debt in distressed territory has risen to almost two-thirds. I keep hearing the banks are in good shape but when you owe a bank a few 100k it’s your problem but when you owe them billions; it’s the banks problem. For years as central banks forced rates lower, they removed risk premia from high risk assets. The drive for yield, saw investors ignore the fact that there were no insurance premia. Companies have gorged on cheap debt for a decade, sending the global outstanding stock of non-financial corporate bonds to an all-time high of $13.5tn by the end of last year, according to the OECD, or double where it stood in December 2008 in real terms. The day of reckoning is here and we need to take a long hard look at where central banks have taken us. What is confusing is just where the USD goes now.
Meanwhile, I feel sorry for Italy and I am told the health system is akin to a war zone but my fear is that they may be a template for what may be coming but that is rather a sobering thought. Throwing money at this in the form of tax cuts is missing the point. The people dealing with this at street level need the funds, beds and ventilators. Spend money yes; loads of it but treat the cause. Italian doctors and nurses say they cannot cope. “We gutted entire hospital wards to make room for the seriously ill. One of the best healthcare systems in the world, the Lombard one, is one step away from collapse” said a spokesperson for VICE. But many are a bit late with thoughts of hedging and even gold has not helped much as it fell again last night. Travel restrictions could see airlines grounded for weeks. The knock-on effect could be brutal but we simply do not know how much damage this panic is causing or how long it will last. Will eradicating the virus get things back to normal quickly? That depends on just how much damage has already been done and from where is am sitting, it looks pretty bad already; where are the stock buybacks when you need them? Where are the rating agencies?
Oil, if it stays down here for long, is sending deflationary winds towards the US and a swap rate that measures expectations of the average level of inflation over five years, five years from now, sank to 1.16 per cent, its lowest level since records began in 1999, before edging higher. Meanwhile, the 10-year “break-even” inflation rate dropped to 0.92 per cent — the lowest level since March 2008. The Fed is going 50bps at this month’s FOMC at least. Investors are pricing in no growth and falling inflation; they have to act. I think Powell could have cut without the oil price war so he may be required to do more than cut rates and the fall in inflation expectations gives him the ammunition to go large. But again, before they meet, Lagarde has got to pull a rabbit from a hat today. My concern is that when all this calm’s down and the virus is a thing of the past and we are all back at work, that the central banks and populist governments refuse or can’t take back the drugs; that will be the next problem. But even if a cure is announced, the time it takes to get it out there could be months. Some real damage could be done by then and society is going to be tested as well as governments.
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Strategy:
Macro:.
Long Gold @ 1639.00 Stop below $1590.
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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