Good morning.. Markets had a better night last night but the surprise yesterday was the disappointing reaction to what was a massive Fed stimulus injection. It is enough for me to take off the EUR short recommendation and I think we may see the USD move a little lower, especially if stocks hold up today and the US congress dump some of their politics and get around to agreeing a financial package to help the economy on a fiscal basis. Gold is higher and I fully expect this to continue as there seems to be something of a supply issue as Swiss refineries shut down. The weaker USD will also help if seen and a lot of the big margin calls have been settled. The Fed moves were absolutely huge but still the markets want more from the fiscal side. It’s coming and the joint stimuli are going to be massive. We just need to get past peak virus. PMI data starts today with the EU, UK and US all posting what will make sober reading; the reality is here now in the data but we know this is coming. Another choppy session ahead..
Keep the Faith..
Data.. All Times GMT
08:15.. France PMI MFG Prelim March Cons: 40.0 Prev: 49.8
France PMI Services Prelim March Cons: 42.0 Prev: 52.5
08:30.. Germany PMI MFG Prelim March Cons: 39.6 Prev: 48.0
Germany PMI Services Prelim March Cons: 42.3 Prev: 52.5
09:00.. EU PMI MFG Prelim March Cons: 39.0 Prev: 49.2
EU PMI Services Prelim March Cons: 39.0 Prev: 52.6
09:30.. UK PMI MFG Prelim March Cons: 45.0 Prev 51.7
UK PMI Services Prelim March Cons: 45.0 Prev: 53.2
13:45.. US Markit PMI MFG Prelim March Cons: 42.8 Prev: 50.7
US Markit PMI Services Prelim March Cons: 42.0 Prev: 49.4
14:00.. US New Home Sales Feb Cons: 750k Prev 764k
US Richmond Fed Manufacturing Index Cons: -9 Prev -2
Speakers:..
17:30.. The Eurogroup will convene via video conference to work further on a coordinated crisis response
Details 24/03/20
The Fed goes large and the UK locks down; what next? Turning Japanese and following a busted formula. Square EUR.
As I said on Monday, the Fed had to do more and more it did; a lot more. In a surprise announcement Monday before markets opened in New York, the Fed said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs at rock-bottom levels — and to help ensure chaotic markets function properly. It also set up programs to ensure credit flows to corporations as well as state and local governments. The Fed unveiled an unprecedented expansion to its mandate, announcing open-ended QE which also gave it the mandate to buy corporate bonds (in the primary and secondary market) to unclog the frozen corporate bond market and we are just one step away from a full Fed nationalization of the market (only Fed stock purchases remain now).This is a big move and for a while, weakened the USD and saw stocks rise but neither lasted. Yet again the US markets had a bad close as any rally at present is sold into. The question now is what more the Fed can, or is allowed to do now? The big stress area is still in the credit and funding space and not a lot has changed there. Markets swung wildly yet again and vol was elevated.
Having seen US yields in the 10yr space drop below 0.7%, we bounced back to 0.78% at the close but rose further overnight with USTs yielding 0.815% as I type this. As expected, we got nothing from the call between G20 members, which kind of shows they have no solution.
Meanwhile, GBP had a muted reaction to the story that the UK is now in full lockdown with non-essential shops shut, all gatherings of more than 2 people cancelled and the country being forced to stay indoors for at least 3 weeks! That is going to put a strain on everything from businesses to relationships, as the country literally stops functioning. The UK is worried that it remains on the same curve as Italy shaped and the worst is yet to come. There was some good news after US stocks slumped again into the close last night; Asian stocks and U.S. futures climbed on Tuesday after global equities hit their lowest level since 2016, the dollar snapped a 10-day rally and Treasuries dipped as appetite for riskier assets revived.
Benchmarks in Tokyo, Hong Kong and Sydney climbed at least 2%, and Korean shares jumped about 7% as the government announced measures to stabilize financial markets. I am uncertain about the USD here but will take the short back after the extreme Fed actions at 1.0778 (time of writing). To be honest, the USD should be lower and stocks a lot higher after what the Fed has done. It seems the Fed is primed and prepared to buy just about everything.
The Fed are clearly doing all they can but still seem to be seen as playing catchup and a lot of this could have been done earlier but markets still want to see if politicians can dump the politics and agree massive spending packages. Lawmakers failed to agree on a stimulus bill over the weekend and again fell short of the needed Senate votes for a deal on Monday. Time to dump the politics and get on with the issues facing them as they are more than urgent. Apart from buying equities, there is not much more the Fed can actually do. Gold took full benefit from the lower USD and Fed policies and rose well above $1560 and I think this could continue now that most of the margin calls are done and settled. Gold bounced and just kept going.
There may even be a supply issue for physical gold bars. Europe’s largest gold refineries have struggled to keep up because of the region’s widening shutdown. Valcambi, Pamp and Argor-Heraeus are all based in the Swiss region of Ticino, near the border with Italy. Local authorities announced in recent days that production in the area was to be temporarily halted.
Europe, the UK and the US all get some preliminary PMI data through the day today and it is likely to make rather sober reading as businesses continue to close and staff are laid off in droves; the worlds manufacturing has stalled and services also will have taken a direct hit. We saw some evidence of that last night in Asia and Oz. Services particularly weak. The Fed also on Monday revived TALF — a facility dating back to the 2008 financial crisis — which gives the Fed the ability to buy securities backed by student, car and credit-card loans, as well as loans to businesses through the Small Business Administration. The Fed has gone all in; over to the government now. This is a huge shock and awe stimulus package but viewed another way, it complicates any future exit strategy and extends a long post-Lehman crisis legacy of distorted risk premia in markets. But that is for another day; right? Just like the debt issue. A highly indebted US corporate sector, which to be honest was fuelled by Fed policy objectives since the last crisis, is being stripped of earnings growth and cash flows for an indeterminate period. Certain sectors are now at extreme risk of tipping into junk or defaulting. The energy and travel sectors lead this but it is a broad problem with many companies running such tight margins and large debt piles.
Maybe some should go to the wall as executives have milked them dry in the good times and shared in the spoils with shareholders. There is deep moral hazard here bailing them out. Having been partying through the good times, they now want the taxpayer to bail them out; that stinks. What will irk the Fed will be the muted reaction in some assets, especially US stocks. As buyer of last resort, the Fed balance sheet is about to explode in size; usually action that would see stocks soar. Again this was a massive boost from the Fed and look where we are. I guess if we look at the BoJ’s track record and impact from buying everything that is not nailed down, including equities, I guess we may realise why the move was muted.
The world’s central bankers have turned Japanese and it seems like Japan was the template after all for the rest of them. So that begs the question; what happens now? The Fed and other central banks are following the BoJ method which clearly did not work. Oh dear! Maybe all that is left is one almighty reset and let a few things go and start again with some more rules in place. The world has possibly changed; forever.
The immediate prospects for markets look bleak. As politicians’ bicker, we’re still waiting for clarity from governments on rescue packages, for further central bank liquidity programmes and more rescues – all actions designed to stem the overwhelming sense of imminent disaster. Some pundits think another raft of government bailouts and supports, plus more rate cuts, QE infinity and even direct buying of the underlying stock markets could still create a rally and take markets back up. The trouble is that Japan has tried that and it didn’t end well. We may be in the midst of a New World Order being born. Surely something has to change as this system seems busted to me. The developed nations of the west have not even reached peak virus yet and will see much higher falls in growth in the short-term – there are warnings of a 25% down spike in the US and a 30% joblessness rate! No one knows and these wild guesses get us nowhere. Before we can think of a rally in the market, we need to find a base first. I just wonder how the likes of Softbank’s valuations are sitting now; watch the credit space.
This is so much more than a flu virus as everything is unwinding from supply chains to years of central banking experimentation that took us here along with an oil crisis deliberately started for political gain. We are facing a health crisis, a financial crisis and an immigration crisis (unless you had forgotten) and all seem likely to have a dramatic impact on our normal way of life and how financial markets will work. Without radical change, we are all destined down the road of Japan (Fiddling while Rome burns). There is so much we do not know but surely this is a perfect time for change in many things; a reset. Maybe a reset will be forced upon us; I simply do not know but change is coming. Perhaps realizing that facing down a second great depression if the US economy is halted indefinitely as a result of the coronavirus pandemic would not improve his re-election chances, Trump struck a defiant tone at Monday’s coronavirus press briefing when he said that the American economy can’t remain slowed for too long to fight the coronavirus, declaring that the country “was not built to be shut down.” This is a real danger for the US as they are not close to peak virus yet and he wants to get back to business as usual. He, and many thousands of Americans, may pay dearly for this political game he is playing. Shocking.
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Strategy:
Macro:.
Short EUR @ 1.0932 with a stop at entry.. Taken profits this morning at 1.0778
Long US 10yr yields @ 0.835% (short USTs)
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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