Macro: Sandcastle economics
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Market Quick Take - March 16, 2020
Steen Jakobsen
Chief Investment Officer
Summary: Big overnight action as Fed leads central banks in cutting interest rates by 75 bps to 0-25 bps target (Zero-bound) + an expansion of the balance sheet by USD 700 bln. Market however did not like the message and it limit-down until regular US open. ASX in Australia fell 10%, and we could see QE start later this week. Overall liquidity is extremely thin and solvency is the real issue.
What is our trading focus?
PHYS:arc – Physcial Gold ETF
LCOC:xlon – Cocoa close to go below 2003 low
US500.I – S&P500 CFD limit down – watch open
What is going on?
Policy makers is in total panic cutting rates and providing liquidity, governments are stepping up fiscal support, but remember there are three negative credit impulses: collapse of global demand and supply lines, plus energy war which is destructing capital in the energy sector. Policy makers can deal with one, maybe two fall-outs but not three right now.
China’s Jan-Feb data starting to come through: Retail Sales -20% YoY, Investment -13.5% YoY – this implies Q1 GDP of -10% YoY
Expect these numbers to be mirrored in Europe and the US.
Physical Gold trades at huge premium to paper gold. Check PHYS:arc vs. GDL;arc indicating ‘Dash for cash” still continues
Our US value model on MSCI USA Index is now back to average valuation. In 2008/09 it had to go to -2.5 standard deviation cheap before it turned. Goldman Sachs sees 15-20% drop in S&P500 earnings, we see 30% YoY drop.
EU Banks: -41%, Nikkei -29%, DAX -38%, NASDAQ -23% & S&P -24%.
Commodities: Deleveraging is and was the overriding theme among hedge funds. This was highlighted in the latest COT report covering the week to March 10. It showed that both long and short positions were being reduced. The biggest long reductions were seen in crude oil, gold, sugar, cocoa and cotton while short-covering was seen in natural gas, soybeans and corn.
Physical Gold has opened up a premium to paper gold and it highlights the current selling pressure in the futures market from funds in need to realise cash through the sale of liquid positions. Check PHYS:arc vs. GDL;arc indicating ‘Dash for cash” still continues
What we are watching next?
G-7 telephone conference @ 10.00 AM Eastern time (1500 CET)
The meeting is scheduled for 30 min only – Don’t expect major initiative, but it needs monitoring
Liquidity – S&P and NASDAQ limit-down into open at 14:30 CET. USDJPY Currency SWAPS (the price of $ funding for Japanese currency based investors) trades at 113 BPS vs. long average of 20 bps – This show global USD liquidity is very tight
US Mortgage market on the open as 30Y mortgage rates rose dramatically on Friday again indicating il-liquidity.
Calendar (times CET)
1500 – G-7 teleconference
EU Group meeting
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