Market Quick Take - March 18, 2020

Macro 3 minutes to read

Steen Jakobsen

Chief Economist & CIO

Summary:  Markets staged a solid rally yesterday in the US as the Fed policy response to the unfolding crisis has reached a furious pace as another half-trillion USD repo was announced together with the restart of a 2008-era commercial paper purchase facility. The Trump administration was out floating a large stimulus package of USD 1.2 trillion. Overnight, equities erased more than half of yesterday's gains.


What is our trading focus?

  • The stock markets…
  • 10YBTPJUN20 (Italian 10-year government bonds) – with Germans warming up to joint debt issuance in Europe there will most likely be focus on European government bonds
  • USDJPY – USD strength continues due to USD funding issues and safe-haven dynamics
  • Long volatility (VOOL:xetr) – VIX futures term structure continue to signal stress and tailwind for long volatility positions with the spot at 76 and the May VIX futures contract at 53.
  • ETF on 20+ US Treasuries (TLT:xnas) – Helicopter money is driving long rates higher with the biggest move in US 30-year yield yesterday since 1982.
  • Delta Air Lines (DAL:xnys), Deutsche Lufthansa (LHA:xetr) – potential bailouts in the US and Europe combined with the EU’s decision to close its external borders will move this industry.
  • HG Copper (HGK0) drops to 2016 low as it becomes the commodity hedge against global recession, but virus outbreak likely to cut production while fiscal spending could trigger a pickup in demand. 

What is going on?

S&P 500 (cash index) rallied 6% as the Trump administration moved closer to “helicopter money” by promising “checks” to Americans within two weeks and a total package of stimulus of as much as $1.2trn (5-6% of US GDP). Read Christopher Dembik’s research note It’s time for free money for background. The idea immediately moved US 30Y yields higher ending the session 40 bps higher at 1.69% - the biggest selloff in T-bonds since 1982. US 10Y/2Y yield also climbed to 45 bps extending the steepening that started early last week.

Overnight, US equity futures slumped limit down (-5% from the close of the cash index)

US 10-year breakeven rates are breaking down to 0.69% from 1.78% in the beginning. These are the lowest levels since the Great Financial Crisis in 2008.

UK Chancellor Rishi Sunak has announced a £330bn emergency rescue package for UK business, saying the UK government will do “whatever it takes” to protect companies and incomes on a huge scale.

Link: USD funding article

Angela Merkel says she is open to consider joint debt issuance in Europe as proposed by the Italian PM Giuseppe Conte. This would be a transformational step in the European Union and something that has longed been proposed to strengthen the euro area. The Dutch PM Mark Rutte expressed more concerns regarding joint debt issuance. Spain announced up to EUR 200 billion in support to economy

The Fed is restarting a commercial paper (CP) programme with parallels to the 2008 crisis as CP yields have soared highlighting recent monetary policy moves inadequate to address real funding issues for companies rolling daily credit lines in the commercial paper market. Another facility for primary dealers versus

The VIX closed at 76 with the VIX futures contract expiring in May (2nd contract) rising during the session as long volatility continues to pay off with the VIX futures term structure in backwardation.

ZEW Survey Expectations for March plunged from 8.7 in February to -49.5 in March compared to -30 expected reaching levels not seen since late 2011 during the height of the euro crisis. The levels have historically been consistent with negative GDP growth q/q.

The EU is closing its external borders for 30 days for all non-Europeans. This will obviously increase the economic damage to the airline, leisure and tourism industries.

IATA says that airline industry will need $200bn to survive the current demand shock and that most major carriers will run out of cash within two months.

Our ‘Bounce back basket’ is down 11% since March 9 with the two biggest decliners being ConocoPhillips as oil prices continue to be under pressure and CTS Eventim operating an online booking system for tickets to events.


What we are watching next?

USDJPY – does it hold the 108.00 line? This is a key technical area for the currency pair and Japan is heading into the final two weeks of its financial year (end Mar 31), with several past examples of major trend changes in the March/April time frame for USDJPY. We are also watching EURUSD, USDCAD and AUDUSD as the USD continues to strengthen.

Gold putting up a strong fight against the latest collapse in forward inflation expectations. As a result the 10-year real-yield (a key guide for gold) has jumped from -0.55% on March 6 to the current +0.31%. We question these inflation expectations and maintain a positive outlook.

Bonds – At this point, the spike in long yields can be called volatility, but another day like yesterday could bring forward yield-curve-control

Calendar (times GMT)

  • 1230 – US Housing Starts (Feb) – again too early to show COVID-19 impact
  • US FOMC Meeting (cancelled)
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.