Market Quick Take - March 27, 2020

Macro 3 minutes to read

Steen Jakobsen

Chief Investment Officer

Summary:  The market rebound took on added energy with the US equity market posting a technical bull market recovery from the ultimate lows despite the eye-popping 3.3 million in US initial weekly jobless claims. We continue to watch whether the market can find stability and how the EU moves forward after the EU meeting yesterday showed lack of consensus on debt mutualization.


Please see our Special Edition podcast and an article we penned pulling out some of the key themes for investors wondering how to position themselves both through this crisis and for the long-term in its aftermath.

The narrative now will be that if market conditions are normalizing and policymakers have gotten ahead of the curve, risk assets will continue higher driven by liquidity while safe haven long sovereign bonds should drop (the irony of QE), unless the long end is already being controlled via de facto yield-curve control.

In a sign of stability the US dollar fell 3.5% this week, the biggest drop in 10 years. We have seen the strong dollar, what we have called the Killer Dollar, as a major sign of liquidity constraints, the falling dollar has been a strong tailwind for the market the last two days.


What is our trading focus?

  • USDJPY – the USD has rolled over across the board in recent sessions, and with USD funding pressures easing from the Fed’s aggressive opening of swap lines.
  • EURJPY – the euro crosses are taking on added interest as the EU struggles to support the “debt mutualization via coronavirus bonds” as noted below – this could wear on the euro’s relative performance to a potentially hard-charging JPY (see above on USDJPY).
  • US500.I (S&P 500) – US equities are up 17.6% in three trading days. The one month forward return on S&P 500 post a 10% gain over three days has historically been around 6% on average, so technically there arguments for further gains here. Also rebalancing of strategic asset allocation portfolio and pension funds is also adding substantial flow into equities
  • EXX1:xetr (European banks) – yesterday’s rally saw utilities rise as much as financials which was odd as we would except financials to be a high beta play to positive sentiment. If the rally can continue today we expect financials to begin showing its high beta characteristics and lead the gains.
  • 10YBTPJUN20 (Italian 10-year government bonds, or BTP’s) – we put Italian BTP’s back in the spotlight after a disastrous EU meeting late yesterday failed to produce signs that the EU core ex France is opposed in principle to debt mutualization, even as the ECB operates aggressively to buy Italian bonds.
  • 10YUSNOTEJUN20 (US Ten Year Treasury) – weak economic growth is traditionally a strong supported of long US treasuries, while aggressive QE from the Fed in the past has been associated with weakness. The long end of the curve has gone very quiet and further strength might indicate that policymakers need to do even more to bring support or that yield-curve-control is in effect, which injects volatility elsewhere – a key development to watch.

What is going on?

The EU is struggling to support the “debt mutualization via coronavirus bonds” narrative that has developed in recent days. A failure of the EU to show solidarity beyond coordinating a healthcare response could reopen the existential angle on EU sovereign bonds, though the ECB is already abandoning prior rules on purchase distribution and aggressively purchasing Italian bonds. The German-Italy 10-year yield spread below 160 basis points on yesterday’s market close. The spread is opening in orderly fashion for now.

Oil price still languishing – articles abound discussing the physical reality on the ground that the world is running out of places to put oil production. Shutting in production can cause damage down the road to production potential.

Covid-19: US Covid-19 cases are the most in the world now on more widespread testing and the US death toll crossed 1,000 yesterday and the center of the pandemic could be shifting to the US.


What we are watching next?

Crossed the BULL/BEAR line in risk sentiment – now what?– yesterday’s rally took out the prior day’s highs – our bull bear line, so around 2550 in the S&P future and suggests a constructive bounce-back rally is in progress as long as this level holds – it was also the low as of this writing in the Asian session in the after hours consolidation of yesterday’s rally. Now the focus shifts to the 38.2% retracement of the entire sell-off wave from the all-time top to the lows – which is at 2641 for the June S&P future.

Quarter end rebalancing still a thing until next Tue – many have pointed to huge potential of rebalancing flows back into equities because of lopsided performance for bonds vs. equities in March and for Q1 are circulating – we’ll feel more comfortable in assessing the quality of this rally once we are in April.

The missing piece – Oil – We firmly believe the energy market is the only market with true price discovery. Oil has dropped 60% during this crisis. That 60% represents to us the absolute worst case scenario. One in which global societies are not able to slow-down or stop the Covid-19 virus. The virus can be deadly, but so is this the total lock-down. If the global economy is not moving back to towards some sort of normalcy by May, then further drops to that number are likely. For now though we remain constructive for a ‘fragile stabilization’ scenario

 

 

Calendar today (times GMT)

  • 1230 – US Feb. PCE Inflation
  • 1400 – US Final Mar. University of Michigan Confidence – it will be interesting to see the magnitude of the negative adjustment from the preliminary number as a sign of how Covid19 is impacting confidence

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.