Head of FX Strategy
Summary: The central banks and world governments have a tall task ahead of them in getting ahead of what is now a raging contagion across asset markets in the wake of a very weak speech from Donald Trump overnight on the Covid19 outbreak. We see material risk of a market holiday if the markets are unable to turn the corner ahead of the weekend.
First of all, apologies that I am bringing a tardy update today – all of Denmark has been put in virtual lockdown and this is causing a bit of disruption to our daily work-lives as we shift efforts to working from home and kids are out of school, etc.
Trading interest
Please have a listen to today’s Saxo Market Call, in which we discuss the disastrous address overnight from President Trump, which may be signaling that he understands his presidency is a lame duck one, as well as other prominent risks we are seeing across markets – most notably in US corporate credit. Also note that we will be putting out a quick morning note to help establish the day’s agenda – see our first effort. Finally, have a listen to our longer form Special Edition podcast we recorded yesterday that takes a wider, longer term view of where we are all headed with this in terms of the incoming policy response and the outlook for inflation and otherwise.
Markets melted lower in the wake of President Trump’s address overnight on the Covid19 “foreign virus” outbreak as he called it. His delivery was monotone and emotionless and signals that perhaps even feels that it is the end of the line for his re-election chances on his midhandling of the Covid19 crisis. Signs of the Democrats and the White House being far apart on the policy remedy needed have the markets in a bad state as well, as does the dawning reality of the scale of the Covid19 impacts. All professional basketball games have now been cancelled in the US and famed Hollywood star Tom Hanks announced he has tested positive for Covid19. The US equity futures were limit down at one point and we have to seriously ponder a market holiday declaration of a week or more – possibly as early as Monday as the Fed and the US government will need to put together the biggest of all bazookas to get ahead of the raging contagion across asset classes.
It is still very early in ECB presidency of Christine Lagarde, but she already faces her first “whatever it takes” moment today as markets have not been under this kind of pressure since the worst spots of the global financial crisis. EU banks are under massive pressure and the EU economy is shutting down entirely – action needed and now!
Chart: EURUSD
Until late yesterday, when it was clear that everything was selling off (bonds and equities), the EURUSD seemed to be trading in sympathy (negative correlation) to risk appetite, but some of the downside since yesterday may be on the US dollar liquidity fears and anticipation that the ECB is set to lower rates again – really the least effective and even counterproductive of its policy options. Still, we suspect that the EURUSD has turned the corner and will look for where, and if, it finds support. The first level is the obvious 1.1200 pivot area on the way up, followed by the 1.1100 area 200-day moving average and then the last gasp support areas of the 61.8% retracement down near 1.1050 and ultimate 1.1000 ahead of the lows.
The G-10 rundown
USD – the big dollar roaring back to life on this latest deleveraging – if not this week, then next week will see all out efforts to bring USD liquidity on an as-yet-unseen scale.
EUR – showtime for Lagarde – clear signs of injecting EU banks and coordination with EU governments critical for reviving confidence in the single currency.
JPY – the yen continues to stand tall here today, but has failed to post new highs against the US dollar as US long treasuries came under pressure yesterday – a development that reversed sharply overnight, however. Still prefer USDJPY lower here.
GBP – sterling getting punished – perhaps still some residual speculative longs to clear out and perhaps on the risk of an isolated UK post-Brexit – decline in GBPUSD looks worrisome and could see test of lows on a failure of
CHF – the franc picking up a stronger bid today, perhaps as market fears an insufficiently strong ECB response – status for EURCHF key in today’s sessions. Let’s not forget that SNB owns a lot of bonds and stocks if all of these are under pressure from here….
AUD – the Aussie following the risk off script and trading below. This feels far from over if the risk deleveraging doesn’t stop. BHP Billiton stock has collapsed – an important indicator of expectations for Oz economy.
CAD – oil price war brings risk of test of full cycle top of 1.4500+ in USDCAD if this continues.
NZD – kiwi seen as less exposed than Aussie to cyclicality of global growth, but liquidity also to consider as a NZD negative – AUDNZD working down into important long term area.
SEK – EURSEK ripped back higher and close to cycle highs after a weak CPI number and on deepening risk off today – value long term – but we can go anywhere with SEK for now – and especially NOK
NOK – EURNOK exploding higher – can’t keep this pace of NOK declines without official response soon, but if oil is going to 25 there is still more downside risk.
Upcoming Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
