The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Chief Investment Officer
Summary: Calmer markets across Asia today following a plethora of central banks moving to ease financial conditions and restore stressed liquidity conditions.
A lot more green on the screen, albeit restrained gains relative the big moves of late, after European and US stocks bounced overnight. CBOE VIX coming sharply off recent highs overnight also helping to soothe sentiment. Although the continued surge in both high yield and investment grade spreads, not confirming the relief rally. We still maintain that to have real confidence in a longer duration bounce volatility needs to reset meaningfully lower.
US futures have remained negative throughout the Asia session, but very volatile with big swings in both directions (Quadruple Witching today), tracking higher of lows at time of writing. Futures pushed higher mid-morning, but slumped on news Los Angeles County are issuing a stay at home order, including the closure of all nonessential businesses. And just moments later were hit again when news crossed that the Governor of California is issuing a state-wide stay at home order, largely because the state faces a shortage of hospital beds, so desperately need to minimise infections to prevent overloading the healthcare system.
The king dollar is taking a breather today allowing Asian currencies a day of respite. The Aussie dollar is reinvigorated today, bouncing back from yesterday’s lows as confidence returns on the news the Fed will be establishing a $60bn swap line with the RBA to ease USD funding squeeze. The RBA embarked on their first round of bond purchases, totalling A$5bn and spread across bonds between two and eight year tenors. The main purpose to lower rates across the curve and reduce borrowing costs for lending priced off the front end of the yield curve, which is generally most retail and wholesale. The measures will complement the government’s fiscal support package and help to alleviate downside risks for the Australian economy. Again, as with the first fiscal package, these measures from the RBA are likely the first line of defence and with time, more will be necessary as recession looms on the horizon.
The package is certainly a welcome development and a good starting point, but don’t forget the Australian economy comes from a position of weakness and desperately needed the fiscal contribution PRE virus. The economy has lost momentum since the second half of 2018, unemployment has risen, the private sector is in recession and both business and consumer confidence has been mired. Again all PRE virus. And more recently the bushfires and drought have also served a 1-2 punch to Australia’s economy. The COVID-19 outbreak continues to spread globally and as transmission increases in Australia, preventative measures become more drastic and disruptive to the economy.
What we’re watching:
The PBOC continue their stealth weakening of the CNY, setting the USD/CNY reference rate for today at 7.1052 – a twelve-year low. Whilst the PBOC want nothing less than a disorderly devaluation of the currency, they have been very clear they wish to detach from the importance of the “7 level”. A weaker currency would be desirable at present in order to boost exports and support the manufacturing sector, which is hit from the collapse in global demand. The weaker oil price allows for a weaker currency without raising the price of China’s import bill at present also.
But what does this mean for US/China relations, we know the US president is partial to labelling China a currency manipulator. Meanwhile tensions between the two superpowers appear to be on the rise again even before currency comes into question. President Trump has generated a great deal of criticism for his delineations of the “Chinese virus” and in response the Chinese state media have launched a full frontal campaign blaming the US for the COVID-19 outbreak.
Trump official asks states to delay jobless claims data according to the New York Times. The email, shared with the Times notes that the reports are monitored closely by financial markets and should remain embargoed.
In a speech Wednesday evening, California Governor Gavin Newsom said the state had received 80,000 unemployment applications just on Tuesday alone. If these numbers are extrapolated country wide we could be looking at 3mn jobless claims vs. 211k last week. No wonder Trump wants those numbers on lockdown! Given that the consumer drives approximately 80% of the US economy and is the heartbeat of the economy the direct cash handouts Mnuchin is touting had better come soon. Policy makers must underwrite the demand shock and helicopter drop payments directly to households along with support for cash strapped businesses.
Manufacturing Destruction: The March Philly Fed and Empire Manufacturing releases currently point to an ISM in the low 40s
Chief Investment Officer
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