Head of FX Strategy
Summary: Markets have bounced hard from the recent vicious declines in risky assets on the hopes that the G7 are set for a major coordinated action to bring relief to markets. We are skeptical on the ability for the plunge protection team to provide a sustained relief bounce here and continue to advocate a cautious stance.
Trading interest
Please have a read of a piece I wrote yesterday considering three possible scenarios for financial markets from this coronavirus outbreak – a piece for thought and perspective, not a forecast!
A ripping comeback in risk sentiment yesterday materialized in the wake of a G7 statement declaring the intent to hold a conference call on the coronavirus outbreak (today at 1200 GMT / 1300 CET) and teasing both monetary and fiscal measures. There was some moderation of the move overnight after another statement confused with indications that no coordination of measures should be expected but that the statement is still under discussion. The episode is a prime exhibit for how vicious market moves can be in either direction due to very poor liquidity.
As for further stimulus efforts from here – rate cuts are the weakest of weak medicine and fiscal stimulus is only relevant in the context of credit forbearance – keeping businesses in operation to meet payroll, roll debt, etc.. as long as any extended pandemic . Achieving such stimulus at the necessary scale and in sufficiently short period of time will be difficult if the coronavirus pandemic leads to wide spread reduction in activity.
As for coronavirus news, the US is of most concern at the moment, with cases popping up all across the nation and stories of lack of precautions, lack of testing, and lack of transparency from the CDC which could lead to a vicious public response in the form of hoarding and staying away from public spaces and reducing travel. There are already anecdotal stories of this, but a critical mass of cases or stories could see this kind of behavior notching higher by orders of magnitude. Only some of the February US data is showing signs of the virus impact (yesterday’s ISM Manufacturing was weak as the Import orders component collapsing from a surge to over 50 in January (resumption of trade after US-China phase 1 trade deal?) to a parlous 42.6, the worst since 2009. Despite the G7 attempt to offer support and a likely Fed rate cut today, I am looking for the market to fade this bounce quickly – possibly as early as today.
I have run out of time to cover the US Super Tuesday primaries today – but these are important and the odds are rising of a “brokered convention” – the most contentious outcome for Democratic voters. As well, has anyone thought about the risk that these very old candidates (maybe even Mr. Trump) may be forced to curtail their campaigning activities due to coronavirus fears at some point?
The RBA cut rates by 25 basis points overnight as widely expected, but with a minority gunning for a 50 basis point cut, the Aussie actually firmed overnight, with the backdrop of a sentiment rebound and promises from Australian Prime Minister Morrison to bring support to the economy to keep Australians in their jobs provided an additional boost. The RBA statement was as positive as optimistic as usual – clearly out of line with the reality on the ground. A collapse in Building Approvals to the lowest level since 2013 was a sign of the profound disruption from the wildfires.
Chart: EURUSD
Until today, EURUSD has been a one-way street to the upside since reaching its lowest levels less than two weeks ago. A glance over at market positioning ahead of this deleveraging episode in risky assets would have made clear that an across the board reduction of positions might see some EUR support – particularly if a sizeable chunk of the euro selling is linked to carry trading or funding for investments reaching for yield in general. An economic activity shutdown like the one from a spreading reaction to the coronavirus outbreak hits surplus/exporting economies far harder than net consumers, so we wouldn’t expect this EUR outperformance to extend notably from here against the US dollar once a significant positioning adjustment has been made (i.e., already?). 1.1200 looks like a rather major line in the sand and we will watch the backfilling here with interest for how sustainable this move proves – first key support down at 1.1000.
Today’s G-10 rundown
USD – the US dollar sharply lower versus the high beta EM currencies responding to the strong bounce in risk sentiment, but the pattern not the same within G10, where the USD firms a bit versus the EUR and JPY on the same development. Still interesting that the market has removed a 100 basis of Fed policy in the forward expectations without more notable weakness in the USD (EURUSD aside – see above chart comments).
EUR – the euro appreciating on a major positioning adjustment that may be far from complete, but not looking for the rate of broad appreciation to potentially slow from here (EURJPY shorts?) after the initial shock.
JPY – the JPY should remain the safe haven of choice as long as bond yields continue lower and on further waves of deleveraging.
GBP – EURGBP bulled up to the 200-day moving average on the combination of speculators finding themselves heavily positioned the wrong way around heading into this episode of deleveraging. Can’t call an end to this just yet, but watching the quality of any retracement here, as with all other EUR pairs.
CHF – EURCHF could be one area to test the notion that the broad Euro rally has been primarily positioning- and carry-trade based.
AUD – the Aussie getting a modest boost as the RBA failed to panic with a fifty-basis point move and amid hopes for fiscal stimulus on the way. But the bounce in AUDUSD, for example, would have to threaten above 0.6700 to begin reversing the well established down trend.
CAD – USDCAD trying to reverse lower recently on the bounce in sentiment, would need to punch down through 1.3300-1.3250 to reverse the recent move higher.
NZD – AUDNZD traders have another chance to test the thesis that this pair gearing for a rally on the principles of longer term valuation and RBNZ playing eventual catchup with rate cuts.
SEK – EURSEK contending in vicious, churning fashion with the 10.60-65 area that contains the 200-day moving average and looks like a pure sentiment play on coronavirus/deleveraging (further fears for global growth pointing higher for the pair, etc.)
NOK – EURNOK rally has room to consolidate to 10.20-25 without reversing and NOK vulnerable to further weakness if oil can’t put in a rally here.
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
