Market Quick Take - March 23, 2020

What is our trading focus?

Trading focus is squarely on stocks, treasuries, the US dollar and oil after markets opened this week in a negative mood and US equity futures went quickly limit down after the US Congress couldn’t agree on the terms of a rescue package for the economy late Sunday. This keeps our focus squarely on when the deleveraging across global markets stops and in particular, when the US dollar turns lower.

• EURUSD, USDJPY – the recent US dollar strength is an important sign of stress on global liquidity, and is one of the most important market indicators to watch – looking at EURUSD moving above 1.10 and/or USDJPY moving below
• OILUSMAY20 and OILUKMAY20 finding support? Both holding above last week’s low despite major US city shutdowns and more airliners parking their fleet. Volatility however hovers at close to 200% so be VERY careful.  The key resistance levels to break are still more than 10% away.
• 10YBTPJUN20 (Italian 10-year government bonds, or BTP’s) – a key indicator on whether the German move to provide stimulus is seen as having wider EU implications (i.e., supporting BTP’s), particularly after ECB hinted it is willing to bend the rules on purchasing more peripheral debt
• 10YUSNOTEJUN20  (US Ten Year Treasury) – US treasuries found strong support all along the curve on a wobbly Friday session for risk appetite. This is an important sign of at least stability at the margin for this most important of global safe havens after recent signs of dysfunction. Further drops in yield are a likely indication of the ongoing dash for cash and safety.
• LQD:arcx (US investment grade corporate bond ETF) – with underlying single issues difficult to trade, the market has piled into selling this ETF, which has traded recently at a discount to the supposed NAV of its components – this is an indirect way for traders to look for risk appetite in the broader corporate bond space.
• HYG:arcx (US high yield bond ETF) – see above comments for LQD, as the HYG represents the high yield corporate bond sector, which is even less liquid in times of market stress.

What is going on?

Germany announced a large stimulus package over the weekend at up to 10% of German GDP as the country is finally set to engage the state of emergency required to abandon constitutional limits on deficit spending.

Covid-19: German chancellor Merkel entered isolation after her personal doctor was diagnosed with Covid-19. A staffer for US Vice President Pence tested positive and US Senator Rand Paul tested positive.

US St. Louis Fed President Bullard says that the US jobless rate could go to 30% and that US GDP in Q2 could risk dropping to -50%, figures that are multiples of the worst data since the Great Depression.

Nordic funds halt redemptions: In Sweden, Denmark and Norway, a number of high yield corporate lending funds halted redemptions as there is suddenly no market at present for the instruments in their portfolio were they forced to liquidate holdings.

Mexico cut its policy rate 50 basis points to 6.50%, joining other EM central banks in similar moves, even as the Mexican peso has devalued as much as 25% from recent highs against the US dollar, taking USDMXN to its highest level ever near 24.75.

RBNZ starts QE - in a surprise announcement, New Zealand's central bank announced NZD 30 billion in QE to deal with the Covid-19 emergency. The country has also announced a Covid-19-related total shutdown akin to the strictest measures in Europe.

What we are watching next?

The US rescue package – it must come Monday, it must be large ($2 trillion to start, but perhaps more important to extend an open-ended commitment) and it must provide cash to households and small businesses to keep these important economic actors ready to resume their economic output once the Covid-19 quarantines lift.

Fed to broaden purchase types? US Minneapolis Fed president Kashkari said in an interview over the weekend that the Fed can do more to bring stability, including purchasing corporate and municipal bonds. This could be contentious with Democratic US lawmakers, but is a massive area for concern as the US corporate lending market is on its knees after blowing a bubble in recent years. Commercial mortgages are another area of potential systemic concern.

USDCNY – while USDCNY has traded with a percent of its high for the cycle in 2019, but has been quietly managed by China relative to the wilder gyrations elsewhere. Any sign that China is abandoning its commitment to CNY stability and strength is an added global risk in an already touchy environment.

Calendar on Monday (times GMT)

• 0800 – Switzerland Weekly Sight Deposits (evidence of scale of intervention)
• 1500 – Euro Zone Mar. Flash Consumer Confidence
• 2200 – Australia Mar. Flash Manufacturing / Services PMI