Market Quick Take - March 25, 2020

Macro 3 minutes to read
Steen Jakobsen

Chief Investment Officer

Summary:  Markets put in their strongest close-to-close rally in the US since 1933 yesterday in a delayed response to the massive new Fed backstop and the anticipation of US fiscal rescue package, which was forthcoming in late Asian trading hours this morning and looks set to be a whopping $2 trillion. Is this enough to allow the market to pause for breath, at least into quarter end?

What is our trading focus?

A massive $2 trillion rescue package deal has been agreed by the US Congress and President Trump and will likely be signed tonight, providing a further boost in sentiment overnight – more details below, but trading focus now is on whether, for example the US S&P500 can post its first two consecutive up-days in a row since this entire sell-off was set in motion.

  • AUDJPY – the classic proxy for risk appetite in G10 FX, this one has bounced from almost 60 to above 67 and is running out of room and will be nearing important resistance at 0.7000.
  • ITALY40.I (Italian equities) – the positive news off the Fed’s open-ended QE programme and the big US stimulus package almost voted through the Congress could lift Italian equities - one of the most hard hit equity market. The major short-term level in FTSE MIB futures is 16,746 and then a bit longer term 18,417 (38.2% retracement level).
  • EUN5:xetr (EUR investment grade corporate bonds) – US investment grade corporate bonds were up 11.5% from the lows which means that European investment grade corporate bonds could have another 3-5% on the upside.
  • XAGUSD (Silver spot) – As per our latest note we see further upside to silver given its historical cheapness to gold and as industrial metals in general receives a boost from the FED action and emerging supply bottlenecks.

What is going on?

The US government delivers an enormous $2 trillion package, which is nearly 10% of US GDP – not all details are clear on the deal, but a Democratic proposal late yesterday included measures like requiring creditor forbearance on mortgage and car payments.

March  flash PMIs collapsed everywhere – particular for services, with the EU Flash Mar. Services  PMI at an unprecedented 28.4, UK Services at 35.4 (UK going into full Covid19 shutdown only yesterday) and the US Markit Flash Mar. Services PMI at 39.1.

Covid 19: India has announced its own profound shutdown levels for the nation of 1.3 billion, and Indonesia may be tilting that way after an acceleration in cases and restrictions there.. In the US, significant shutdowns are now affecting around 100 million, so almost a third of the population. In the UK, Boris Johnson is ordering temporary hospitals to be built to deal with a mounting crush of patients.

Volatile volatility as the VIX fell all the way to 36.24 during the rally but then came roaring back to close at 61.67 and the curve went further into backwardation. A potential sign that the volatility market is not really buying this rally.

Gold rallied strongly yesterday after the US Fed introduced open ended QE. This was a reminder of the actions in 2009 which triggered a strong rally in precious metals during the following years. The blowout in the basis between spot and COMEX futures has highlighted the risk to supplies as the coronavirus has led to the shutdown of three major refiners in Switzerland. The world is not running out of gold but it is currently held either in the wrong bar size or in the wrong locations.


What we are watching next?

Quarter end bump in risk appetite? – after the brutal sell-off in equities since the Market top just a little over a month ago, equities posted their strongest single day rally since 1933. It is an important inflection point now that the Fed has gone about as big as it can at the start of the week and the US government has followed up with its massive rescue package.

EU coronabonds and ESM support on fiscal side: the EU is the next focus for a major fiscal response that goes beyond the individual countries efforts to stimulate their respective domestic economies. The idea of “coronabonds” to bring relief across the union has been circulated as a backdoor to the beginning of at least partial debt mutualization – the size of the program will be an important signal for further reducing existential concerns for the union. Eurogroup President Mario Centeno said yesterday that there is broad support for tapping the European Stability Mechanism (ESM) for 2% of respective national GDP levels. This looks rather cautious, but it’s a start.

The USD and the JPY into Japan financial year end. A coincident indicator of relief across global markets would be a weaker USD and weaker JPY into the end of this month as well, as Japan closes its books on its financial year at the end of the month.

Calendar on Monday (times GMT)

  • 0900 – Germany Mar. Final IFO Business Climate Survey (original reading 87.7)
  • 1430 – US Weekly DoE Crude Oil and Product Inventories (implied demand figures will be interesting for sense of the scale of the US shutdown)

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