Good morning.. I wanted to get this out early as Bond markets are getting smashed. The world’s governments are embracing MMT and massive stimulus packages are being unveiled. I guess they are trying to bridge the economy while we get through this ...
Good Morning.. Volatility still dominates and it is getting tough even holding FX positions now. We had a bit of everything again yesterday and the now customary ramp in to the Wall St close. But to no avail; we are lower again. The BoE decided to slash rates by 50bps before the scheduled meeting and before the budget announcement but so far there has been little impact on GBP. The BoE is another central bank that now has an empty magazine and they have said they will not go negative. Central banks are going all in but the BoJ and ECB still look rather hamstrung. Maybe the ECB will look at targeted loans(TLTROs), which may be moved below the refi rate!! But monetary policy is not a cure. The cases in the US are about to explode higher and Trump may be held responsible for ignoring the issue. Central banks are going to empty the tank and that means the Fed will hit zero soon and may start to increase the balance sheet again. That, to me, is a USD bearish story still. But USDJPY reacted strongly yesterday to a rise in US yields and vols are up at 2008 levels again. It’s going to be choppy; that’s for sure. I am looking to sell the USD but want to sell it higher and nearer the Fed meeting. These high vols mean that timing is everything now.. Not sure data matters much but I note the collapse in Aussie Consumer confidence last night. US CPI may be of note but still rather old news.
Keep the Faith..
Data.. All Times GMT
09:30.. UK Ind Production m/m Cons: 0.3% Prev: 0.1%
UK Index of Services m/m Cons: 0.2% Prev: 0.3%
UK Visible Trade Balance Cons: -7.00bln Prev: 0.845bln
UK Mfg Production m/m Cons: 0.2% Prev: 0.3%
UK Construction Output m/m Cons :0.1% Prev: 0.4%
UK GDP m/m Cons: 0.2% Prev: 0.0%
12:30.. US CPI Core m/m Cons: 0.2% Prev: 0.2%
US Core CPI yoy Cons: Cons: 2.3% Prev 2.3%
US CPI m/m Cons: 0.2% Prev: 0.1%
US CPI yoy Cons: 2.2% Prev 2.5%
11:30.. U.K. Government Announces 2020 Budget
Another roller-coaster and USDJPY vols the highest since 2008! Central banks to go all in (BoE Cuts) but it’s not enough.
Yesterday had it all again but the one underlying, unchanging theme is that volatility remains high. We had massive moves yesterday in just about everything and USDJPY was just one pair that saw some significant USD strength in the afternoon (in JPY we saw 1-week implied volatility has shot up to 32% the highest since 2008). Does someone know something or was this just reflecting the steep drop in USTs and the rise in yields? My stop in EUR, which I brought up to 1.1310, was hit but it was a profit and I did feel that the USD may turn now as the funding issue and stress attracts USD buyers. But the USD rally didn’t last long as stocks in Asia dropped once again last night. Even GBP fell against the USD and today we get the budget and soon after (possibly the same day or before the BoE meeting) we will probably get the BoE cut rates and possibly 50bps. I wrote that last night but they went ahead and cut before the budget this morning and outside a regular meeting. This now leaves the BoE rate cupboard bare as they have said they will not go negative. But it is governments that markets and central banks are screaming at to help as it appears monetary policy is nowhere near potent enough now. Lagarde was out screaming for governments to get started on fiscal policies and Mnuchin and Trump are hoping to push through some tax cuts. Lagarde has a problem though, as the EU banks are reeling already from negative rates and a flat yield curve. More cuts will kill them.
The UK budget is likely to have quite a bit of spending earmarked too and I am sure Boris is ripping up the idea of balancing any books. Why would he as he is a populist PM and all of them will spend as they believe borrowing costs will remain low forever; good luck with that. Stocks had their usual violent roundtrip which is becoming the norm but I have no idea how anyone trades that stuff now. Mnuchin said after meeting Pelosi, that there is Bipartisan urgency to pass a relief package, adding that there are some things Treasury can do on its own to provide relief which are being explored. But where is the package; Trump seems to be running into some resistance to his tax break plan as it seems he is using it to boost his chances of re-election and tax breaks do not make up for a lack of urgency in the US towards the outbreak, which is spreading fast now. Finally, wires reported that Senator Shelby said options were being mulled to buffer US oil producers which could include longer-term loans. Crikey; they need it too. This elaborate financial system that has been funding these cash-burning operations which clearly need a high price of oil and gas, which is precisely what it hasn’t had in years. Even when WTI was still over $100 a barrel, shale oil producers were still burning cash in this relentlessly tough business. Some will not make it and I just wonder how secure all those loans are now?
The seriousness of the impact from whole countries locking down is being realised and it is also clear that the fiscal route is all we have left! But I think markets expect some shock and awe from the Fed at this month’s meeting (18th March) and I wondering if they have any plans to manipulate the Yield Curve (as the BoJ do) or something from “left field”. But again, we come back to the rather ineffective ECB and it is this that keeps me from suggesting a massive short in EUR. To my mind the Fed are going to zero very soon and may also inflate the balance sheet soon which at some point has to be USD bearish. The danger for the Fed here is that cutting rates quickly is slowing the velocity of money and that is financial tightening. The velocity of money is the oil in the engine in all economies.
But you cannot cure a debt issue with more debt; not for long anyway. There is already evidence that lower rates are not leading to expanding consumption, business investment, or economic activity. Furthermore, while QE may temporarily lift asset prices, the lack of economic growth, resulting in lower earnings growth, will eventually lead to a repricing of assets; down. The reality is that the fragility and leverage of many companies, which hold mountains of debt, are being laid bare and I have been talking about this for months. Powell realises his limitations and said recently that “A rate cut will not reduce the rate of infection. It won’t fix a broken supply chain. We get that.” But here we are staring at another 50bps of cuts this month. So, maybe he feels he needs to do more and Trump will be keeping the pressure on with the UK cutting 50bps today!
FX vol is back and not going anywhere for a while. Oil is seeing swings not seen since the Gulf War! Meanwhile Trump says don’t worry it will pass. The idea that the virus will die out when the weather improves is NOT the issue here; it is how long it takes to restore global supply chains and probably consumer confidence. In Oz last night we saw consumer confidence collapse. After printing at 2.3% last month, it was due to fall by -0.4% but came in down 3.8%! I think this may be repeated in many other economies now and the consumer psyche has been damaged badly here and a pull-back on spending on non-essentials will follow. Many companies, which run on such tight margins, probably won’t make it to the warmer weather and we have already seen Occidental slash their dividend payments and many other energy firms may be forced to do the same. Have we really priced in the loss of earnings to large corporates in all this? The dangers are clear to see but not for Trump it seems whose only focus is getting stocks back up so he can win a second term. That may be in some doubt now.
But stocks ramped into the close again last night and it seemed that all is good with oil up, gold down, stocks up and bonds down. Forget the fact Italy has gone into a countrywide lockdown – the market is apparently confident that promises of further easing, relief packages, and even Donald Trump reversing from his earlier “Virus is Fake News” calling for payroll tax cuts and industrial sector bailouts, means everything will be sorted. Hmmm, somehow, I doubt that. “The best way to prevent economic damage is to stop the spread of the virus. President Trump isn’t going to wriggle out of addressing this growing public health crisis with tax cuts,” said Ron Wyden, the top Democrat on the Senate finance committee, who added a payroll tax cut would not help workers without paid sick leave or who had lost shifts and tips. Someone finally gets it. Trump’s administration was late dealing with this and if this spread really picks up, which looks likely, then voters may not forgive him.
With all the potential stimulus coming, it is worth noting what happens when we get a supply shock. Prices rise and if at some point the demand picks up again, inflation could be the next threat the Fed and a few others face. Just how will the central banks deal with that? I am not sure at all the markets will allow them to hike much without setting off on another steep fall. There is a chance that the kitchen sink is thrown at this and the global flood of stimulus measures hits the economy like a Tsunami of energy. Of course, we need to get through the deflationary aspects of this first; but it is worth bearing in mind for those of a more macro nature. I know it’s boring but keep an eye on dwindling inventories, as when they empty, prices rise. Right now we are likely to see a demand shock as well as a supply shock and that is going to hit hard in my view. Stocks are back down this morning and bond yields are lower, taking the USD down but it will be interesting to see how long any rally in US stocks lasts if and when we do get a tax package from Trump. It is not a cure and seems rather like “Fiddling while Rome burns” to me. Deal with the cause; not the symptoms.
What we are seeing is a rather classic sell off structure with pockets of strength which fail to hold. The danger now is that we make new lows but I think many will wait and see just what Trump and the Fed come up with. If we start to fall again after all that, then look out. This is not going to calm down for a while.
Short USDJPY @ 107.31.. Stop above 108.55 Taken Profits at 101.90
Long Gold @ 1639.00 Stop below $1590.
Long EUR @ 1.1060.. Profit stop triggered at 1.1310.
Macro Long FTSE250 20,900
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