As if this week couldn’t get any stranger, today is a real Black Friday, Friday the 13th. Friday the 13th is also a rather infamous series of slasher movies, with the main protagonist, Jason Voorhees, resurrected in a series of sequels to wreak havoc on the local teen population on Friday the 13th. From a financial markets point of view, Jason hasn’t bothered waiting for Friday this time, slashing his way through equity, energy, currencies and now bond markets throughout the week. He has left a trail of destruction in his wake far higher than the body count in any of his starring roles.
US equity markets endured their worst day since 1987, with the leading indices all hitting there 10% circuit breakers at one stage and closing just above that level. The ECB wisely chose to eschew a rate cut further into negative territory, knowing that is would make not an iota of difference when liquidity and working capital are the underlying issues. The ECB increased QE and announced super cheap funding for banks at negative rates to encourage them to lend to business.
I take my hat off to the new Chairperson Christine Lagarde. She shepherded the ECB to do the best it could, with the monetary tools available, all the while calling for joint fiscal action with the governments of Europe. And therein lies the crux of the problem — a complete failure of fiscal leadership, by both the European Union and the United States.
In Europe’s case, the limitations of the Union are being cruelly exposed. Held in thrall to the balanced budget fiscal austerity gnomes of Berlin and Northern Europe, it has descended into every man for himself situation with no central leadership or capacity to direct centralised fiscal transfers to where they are needed. I could wax lyrical for hours about the this, suffice to say the European Union remains, and will remain, at the top of my coronavirus/oil hitlist for regions that will perform the worst in 2020.
In the US, it is becoming clear that the situation is descending into bipartisan doctrinal chaos. Sadly, neither the President or the Congressional Republicans and Democrats seem able to put aside there ideological and personal disagreements. Thus failing to provide the rapid and dynamic fiscal leadership that America requires, when it needs it the most. Alarmingly, the Senate is in recess next week, and the House of Representatives the week after. Washington’s politicians need look no further than themselves when searching for scapegoats for the week that has been. More worryingly, it will inevitably slow the response from the government that is needed, just when it was needed the most.
The Federal Reserve did its best last night, announcing a 3-day $1.5 trillion blitz of liquidity to the markets via the repo market. That only caused a temporary pause in the markets sell-off, which resumed shortly thereafter. The limitations of monetary policy are being laid bare by the financial markets when used in isolation.
Most worryingly, US bond yields rose last night, when really, the situation was ripe for a mass stampede to the US Treasury market driving down yields. That suggests two things. One, credit is tightening, a gruesome scenario for business. Two, investors are now moving to the ultimate haven, hoarding cash in boxes under the bed. With impotent governmental authorities in the US and Europe, tightening credit and the hoarding of cash, investors who think the price of stocks are approaching bargain levels may need to think again. Friday the 13th has just started, and Jason Voorhees’s work is not yet done.
Equities
With the S&P500, Nasdaq and Dow Jones all closing down over 9.0%, it is no surprise that Asia is a sea of red this morning. In after-hours trading, futures on the S&P 500 and Nasdaq have continued falling, both down around 2.0% in Asia.
The Nikkei 225 has borne the brunt of the global panic, down 9.0% this morning. Jakarta has already hit its -5.0% circuit breaker with Singapore’s Straits Times down 5.70%. Australia’s All Ord’s has fallen 7.0%, and the NZX 50 is down 6.0%. South Korea is lower by 7.50%.
The Hang Seng is down a comparatively mild 4.80% with China’s Mainland exchanges finally starting to crack after a week’s selling pressure internationally. The Shanghai Composite and CSI 300 have fallen 4.50% with the Chinese Yuan fixing above 7.0000 to the USD in quite some time.
At this stage, it is hard to construct even a value case for equities. The widening of credit spreads, and the rise in US Treasury yields overnight, suggesting that liquidity is squeezing despite the best efforts of the world’s central banks. Against this background, bottom fishers would be better advised to avoid catching falling knives and wait for signs of stabilisation before dipping their toes back in the water.
Currencies
The flight to safety was no more apparent than in currency markets overnight, with an insatiable demand for US Dollar pushing the greenback higher across the board. Emerging markets sank as investors capitulated enmasse, with resource and oil centric currencies singled out for special attention.
In the developed market space, my call on the Euro was totally wrong. Despite the ECB leaving rates unchanged, EUR/USD fell nearly 1.0% to 1.1185. GBP/USD plunged almost 2.0% to 1.2560, as markets priced in Britain’s export market exposure to the epicentres of fiscal ineptitude, the United States and Europe.
The resource-centric and China proxy favourites, the Australian and New Zealand Dollars, endured a horrific session overnight. AUD/USD fell 3,0% to 0.6235, an 11-year low. The NZD/USD plunged 2.90% to 0.6090, just shy of its early March lows. Both Antipodean’s have staged 50 point rallies this morning though, suggesting that exporter hedging interest has been drawn out to play at these levels. The bounces are modest, however, and both remain acutely vulnerable to more bad news internationally.
The onshore and offshore Chinese Yuan, after being a relative bastion of stability this last week, finally capitulated to relentless Dollar inflows and the fall of European and Asian currencies overnight. The PBOC adjusting its basket driven fix to 7.0033 against the greenback today. That was enough to pull both back from the morning’s highs around 7.0250. With the capitulation of European and Asian currencies in the last 24 hours, the onshore USD/CNY has likely settled into a 6.9500/7.0500 trading range, with the PBOC wary of too rapid a depreciation for fear of upsetting the White House.
The US Dollar has risen sharply versus regional Asian currencies. Today the USD/KRW is 1.40% higher at 1223.50, with USD/IDR crashing through the Bank of Indonesia’s previous line in the sand at 14400.00, rising 2.0% to 14810.00 today. The Singapore Dollar fell overnight, and has declined 0.20% again this morning to 1.4110, still below its recent 1.4150 high versus the US Dollar.
The overriding theme from the last 24 hours is the markets are hunting for US Dollars, and don’t really care what rates they pay to get them. Bond market yields rose overnight suggesting that investors are now hoarding cash. The cash they want to hold is clearly US Dollars. For that reason alone, we expect Dollar strength to reign supreme into the weekend.
Oil
Oil’s recent recovery rally was well and truly consigned to history overnight, with both Brent crude and WTI plunging. News that the Saudi’s are aggressively knocking on doors to sell cruder at discounted rates in volume saw Brent crude collapse by 9.0% to $32.70 a barrel. WTI fared comparatively better, but still fell 6.6% to $ 30.90 a barrel.
Both contracts are modestly higher in Asia as some locally driven bargain hunting comes in, Brent has climbed to $32.90 a barrel, and WTI is ten cents higher at $31.00 a barrel.
To say that oil’s price action is negative is an understatement. The critical levels are $30.00 a barrel for Brent crude and $27.50 a barrel for WTI. Both remain immensely vulnerable to the continuing flood of bad news elsewhere. With Russia and Saudi Arabia seemingly comfortable increasing production and dropping prices, and with no signs of a return to the negotiating table, any rallies in oil will be limited and short-lived for the foreseeable future.
Gold
Gold has become my bane, collapsing by nearly 60 dollars, or 3.50% overnight, finishing at $1578.00 an ounce, but trading as low as $1551.00 an ounce in panicked selling during the session. The rise in US treasury yields, the need to sell gold to cover losses in the stock market, and the uncontrolled rush by global markets to hoard US cash, all seem to have combined to chop the legs from under gold. Jason Voorhees would be impressed with this Friday the 13th price action.
One modicum of hope is that the $1560.00 support zone held on a daily closing basis. Gold also has another layer of strong technical support in the $1540.00 regions. A weekly close below that though, would open further losses to $1450.00 an ounce potentially next week, should all other external factors stay the same.
That said, the fundamental factors that were supportive of gold at much higher levels earlier this week, are screaming louder than a Friday the 13th movie victim today. For those who were super-patient yesterday, gold’s case looks even more compelling this morning. However, at this moment, I cannot say whether buyers at these levels would be catching a huge bargain or catching a falling axe.
