Central Banks around the world appear to be about to deploy more large calibre monetary weaponry than an NRA convention. Both the Federal Reserve and Reserve Bank of New Zealand have enacted emergency rate cuts overnight. The actions of the Fed cutting the fed funds rate by 100bps to 0.0-0.25%, will likely spark of a wave of aggressive rate cuts by Asia’s’ central bank this week.
Additionally, the Fed has slashed the discount rate by 150bps to 0.25% and allowed banks to access the discount window for up to 90 days. They will also buy $700 billion in bonds, returning to QE to keep credit markets from tightening further. More than likely, the Fed was alarmed by US Yields rising at the back end of last week, even as markets crashed, suggesting that credit was getting harder to come by. A distasteful situation.
The RBNZ for its part slashed rates by 75bps to 0.25%, its lowest in history. They indicated that it would stay at that level for the rest of the year, warning of jobs losses and business collapses. They have a point, with Air New Zealand cutting its international capacity by 85% following airlines around the world parking up aircraft and cutting timetables. As a sector, more of the global airline sector will be on state-backed life support sooner rather than later.
That was pretty much the excellent news sadly. Across the world, strict border controls are being erected to contain the coronavirus spread. Spain joined Italy in a virtual national lockdown, with the government using draconian emergency powers. Germany also closed its borders overnight, and Singapore ramped up self-isolation procedures for incoming arrivals.
A tough Monday ahead was quietly signalled ion Saturday by Saudi Arabia Tadawul, with equities there falling 3.0% despite the greatest comeback ever by Wall Street on Friday. US stock futures have already fallen their 5.0% limit down inside the first 30 minutes of trading today. The Nikkei futures are down 6.0% with Australian 5.0% lower.
With the world now on its way to a global lockdown to fight the coronavirus pandemic, the full scale of the effect of the coronavirus pandemic on economic activity and everyday life is, at last, being assessed in an honest light. From here, a recession now seems inevitable for the world. A best-case scenario is that containment efforts bear fruit, and in three months’ time, the world sees the light at the end of the tunnel and recovery begins. That is the optimistic scenario though with some significant countries in the world still dilly-dallying, or in a state of denial. You know who you are.
Against this backdrop, critical industries such as tourism, air transport and energy extraction find themselves at the edge of the cliff. Governments around the world will be faced with stark choices, allow them to collapse with the economic effects downstream, such as mass job losses, or become the reluctant owners of a whole portfolio of unexpected long-term investments. I fully expect entire swaths of national economies to be nationalised, if only temporarily, before this is all over.
Looking ahead, China releases another combined set of Jan-Feb data this morning at 1000 SGT. The House Price Index is likely to fall to 2.80%, Industrial Production shrink to 1.50% and Retail Sales to fall to 0.80%. In all likelihood though, any data this week will be subsumed by the coronavirus pandemic. If the Fed and RBNZ are anything to go by, markets should expect a swath of rate cut announcements by Asia’s central banks today and tomorrow, as there definitely appears to be a globally coordinated effort now in action.
Equities
Following the miracle bounce of 10% by US stock markets on Friday, the party looks to have been swabbed and self-isolated as quickly as it has begun. This morning, both S&P 500 e-mini and Nasdaq futures hit limit down at -5.0% as soon as trading opened at 0600 SGT. The Fed rate cut, rather than calming markets, appears to have highlighted just how serious the international situation has become.
The Nikkei 225 futures had fallen by over 4.0% in pre-market trading, with exchanged based trading just getting underway. The ASX 200, having rallied by 12% on Friday from its -8.0% lows, has had no such miracle comeback today, falling 5.0% in the early session. New Zealand’s NZX has declined by 2.50%.
Asian markets are set for a tough start to the week, with only the anticipation of further easings by regional central banks likely to offer any support. We fully expect any rallies to be limited in duration today and Asia will most likely finish Monday in the red.
One thing to note is that intra-day volatility will remain extremely elevated. Equity markets are being dominated by tail-chasing short-term momentum traders’ intra-day. That is creating liquidity gaps on the other side of their trades, and I suspect it is a significant reason we see the size of the selloffs and rallies that we are intra-session.
Currencies
The near 10% surge in equities on Friday in the US saw the US Dollar make enormous gains in poor liquidity conditions. That move has ended abruptly today.
The Fed rate cut has seen the US Dollar fall versus the G-10 this morning, with the dollar index lower by 0.77% to 97.95. The EUR/USD has climbed 0.50% to 1.1160; the GBP/USD has risen 0.75% to 1.2370, following its monumental 5.0% fall last week. Having closed at 108.00 on Friday after a tumultuous session, USD/JPY has fallen 1.0% to 106.80 today.
That pattern has been repeated across the majors except for the New Zealand Dollar. The RBNZ cut saw the Kiwi fall by 0.65% to 0.6040 today with a test below 0.6000 now seems inevitable in the coming day.
In Asia, the US Dollar is likely to rise aggressively against regional currencies. Markets will be spooked by the early morning equity moves and a rotation out of EM is almost guaranteed. Secondly, given the emergency Fed rate cut, markets will move to aggressively price in reductions by the region’s central banks over the next day or two.
One thing to note is that liquidity appears to be deteriorating in FX markets as well. Whether that is due to many participants, most especially real money, working from home, I am not sure. The same liquidity gaps that are appearing in equity markets, as momentum chasing intra-day algos all chase the same strategy, and liquidity is withdrawn ahead of them, seems to be infecting FX markets. We should prepare for more wild intra-day moves because of it.
Oil
The escalating coronavirus pandemic, with countries around the world closing borders and locking down populations to contain its spread, has seen Friday’s false dawn end quickly today. With the nightmare scenario of an oil price war and a global recession upon us, oil has collapsed in early Asian trading.
Brent crude has fallen 8.0% to $32.65 a barrel, and WTI has also fallen by 6.0% to $31.00 a barrel. Brent crude looks to be readying another test below $30.00 a barrel sooner rather than later.
Both Saudi Arabia and Russia appear to be comfortable with their respective positions. Indeed, Russia stated that it could afford to have oil at $30.00 a barrel for 5-7 years without feeling the pain. That sounds more bravado seem factual to my mind, but it does appear that both oil giants are happy to go all in and damn the torpedoes.
The big loser will be US shale, where the Republican government will possibly face a bailout decision on a heavily indebted industry sooner rather than later. That is doctrinally anathema to the Republicans, and perhaps not even legal. I n the face of a global double-hit, some major shale companies will be going to the wall sooner rather than later. Russia’s timing has been both incredibly cruel, but incredibly precise.
Oil prices in the short-term, are going to remain under pressure in Asia. The demand shock from the global coronavirus lockdown makes a bullish case for oil, impossible to construct in the near-term.
Gold
Gold fell nearly 3.0%, or $46.00 an ounce on Friday, to $ 1530.00 an ounce. Sold initially to cover margins as equities collapsed, it then suffered even more as Wall Street equities rallied by 10.0%.
Gold gapped higher at the open to trade as high as $1575.00 an ounce in early trade, but has since retreated to $1548.00 an ounce, although that is still a net gain of 1.0% on the day.
A global pandemic causing a world shutdown, falling energy prices, emergency rate cuts and new swaths of QE and a fall US dollar, should all be nirvana for gold. Unfortunately, these are not regular times, and the usual rules don’t seem to apply anymore. If equities drop further, liquidation of gold long positions seems inevitable. If equities rise, gold gets sold anyway.
Likely, patience will reward gold longs, but deep pockets will be required. Having fallen $175 in the past week, more downside pain cannot be discounted, and nor will technical levels be respected. That said, the $1460.00 to $1480.00 region looms as longer-term support. If one was looking to go long and close their eyes, that could be as good an area to do so as any.
