This week will be filled with essential data releases, such as the manufacturing ISM and Friday’s February employment report. However, given the collapse in risk assets and a sharp repricing of Fed rate cut expectations last week, market attention will likely focus on this week’s rollout of Fed speakers. As I hinted at in last week’s blog, the market is now expecting the Fed to cut interest rates by 25 basis points at each of the next two rate cut decisions.
Depending on the severity of the economic impacts of the spread of the coronavirus, there is certainly scope for more stimulus. So, Chair Powell’s unusual statement last Friday afternoon likely marked a turning point in the Fed’s tone concerning the potential for near-term policy action–probably as soon as the March 18 meeting or even before although I’m thinking now that might produce more panic than not is in the works.
This could be kicked into high gear and the communications of other officials this week as this will be their last chance to set market expectations ahead of the blackout period for the March meeting, which begins Friday evening.
Asia Week Ahead
The Bank of Korea (BoK) surprised markets last week by not delivering a 25bps rate cut as widely expected, despite the Covid-19 outbreak and its impact on growth. Together with its concerns about rising housing prices (mortgage) and financial market (FX) volatility, its assumption of a relatively muted impact of the Covid-19 appears to be behind its decision not to cut rates this week.
Bank Negara Malaysia (BNM) could cut its policy rate by 25bps on March 3. as the market is moving its rate cut call forward from May to March. And repricing expectations for lower growth not just in Q1, but also in Q2, as the impact from the Covid-19 outbreak and ongoing political uncertainty weighs on economic growth structures.
China’s exports are expected to contract 10% yoy in Jan-Feb, vs. 7.6% growth in December, on the back of the Covid-19 outbreak. Although the latest indicators point to a recovery in migrant flow, coal consumption, and property sales, risks remain tilted to the downside given their slow rebound.
Respect the importance of risk parity funds, which quickly rebalance massive bond versus equity holdings, but most of all, be nimble playing the dip this week versus the machines in NY4. CTAs have cut long equity exposure to being short but could go further. The CTA’s were extraordinarily long and have now flipped slightly short (18th percentile) but remain well above prior massive sell-offs in 2011-16-18
Im not sure how much we can lesson from the previous disaster playbook as at one point the Vix was on the precipice of pricing in an extinction scenario’.
However, generally, these types of sell-off are triggered not because the market knows how to price risk but rather as in this case because they didn’t know how to factor in the Covid-19 tumult, which likely triggered a massive position cut and run to panic stations But history shows that once a disaster hits and markets sell-off, investors may make rational projections about the initial growth slump, but then tend to be bad at the pricing in how quickly growth can recover, especially those that don’t follow the PBoC.
Don’t get me wrong the PMI numbers in China are brutal, but if you thing the PBoC is going to sit on their hands on not turn on the tas, you will be in for a reality check. Follow the flows: Central banks will continue to pump billions in cash into the market. This could end the global rout.
But at the end of the day, Bloomberg’s Manus Cranny summed it up perfectly on Twitter “Another ten years off from the beach life.”
Oil Markets: All Eyes On OPEC
With oil heading for its most significant weekly loss in almost nine years, the pressure is growing on OPEC+ to deliver a response to halt the decline. Saudi Arabia is reportedly pushing for an additional 1mb/d production cut, more aggressive than the 600kb/d cut recommended by OPEC’s Joint Technical Committee, and OPEC’s secretary-general said there is “renewed commitment” within the group to take action to stabilize the oil price.
While the OPEC+ meeting next week (March 5-6) will be relevant, I continue to believe that any optimism that follows a positive outcome will be short-lived and that oil will not begin to recover until
Covid-19 is no longer seen as a risk. Keeping in mind, we are dealing with the April delivery contract, so there’s not a great deal of material wiggle room address an oversupplied market.
On the other hand, much of the dramatic move down in oil and oil equities this year is already pricing in close to a worst-case scenario for the impact of Covid-19. And $40 WTI ~ $45 Brent =US drilling activity will materially adjust, so the bulk of the selling should be behind us unless worst-case of a super spreader Covid 19
With that in mind, China PMI data release over the weekend was absolutely brutal, so the market open will be closely monitored.
CHINA FEB. MANUFACTURING PMI 35.7; EST. 45.0 * CHINA FEB
NON-MANUFACTURING PMI AT 29.6; EST. 50.5 * CHINA FEB.
COMPOSITE PMI AT 28.8
As I stated last week, the market call was extraordinarily bad heading into the data. And on the dreary print, I have no idea what Wall Street was looking at. Indeed, one doesn’t need a Ph.D. in Economics to figure out that with China’s industrial complex in lockdown for a month, things we’re always going to come out bad. But the glaring delta in the data does raise some questions at a minimum about how accurately this month’s PMI survey was sampled.
There is no denying gold’s “haven” credentials are getting questioned in light of gold’s tepid performance with nary a bounce in sight. It should be particularly worrying for gold bulls with Treasury yields collapsing, which should have been extremely positive for gold.
Risk-free sovereign assets, not gold, is the preference of choice as cross-asset investors grow concerned about the considerable drop in physical demand since the virus hit. So, the bearish aspect of reduced consumer demand amid the economic slowdown could be depressing prices as physical does remain a significant demand channel.
In a reminder of how vital month-end can be for precious metals, what started small – moves driven by losses in equities or elsewhere – seems to have turned into a complete position unwind.
Indeed Month-end rebalancing and people possibly selling their winners (gold) to cover margin calls and raise cash could be the straw that broke $ 1600 back.
It’s more than just margin calls, that view was milked on the Comex backward and forward to no end on Wednesday. But with inflation expectations back to 2016 levels despite 2.5 fed rate cuts baked in the cake that is the wall of worry markets including gold. Gold is a commodity after all, and let’s not lose that focus amid all the gold fever pumps.
But with gold’s 50-day moving average at 1566.50 ( April 20 futures) holdings on Friday, we could be entering a technical buying zone for longer-term term trader, so it will be critical to holding that level for long term momentum.
Thematically I tend to be less technical and more supply and demand momentum style gold trader, but with CTA’s driving the bus right now, charts need to be respected.
Market sentiment has shifted markedly from viewing the coronavirus outbreak as more of a China-centric issue that will ultimately be followed by a V-shaped recovery, to now seeing it as a global outbreak that will result in a protracted drag on growth.
The Yuan has remained a beacon of stability as it remains anchored to PBoC policy but could continue to strengthen as growth rebounds aided by government stimulus.
AS for the ASEAN block, the view remains this same Parocially, currencies of the small-open economies (KRW, THB, MYR, and SGD) to underperform those of the domestically driven economies (INR and PHP), as the former group is more exposed to Chinese demand, supply chain disruption and of course tourism.
The Australian Dollar
AUD remains under pressure as risk aversion via JPY crosses continues alongside the potential for calendar-related flows compounding the price action, there has been very little bounce into the weekend, but it’s essential to keep an eye on the A$ response to a Fed policy impulse and a likely PBoC RRR cut. The Australian dollar is a growth beta, so this could eventually win the day, but the long Aussie is definitely a pain trade.
No real change in view bias to sell rallies remains, but the market appears to have trimmed a little into this last leg. But the AUD higher beta to weaker China data, the weekends PMI release should test the AUD resolve this week as will the RBA’s probable dovish impulse.
The Covid19 rapid spread scenario has created a potentially massive negative feedback loop for US stock and the USD. The most prominent position in the world (other than long gold) is probably still short EUR/USD, as that has been a core CTA and real money position for more than a year and specs added massively at the lows on the USD Yankee bullish fever. The worse things get, the better the odds of the end of BLACK ZERO
The EUR/USD was flyboarding higher on the combination of the continued unwind of EURO funded carry trades, and a reversal of the stack of “Euro put options,” which rapidly flipped to a towering pile of “Euro call option” as the G-10 markets wax dovish the FOMC rate curve.
EUR buying is emerging as a clear theme, and the bias is expected to continue with hedge funds back up the truck to unwind and reverse short Euro positions.
But with things in total panic mode over the past 72 hours and not that traders had the weekend to US headline detox. The Euro’s hypersensitivity to weaker China data, on the back of the dreary China PMI released over the weekend, I would expect some air to deflate from the Euro ballon this week.
The Weekly Wrap By the Numbers
7% – MSCI World stocks in a bear market.
48.23 – The level of VIX, some 10% higher than the peak in 2009.
$277 bn – Apple’s market-cap decline in two weeks.
17% – MSCI stocks still up YTD.
24bp – The 2:10 year spread (remember the yield curve inverted last August).
31/3/09 – The last time the US Energy sector was at this level.
15% – The decline in the most extensive Gold stock (NEW US) from the recent high.
-0.2783 – US 10-year breakevens (USGGT10Y Index).
18% – US renewable energy basket returns YTD.
6/39 – The sell-side Buy ratio on Tesla (NASDAQ:TSLA) – a record low.