That call appears to be finally heeded by governments around the world. Globally, from New Zealand to Spain, impressively large fiscal packages are being rolled out to mitigate the effects of the coronavirus recession.
Most pleasingly, the United States seems to be finally getting its act together, with the White House seeking approval for a $1.2 trillion package that includes direct payments to households. The White House is proposing two tranches, of $1,000 and $2,000 to qualifying Americans within two weeks. Other proposals were $300 billion in small business loans and income tax payment deferrals. Off course this all needs to be approved by Congress, and one could argue, it probably isn’t enough.
A win is a win after weeks of stuttering and fragmented inaction, and markets liked what they saw. U.S. stock markets all rallied impressively, finishing higher by around 6.0%. That rally will fade as the reality sets in, that the U.S. is at the start of its coronavirus battle, not the end.
One concern I have had over the past few days has been the rise in offshore U.S. dollar funding rates and rising U.S. Treasury yields. The 10-year treasury yield rose a mind-boggling 36 basis points to 1.08% overnight. Nine days ago, markets were touching 0.30%, and nobody could buy enough of them. The rise in interest rates though, despite galactic rate cuts by central banks around the world, is worrying. It suggests that credit markets are under stress, and banks and other institutions are hoarding cash.
I can hardly blame them though, lending into a corporate market under severe cashflow duress is a difficult pill to swallow. The new IFRS 9 rule could not have come at a worse time for the banking system and is likely to be exacerbating the squeeze. Butterfly effects and unintended consequences have been running through my mind. For accounting nerds out there, IFRS 9 requires banks to provision for bad loans up front, before a customer misses a payment, as was previously the case. Thus, if risk models imply the likelihood of impairment is high, cash must be set aside by lenders. We will all be hearing a lot more about IFRS 9 in the months ahead.
The Federal Reserve has restarted its GFC-era commercial paper programme to the tune of $300 billion. The Fed will buy commercial paper directly from qualifying corporates, in exchange for cash at a rather juicy mark-up. That will, in part, alleviate the working capital and debt repayment strains in corporate America. That won’t help offshore companies struggling with dollar and local currency funding. In all likelihood, support internationally, in the form of direct loans or guarantees, from governments, will be required in impressive amount to keep the wheels of commerce turning until coronavirus has passed. A failure to aggressively head off a credit squeeze before it gets started will render all the other hard work on the monetary and fiscal front, null and void.
Further evidence of what a coronavirus recession looks like was apparent in Japanese data today. The February Balance of Trade surged to yen 1.10 trillion. It masked, however, an enormous fall in imports by 14% YoY, highlighting the demand shock that the coronavirus induces. Surprisingly, exports held up relatively well, falling only 1.0%. But as the China data revealed this week, the coronavirus shutdown pummels both sides of the aggregate demand and supply curves.
The data calendar for today is strictly 2nd-tier, as the coronavirus pandemic continues to be the primary driver of markets. Financial markets will concentrate on tightening credit risks, viral spreads, and the proactiveness of government responses. The Street will immediately and aggressively punish any clogging of the wheels of the White House’s proposals by Congress.
Equities
The prospect of a crowd-pleaser sized fiscal stimulus package emerging from the White House was enough to propel Wall Street to an impressive rally overnight, ignoring the huge leap in U.S. yields it also induced. The S&P rose 6.0%, the NASDAQ rose 6.23%, and the Dow Jones climbed 5.19%.
The steepening of the yield curve should be good news for banks and the interest margins. That joy is mollified by the fact they need to find customers to lend it to, who will pay it back; not a simple equation in these times. The entire U.S. airline industry and behemoths such as Boeing (NYSE:BA) will likely need a government bailout in some shape or form before this is over as well. Put together, yesterday's equity rally still looks like a bear market rally, and not a new dawn.
U.S. equity indices futures have sunk this morning in Asia. The S&P e-mini is falling 3.30% and the NASDAQ futures are falling 3.50%. Those falls are likely to temper Asia’s generally bright start of trading today.
One exception is Australia, where the ASX 200 has collapsed by 6.50% this morning. Australia seems to be playing its own game at the moment, with a much higher correlation to the aftermarket U.S. index futures than the rest of the region. The make-up of the main index may partly explain Australia’s woes. It is heavily weighted towards banks and resource companies. With the RBA slashing rates and about to start QE, interest margins will be under pressure. Add in a country effectively in lock-down and a sagging corporate sector, and it’s hard to be positive on the Big Four in the near-term. As for the resource sector, that needs no explaining at all.
The rest of Asia though is enjoying the White House-induced respite from overnight. The Nikkei 225 is 1.50% higher with the Straits Times jumping 2.50% and the Shanghai Composite by 1.25%, though the Hang Seng is flat. The performance of Singapore is particularly impressive, coming after Malaysia also locked down its land borders yesterday.
Peripheral ASEAN continues to struggle though, Malaysia falling 0.30% as its lockdowns deepen, and Jakarta falling 1.30% today. A rise in coronavirus cases in Malaysia, and a general sense of disbelief in Jakarta that the government has a real grip on coronavirus continues to sap confidence in both markets.
Currencies
The astonishing steepening of the U.S. yield curve saw a massive rush into the dollar overnight, with the greenback pummelling most of the majors. The EUR/USD fell 1.60% to 1.1010 and USD/JPY rose 1.70% to 107.65.
Australia continues to suffer with the AUD/USD falling through the important 0.6000 level to 0.5950, before recovering to 0.6010, down 2.0% for the day. With the RBA almost certain to announce some sort of quantitative easing tomorrow, the AUD remains anchored at its GFC lows. With a high weighting to banking and resources in its equity markets, a negative yield gap versus the U.S. dollar, and a domestic economy in lock-down, further losses appear to be likely.
The UK sterling looks set to test multi-year lows around 1.1950. Overnight it fell 1.50% to 1,2080, having traded as low as 1.2000 during the session. Massive fiscal stimulus requirements, interest rates near zero, and with EU trade negotiations still to come, have seen sterling suffer an astonishing fall from grace. Sterling has fallen over 7.0% from two weeks ago with 1.3000+ now a distant memory. 1.1950 looms as the next significant technical level, with the Brexit lows of 1.1650, once unthinkable, now back on the cards.
The U.S. dollar is generally higher against local Asian currencies today, in quiet trading. The resurgence of the sollar will not be temporary if U.S. 10-year yields remain above 1 .0%. The haven and yield advantage will be an irresistible force for further dollar strength. Going forward, rising offshore dollar funding rates, will send shivers through Asia, which has a lot of U.S. debt to roll over in coming months. That, for now, should keep local currencies solidly on the back foot.
Oil
Oil missed its chance to hitch a ride higher with equities overnight. Both Brent crude and WTI continued wilting as the ongoing producer price war, and the exponential increase in countries closing borders crushed any rebound hopes. Brent crude fell 5.0% to $28.60 a barrel, and WTI fell 6.50% to 26.80 a barrel, ignoring completely, a fall in official U.S. crude inventories.
The rise in Asian equities, and no doubt, some bargain hunting, has seen modest rallies in both contracts. Brent crude rising $29.20 a barrel, and WTI rising to $27.20 a barrel. As ever, the scale of the bounces in Asia, shrink to insignificance, when compared to the falls overnight.
Producers and refiners are now madly scrambling to find onshore and offshore storage facilities for the upcoming weave of oil that nobody wants in April. That alone would keep a lid on prices, even without the demand shock from the coronavirus pandemic. It remains impossible to construct a bullish case for oil in these circumstances, and thus any rallies should be treated with extreme caution. Further downside pain lies ahead.
Gold
A strong U.S. equity rally, an even stronger U.S. dollar, and a massive rise in 10- and 30-year U.S. Treasury yields should have seen gold move aggressively lower, yes? Wrong. Instead, gold irose 1.0% to $1527.00 an ounce, having traded in a $1465.00 to $1554.00 range.
The only comfort I can take is that the $1450.00 longer-term support level mentioned over the past few days, held. I cannot take any credit for trading genius here, though; everyone gets lucky once. The $1450.00 region remains long-term support with technical resistance now at $1560.00 an ounce.
Gold is almost unchanged today in Asia after attempting to probe the upside. While the 100% correlation to equity movements is illogical, let alone rallying as the dollar and yields rise, it is essential to accept one’s fate and not fight it. Eventually, that correlation will break; but until that day comes, traders should float with the tide.