A morning the world stood still
Lockdown, Shutdown & Limit Down
Investors are recoiling in horror this morning at the explosive Covid-19 death count and latest case numbers around the world. The rapid spread has triggered unprecedented draconian containment measures and is seeing the world come to a standstill. All the while Congress is dilly-dallying on an aid plan.
From a market perspective, traders are buckling in and preparing for a horrendous peek into their future this week when US initial jobless claims are released. The high-frequency data will undoubtedly confirm we're entering a vortex of the fastest and most substantial rise in the US and global unemployment in modern financial history.
Current estimates for new US jobless claims are running around 2 million, but with Canada reporting 500,000 last week (from a population of 37m million people) a similar calculation would imply a US equivalent of 4,420,000. If 2 million is the expectation, I'd argue it’s "light" (as in under-reported), regardless of what the data shows.
The relative calm seen Thursday did not make it to the end of the week. The S&P500 fell 4.3% on Friday, despite modest gains in European equities. US 10Y yields fell 30bps to 0.85% and gold rose 1.6% on speculation that the liquidation of safe assets will slow.
Given the widening spread of Covid-19 outside China, economists are in the process of unilaterally downgrading global GDP forecast for the third and, in some cases, the fourth time in the past two months. These rapid and unprecedented downgrades illustrate just how fast we've moved from a brief health scare to a full-blown global recession.
Traders are now pricing in a severe global recession as the US/EU adopt drastic measures to contain the pandemic, likely pointing to an unprecedented G2 recession (since World War II). While the situation in China, South Korea and Singapore seems to be contained, recent data suggests the virus is spreading in other parts of ASEAN and India. As such, to defend against a secondary cluster spread, all of Asia has effectively gone into lockdown mode, suggesting growth in the region will fall well below current negative revision. Which of course is going to trigger more central bank policy easing and government support.
Oil fell another 11.1%, weighed down by news of enforced social distancing in NY state and lockdown measures in California, two of the largest state economies in the US.
Oil markets collapsed out of the gate this morning as prices react in tangent to stringent containment lockdown measures that have seen life come to a standstill around the world. People are working/staying at home and only using their cars for essential matters, as total demand devastation sets in.
Perhaps the only reason prices have collapsed below WTI $20 per barrel are reports that Texas is considering pulling up a chair at the bargaining table with OPEC. What was inconceivable only weeks ago might become a reality.
But with the prospect of storage facilities filling quickly and the potential endpoint of "worthless crude oil" increasingly discussed, if an agreement isn't forthcoming, these talks never happen, or they end in a contentious break-up, oil prices will most certainly head for the bottom at a ferocious velocity.
Gold continued to react to financial market sell-offs and, at times, was supported as government and monetary authorities attempt to manage the economic and financial ramifications of Covid-19.
But in the face of the significant liquidation, gold only closed down $25 in a week when US equities fell 18%, the USD surged and other commodities tanked, all of which suggests some, but not all, of the gold haven properties are starting to glitter again.
More concerning for bullion investors is that the USD has also moved sharply higher. But if the market can get beyond an immediate dash for USDs, gold will have a chance to move higher. It has remained an excellent portfolio diversifier for the past two years.
For gold investors, hopefully, the demand for US dollars from Emerging Market central banks won't cause them to sell gold to raise dollar and support their economies in this time of economic stress. If that does happen, the trap door will most certainly spring.
A weaker USD is part of the solution. Still, a stronger USD is unavoidable if investors fret about the liquidity (short-term rollover risk) and solvency (protracted revenue shortfalls) of dollar borrowers round the globe.
Volumes have been light this morning, perhaps reflecting the fact many Singapore and Hong Kong traders are working from (while home moaning about their Wi-Fi connection and small screens).
But traders also think there's a chance of more policy intervention on the way. The Fed could increase the breadth of EM SWAP lines (last week MAS and BoK were offered lines). They could enter the FX Swap market, flooding the short-dated cash markets with US dollars. Or they could possibly intervene by instructing the NY Fed to sell US dollars, which would likely signal the start of a concerted worldwide central bank effort.
The EURUSD is most prone to be overwhelmed by the economic carnage with the Eurozone facing a demand shock without precedent in the single currency's history. Italy's coronavirus deaths now surpass China.
But it's the debt sharing burden that will bring deep-seated political tensions to the surface between Germany and the broader Eurozone that will dominate the region's political scrim for years to come post-coronavirus and could even signal a collapse of the single currency unit.
The significant increase in USD-denominated debt in Asia EMFX since the financial crisis suggests the demand for USDs will remain strong as the global economy weakens further.
The Ringgit will likely come under further selling pressure on domestic economic concerns and more so against the backdrop of a stronger US dollar. In addition, oil prices are under extreme pressure relative to 2018 and 2019, so the MYR oil price sensitivity will continue to provide a significant downdraft.
Also, the BNM will be most unlikely to drawdown on valuable US dollar reserves to support the Ringgit, since the demand from local banks for dollars is robust.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies