If there was ever a doubt about the benevolence of central banks or governments around the world to cover Main Street's back, it’s time to put that fear to rest. The policy taps are getting turned up faster than ever and investors are tripping over one another to buy any stock on offer today, encouraged by the wall of money argument. Investors have been relentlessly pressing the buy button from this morning’s get-go.
With second wave fears diverted for the time being, investors are having visions of the economy returning to pre-pandemic all-systems-go mode and are reveling in the incomprehensibly large global stimulus that will eventually find its way into every liquid asset imaginable.
US President Trump weighs $1trn for infrastructure to spur the economy; the draft plan is still being discussed but it sets aside funds for 5G and rural broadband as the SPX takes another moonshot. The Aussie is also ripping higher, proving once again to be as clean a proxy for US equities as one can find in FX.
The Bank of Japan leaves policy rates unchanged but expands the corporate lending support program to JPY110 trn from JPY75 trn. This is very bullish for USDJPY at first blush. The Nikkei 225 is taking the increase to the Bank of Japan's corporate lending support program very positively, now +4.5%.
The major news out of the Bank of Japan meeting is the expansion of the corporate lending program. The Nikkei is reacting very positively to this, although the USDJPY rally is much more muted and in keeping with the relative equity and FX moves when the BoJ expands lending programs to the real economy. The economic outlook makes for far grimmer reading than the RBA's earlier today. The press conference could offer more colour on whether the BoJ will lean against the steepening in the JGB yield since the last meeting.
Fed kicks in more
In case the generosity of the Fed was in any doubt, it’s not any more!
Global equity markets are recovering quickly after the central bank announced that it would begin buying individual corporate bonds under the already-flagged Secondary Market Corporate Credit Facility (SMCCF).
And for those investors that wholeheartedly believe in the continuous functional power of liquidity in the system, we’re seeing them over the SPX 3000 line today reveling in yet another Fed policy deluge.
Indeed, it's hard to ignore the sensitivity of risk assets to the Fed credit facilities. For now, we still need to be concerned about a new Covid-19 outbreak in Beijing and a growing wave of new daily infections in several southern US states.
But it’s the transmission mechanism from rising regular cases to financial markets that’s ultimately the concern and whether local or central governments re-impose social-distancing measures. At this stage it appears proximity lockdown will be the new normal.
But more importantly, and something that seems to get lost in every rebound narrative, is whether consumer behavior turns more cautious and inhibits a recovery in spending.
Regardless of whether I think things are going higher, supported by the wall of money argument, we still need to be aware of the facts. Hence the economic data, particularly about the consumer side of things, will be increasingly important in the coming weeks.
Fed Chair Powell will present to Congress on Tuesday but it's hard to imagine he’ll reverse or qualify his dire outlook from last week's FOMC, and it’s also likely he’ll try to avoid making any direct fiscal demands of Congress. This event should not give financial markets any risk-on impetus, but thankfully the for risk sentiment the SMCCF will likely divert attention away from that fact.
After tumbling hard overnight, gold got a last-minute reprieve from the Fed, increasing their balance sheet which effectively weakened the US dollar as risk assets soared.
The US dollar is trading weaker this morning after the Federal Reserve Board donned their firefighting gear again after announcing updates to the Secondary Market Corporate Credit Facility (SMCCF). They plan to begin buying a broad and diversified portfolio of corporate bonds to support market liquidity.
And it seems we’re back to the state of nothing matters anymore, but that belies the fact markets are starting to realize that idiosyncratic upticks in Covid-19 outbreaks are going to present neither a moral nor economic dilemma for policymakers.
But as evidenced by the recent run of choppy price action the road to asset price reflation will be fraught will peril, even as central banks worldwide continue to build multiple stimulus bridges to span to the post-pandemic gap.
After a rather aggressive reversal lower towards the end of last week from the 1.1400 area, the EURUSD based just shy of the support at 1.1190/1.1200. With risk rebounding overnight and the US dollar selling off, EURUSD reclaimed the 1.1300 handles.
Over the longer-term, the preferred USD short is opening up to be the Euro – that was until the NY session. The Euro has proved resilient and the EURUSD will evolve from a short-term positioning/technical/catalyst driven trade to a more enduring trend.
Still, given the reopening of economies in Europe and steady infection numbers, I hardly see a reason to sell the Euro, other than for positioning and the market perception that it should go lower in a risk-off environment. Whether that correlation makes sense at the moment is another question.
The Australian Dollar
Risk betas flourished overnight with the Australian dollar ripping higher after the Federal Reserved suggested they continue to monetize all debt. While at the same time, the Fed’s monetary policy should pose little threat to US dollar bears. AUDUSD tracked equities lower for most of the Asia session yesterday, but the pair regained its footing as equities stabilized. It rebounded decisively throughout Europe and the remainder and US sessions and traded as high as 0.69535 this morning.
Over the past few sessions, USDJPY has shown signs of some minor base-building price action, and as risk has stabilized, demand on dips has started to emerge once again. Overall, however, it’s challenging to get too excited unless USDJPY can break back above 108.00.
The Malaysian Ringgit
With oil prices stabilizing higher and risk sentiment on a better footing this morning, the Ringgit should trade down toward 4.2600 – provided oil markets live up to their end of the bargain.
The Chinese Yuan
For China, the supply side of the economy is recovering more quickly than the demand side. That means higher trade surpluses and more downside pressure on USDCNH.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll