Market Quick Take - March 26, 2020

The sessions ahead of the quarter-end are key for measuring confidence from rebalancing flows and whether the market feels policymakers are getting ahead of the curve in bringing more profound relief. Key on the agenda today are the US jobless claims and yesterday’s highs in global equity indices as the local tactical bull/bear line.

What is our trading focus?

• AUDJPY – as yesterday, we continue to watch this risk proxy, which proved a prescient indicator in turning lower from the highs before broader risk sentiment did.
• EURUSD – the euro has bucked the USD strength yesterday and shown relative resilience, perhaps as EU policymakers and ECB are set to do launch their respective fiscal plans and on hopes that EU peripheral spreads. The 1.1000 level is a key
• EURSEK – Stockholm has raised the emergency level to the highest level as the daily death number jumped again yesterday questioning Sweden’s herd immunity strategy. The potential economic costs for delaying social distancing and closing schools may come as a surprise for the market. This could put renewed pressure on SEK.
• ZNU0 (10-year Treasury June 2020) – in focus today due to upcoming initial jobless claims. A very bad number will mostly spill into fixed-income – both the long end of the Treasury curve and high yield credit bonds.
• VOOL:xetr (long volatility) – Month end & Quarter end repositioning so monitor the volatility. The second month VIX futures contract has risen two sessions straight despite equities rising. Signals that the volatility market is potentially not buying this rally.
• OILUKMAY20 – Energy remains our #1 indicator for global growth. It has been floored 26-28$ even with risk on mode last two days. WTI briefly trading below gasoline yesterday highlighting the massive build in both fuel and crude oil stocks. The short-term risk points to lower prices with a break of 29.00 and then 30.00 needed for the sentiment to improve.

What is going on?

The US Senate signed the $2 trillion stimulus package that now must be signed by the House – expected to happen on Friday - and then President Trump before becoming law. The package includes $500 billion in loans and aid to large companies, $350 billion for small companies, and outright cash payments to individual citizens.

EU looking to suspend accounting rules for banks: EU authorities and the ECB are looking to suspend accounting rules due to pressure on balance sheets from the virus outbreak – this could allow banks to delve into reserves and take other measures, but authorities are concerned that the move could dent confidence in banks, who would be seen as hiding their true state of solvency. Watch this space closely – the most powerful solution would be a recapitalization.

Remember, Covid19 driving a supply shock, not just a demand shock A story highlighting that the Covid19 has created twin shocks is Caixin pointing out that air freight rates have spiked due to the reduction in flights globally.

Ford debt downgraded to junk by S&P ratings, leaving Moody’s with the only investment grade rating for the company’s debt. Ford’s share price closed yesterday at 5.39 – up from the 3.96 low this week, but down 42% YTD.

What we are watching next?

US weekly jobless claims and how the market absorbs the news (see estimates below in the calendar). There are wild estimates from 2M to 5M and the actual number and how the market digests it will be key for the coming US session.

The BULL/BEAR line and risk sentiment status – yesterday’s rally ended with a fizzle after crossing near the key 38.2% retracement line and then dipped again overnight – not a strong sign after markets bounced on hopes that policymakers are getting ahead of the curve. The price action makes yesterday’s highs the key tactical bull/bear line for the moment.

Quarter end rebalancing the best hope for equities – with momentum-oriented CTA’s maximum short on the slide in equities and asset allocators with low equity weights after the massive slide in Q1, there is a prominent potential bid for equities from these source into month-and quarter end.

USDCNY (and USDCNH as the tradeable offshore CNY). The Chinese currency remains a hugely important question as the US dollar has yet to turn notably lower and yesterday saw the largest rise this week in the USDCNY exchange rate, taking it close to the 7.12 area highs from last week.

Calendar today (times GMT)

• 1200 – UK Bank of England – no change expected
• 1200 – Czech Central Bank Rate Announcement  - expected to cut 50 bps to 1.25%
• 1230 – US Weekly Initial Jobless Claims – will be the worst weekly claims figure in US history and this data series will be a top high-frequency series for measuring the state and rate of change for the US labor market. Bloomberg expectations at 1.6M, but many economists estimate much, much higher readings.

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