Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Officer
Summary: Markets are starting off the week in a negative mood after the US Congress failed to agree to a large rescue package late Sunday and despite news of a massive German fiscal boost on the way. It promises to be another hectic, roller coaster week ahead as authorities mount an escalating battle to get ahead of the credit contagion from the Covid-19 outbreak
What is our trading focus?
Trading focus is squarely on stocks, treasuries, the US dollar and oil after markets opened this week in a negative mood and US equity futures went quickly limit down after the US Congress couldn’t agree on the terms of a rescue package for the economy late Sunday. This keeps our focus squarely on when the deleveraging across global markets stops and in particular, when the US dollar turns lower.
What is going on?
Germany announced a large stimulus package over the weekend at up to 10% of German GDP as the country is finally set to engage the state of emergency required to abandon constitutional limits on deficit spending.
Covid-19: German chancellor Merkel entered isolation after her personal doctor was diagnosed with Covid-19. A staffer for US Vice President Pence tested positive and US Senator Rand Paul tested positive.
US St. Louis Fed President Bullard says that the US jobless rate could go to 30% and that US GDP in Q2 could risk dropping to -50%, figures that are multiples of the worst data since the Great Depression.
Nordic funds halt redemptions: In Sweden, Denmark and Norway, a number of high yield corporate lending funds halted redemptions as there is suddenly no market at present for the instruments in their portfolio were they forced to liquidate holdings.
Mexico cut its policy rate 50 basis points to 6.50%, joining other EM central banks in similar moves, even as the Mexican peso has devalued as much as 25% from recent highs against the US dollar, taking USDMXN to its highest level ever near 24.75.
RBNZ starts QE - in a surprise announcement, New Zealand's central bank announced NZD 30 billion in QE to deal with the Covid-19 emergency. The country has also announced a Covid-19-related total shutdown akin to the strictest measures in Europe.
What we are watching next?
The US rescue package – it must come Monday, it must be large ($2 trillion to start, but perhaps more important to extend an open-ended commitment) and it must provide cash to households and small businesses to keep these important economic actors ready to resume their economic output once the Covid-19 quarantines lift.
Fed to broaden purchase types? US Minneapolis Fed president Kashkari said in an interview over the weekend that the Fed can do more to bring stability, including purchasing corporate and municipal bonds. This could be contentious with Democratic US lawmakers, but is a massive area for concern as the US corporate lending market is on its knees after blowing a bubble in recent years. Commercial mortgages are another area of potential systemic concern.
USDCNY – while USDCNY has traded with a percent of its high for the cycle in 2019, but has been quietly managed by China relative to the wilder gyrations elsewhere. Any sign that China is abandoning its commitment to CNY stability and strength is an added global risk in an already touchy environment.
Calendar on Monday (times GMT)
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