Market Quick Take - March 24, 2020

What is our trading focus?

In a hectic trading environment with asset markets gyrating viciously, so much of the market moves up and down in synch, so it is tough to find diversification. Despite the US equity market posting new lows yesterday, market volatility has registered a notable drop and markets bounce again overnight.

• EURUSD, USDJPY – the recent US dollar strength is an important sign of stress on global liquidity, and is one of the most important market indicators to watch – looking at EURUSD moving above 1.10 and/or USDJPY moving below 107.50 (eventually 105.00) for a suggestion that the market is getting ahead of USD funding pressures.
• US500.I – the price to the 200-day moving average has now reached -26% which is the 1.5% percentile since 1927 which means that the S&P 500 is extremely oversold at this point. Three month future return has had a mean return on 4.1% whenever the market has been this oversold. Could lure buyers into buying equities at these levels.
• OILUSMAY20 and OILUKMAY20 both trades higher for a second day as risk appetite returns to Asia after the Fed unleashed its support measures. Also China, the world’s biggest importer, said they would lift the lockdown over Wuhan on April 8.
• XAUUSD surged higher as new Fed measures brought back memories of the 2008 debasement worries. Goldman’s issued a buy note targeting $1700/oz. The next major upside level to watch being $1607/oz.
• 10YBTPJUN20 (Italian 10-year government bonds, or BTP’s) – a key indicator on whether the German move to provide stimulus is seen as having wider EU implications (i.e., supporting BTP’s), particularly after ECB hinted it is willing to bend the rules on purchasing more peripheral debt
• LQD:arcx (US investment grade corporate bond ETF) – the Fed creating facilities to buy corporate debt saw a 7% jump in this ETF yesterday. This is an important indicator for pressure on corporate credit across the board.
• HYG:arcx (US high yield bond ETF) – high yield corporate debt suffered further pressure yesterday as the new Fed corporate bond purchases won’t extend to high yield.
• NKE:xnys (Nike) – Nike reports FY20 Q3 earnings (fiscal quarter ending in February) at 19:15 GMT and could provide clues for investors on consumer demand impact. Watch out for the FY20 Q4 outlook.

What is going on?

The US Federal Reserve – announced its largest effort yet to get ahead of the systemic financial contagion in announcing unlimited QE to purchase treasuries and mortgages, new facilities to purchase corporate debt and commercial MBS, the relaunch of the infamous TALF, bridge loans to companies in trouble and more. A colorful rundown from wolfstreet.com.

The US Congress failed to deliver a package once again as Democrats accused Republicans of favouring businesses over workers and Republicans accused Democrats of opportunism and rolling all manner of Covid19 unrelated “political goodies” into the mix, like CO2 emissions and voter registration issues.

Covid-19: UK has announced a three-week lockdown on activity on par with lockdown in major EU countries. The USA: The Trump administration is increasingly at odds with the recommendations of public health officials, on claims that the US economy can’t afford a total lockdown that extends from weeks to months. Italy: case counts give hope that the outbreak there is peaking.

What we are watching next?

Signs of low in place? – Last 24 hours US Treasuries rallied hard (yields lower), Volatility is coming off panic-highs and we see improvement in sentiment overall. Two things remains to confirm potential for low: A real turn for the dollar and credit spreads to narrow.

EU: talk of “coronabonds” since Friday has been circulating as a kind of backdoor to debt mutualization in the EU. This and the recent large ECB QE have helped put a lid on peripheral spreads, but we need to see a further fiscal commitment across Europe to bring sustained confidence to the euro and EU bond markets and assets.

The US rescue package – the Fed’s new massive All-in-QE has bought the US congress a bit of time by putting a supporting hand under the market, but the rescue package must still arrive and fast to mitigate the risks of the catastrophic reduction in economy activity, employment and confidence.

The USD itself – besides risk sentiment generally, we need to see the USD turning lower soon for a better sense that the tide is beginning to turn – we note EURUSD and USDJPY above, but EM and commodity currencies will prove more sensitive to USD direction here.

Calendar on Monday (times GMT)

• 0815-0900 – France, Germany, EU flash Mar. Services and Manufacturing PMI
• 0930 – UK flash Mar. Services and Manufacturing PMI
• 1345 – US flash Mar. Services and Manufacturing PMI

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