2020-Mar-16

Macro Dragon: Fed Surprise Cut (Again), with coordinated central bank action 

Top of Mind…

• KVP’s initial idea was to spend Sun in the home office coming up to speed post pulling a North Korea (off grid) over the last few wks…

• After all prior to leaving, the one constant drum KVP had beat on the whole year was that One Cannot Own Enough US Duration… & note on Jan 17^th USTs were at c. 1.86%... given we made lows of close to 0.31%, one can feel vindicated once again that in Global Macro you don’t need 100 good trade or even 10 good trade, you just need to have the Meta trade on… you wanted a $100m dollar trade? That was a $250m trade... 

• Anyhow, so much for a quick catch up on markets & developments… +21hrs later, KVP has decided to kick out the MD a little early. By no means feeling up to speed, yet early Asia Mon Mrn developments are too important to send out later

• We started off with a surprise cut from the RBNZ c. 3am SGT/HKT… then c. +2hr later had the Fed on the wires with another surprise cut… this time 25bp & adding further liquidity... and linked to the Covid-19

• Timing on the Fed is suspect as they obviously have a scheduled meeting for the 18^th, yet this looks like its going to be coordinated Monday… so perhaps that why they choose to move on Sunday US time to set the bell curve for risk assets, sentiment & liquidity concern for this upcoming wk

• How the market takes it will remain to be seen, yet its worth bearing in mind post Thu big sell-off in the US… we had a massive c. +10% up-lift on US equities… & a EZ EQ were pretty much down c. -20% in last wk alone & are all sitting at c. -30% YTD….

• Point here is not about calling the lows, yet respecting the potential squeeze & bullish price action today – how it get taken up by Europe & the US will be a bigger test. Remember…

• Asia is where Vocid-19 initially started… & the RoW is catching up with what we went through back end of Jan, Feb & early Mar. Also the US & EU don’t have the historical experience, expertise, procedures & resources that Asia has had to deal with previously with SARs. Let alone the bonus of many government in Asia able to streamline initiatives that are followed & executed promptly – there is no multiple bickering of heads, meetings for planning meetings & listening to multiple parties…

• Just as we initially said the numbers at the star of Feb were likely to low in Asia, that is almost certainly the case in the US & Europe… stay tuned

• So RBNZ cut by 75bp to 25bp & said any further stimulus is likely to be more QE than neg. rates. Here is the link to the statement. Next meeting is on 25 Mar. NZDUSD us 0.6116 -0.29 after being down more than 200bp earlier… AUDUSD at 0.6247 is +0.71%...

• Here is the link to the Fed statement & an excerpt of the coordinated central bank action:
  

  The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

  These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines' effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16.1 The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of U.S. dollar funding markets.

  The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad

• Classic thing would be for EQ markets to rally… this is what we have seen time & time again in this cycle… does not make it right or wrong.

• Now if equities DON’T rally, then we could be in for one very dark week… which could be the fruition of Bear Nirvana. Worth noting that despite VIX pulling back by -23% on Fri, vol of vol continue to lift higher

• Case in point early days yet S&P futures opened down & are c. -4% at c. 2585, gold is up c. 2.4% to 1567 & Crude softer at -1.7% 33.24… still early days & most of Asia is still not on their desks…

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Could be a gang buster week volatility wise for both the bears & bulls

Good luck to everyone out there, a lot of moving parts...

Namaste,

-KVP