THE MACRO MENU: 16 - 20 MARCH 2020

THE MACRO MENU: 16 - 20 MARCH 2020

Updated: Mar 16


A QUICK WORD BEFORE WE BEGIN...


I would just like to say that the rise of cases and spread of coronavirus is a humanitarian issue first and foremost. So our deepest sympathy goes out to those affected by the situation. We will continue to be as responsible as possible in our ongoing analysis and coverage.

MARKET BRIEFING: Monday 16th March 2020

BREAKING NEWS AFTER TIME OF WRITING...


  • US Federal Reserve cut rates to 0% and restarted QE 700bln. Bank lifts its holdings of Treasury securities by at least $500bln and MBS by at least $200bln


  • Is to let banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent


  • Has united with five other central banks to ensure dollars are available around the world via swap lines


  • Powell said that he did not think negative rates would be appropriate policy in the US


  • G7 leaders, including Trump, are set to discuss their virus response on a teleconference on Monday (1400GMT)

  • Bank of Japan has stepped up its active buying of ETF's to an annual pace of JPY 12trl from JPY 6trl


MACRO OVERVIEW - Sunday 15th March 2020

HERE COMES THE FEAR


This week, economic data points are all but redundant with focus squarely on how national governments across the globe respond to rising cases of coronavirus. The Spanish government is set to declare a 15-day national lock-down on Monday and the UK's Health Secretary Matt Hancock is expected to tell every Briton over the age of 70 to stay at home for an extended period.



The escalation in attempts to contain and delay the virus has led to a clear elevation in the behaviour of the consumer with scenes of empty supermarket shelves across the country as people stockpile for the worst case scenario. This irrational behaviour is likely to exacerbate the issue further impacting not only supply chains but the old and vulnerable who may have limited access to resources.


A GLIMPSE OF WHAT'S TO COME


Overnight, we get the release of a series of economic data out of China (Industrial Production, Fixed Asset Investment, Retail Sales, House Prices, Unemployment Rate) which may well serve as the first tangible evidence as to the impact the virus has had on the economy. The consensus on these figures is not good, with forecasts anticipating an across-the-board contraction for the first time on record.



FED RATES BACK TO GROUND ZERO


It is not a matter of if but when do the Federal Reserve opt to move the Federal Funds Rate back to the historical low level 0-0.25% that was last seen in the post financial crisis era.


Markets are currently pricing a 68% probability that the Fed will cut a straight 100bps on Wednesday to supplement their 50bps emergency move on the 3rd March and the mammoth liquidity injections pledged at the end of last week.



There is some discrepancy between analysts on Wall Street on whether the Fed go 100bps now, or 50 in March and 50 in April, but to me it's all just semantics from here.


In summary, I expect the Fed to revert back to the "whatever it takes" mindset which means the ball now goes firmly back to the US administration and the hands of US President Donald Trump. It is for that reason I think this week we could continue to see large swings in market prices with the lack of continuity in policy taken in corona containment thus far.



TRADING OBSERVATIONS


In these type of market conditions, I think it's important not to become too entrenched in one particular view. If movement is not being sustained and price is choppy then react to those conditions, review and adapt.


In my mind, central banks have now played their hand so the driver of sentiment this week will likely come from how governments choose to react going forward.


As a statistic to be aware of for any US stocks traders, the final 30-minutes on Wall Street has seen the Dow swing on average ~300 points in recent sessions, so be extra careful towards the end of the day.


Also, be mindful of the risk of further erratic moves in assets like gold, which last week was subject to huge liquidation of positions as stocks continued to get crushed.


Other market prices I'm watching, which may act as an indication for further signs of distress are; bond yield spreads in Europe and the performance of high yield and leveraged loans, particularly those tied to energy, retail and leisure industries.


The reality is that a full shutdown across entire countries will inevitably lead to a number of casualties across industries. The question here is whether the monetary and fiscal responses are timely and targeted enough to keep liquidity flowing and assist the small to medium size businesses who are most at risk.


FINAL THOUGHTS


I highly recommend watching a video put together by colleague Eddie HERE, who discusses how the unexpected coronavirus pandemic has exposed pre-existing weaknesses in the global economy and how it may end the 11-yr bull run. It's a great insight into the credit markets, its implications and what global central banks can do to address the situation.


This is all I'm going to cover for now as the situation is in constant flux. @snorth19 and I will be having a short chat via my Twitter account (@AWMCheung) later this evening (Sunday 15th) if you want to hear further thoughts on the week ahead, and remember to subscribe to our YouTube channel for regular market updates.


Anthony Cheung

Head of Market Analysis



CALENDAR HIGHLIGHTS

Monday: JN Core Machinery Orders, CN Industrial Production, Fixed Asset Investment, Retail Sales, House Prices, IT CPI, US NY Empire State Manufacturing Index, TIC Data


Tuesday: JN Tankan Index, AU House Prices Index, JN Industrial Production, Capacity Utilisation, UK Employment Change, Unemployment Rate, Average Earnings, GE ZEW Economic Sentiment, EU Construction Output, Wages in Euro-Zone, US Retail Sales, Industrial/Manufacturing Production, Capacity Utilisation, Business Inventories, JOLTs Job Openings, NAHB Housing Market Index, CA Manufacturing Sales, US Primaries: Florida (219 delegates), Illinois (115), Ohio (136), Arizona (67)


Wednesday: IT Trade Balance, Industrial Sales, EU Trade Balance, CPI, US Housing Starts, Building Permits, US Fed Interest Rate Decision, Summary of Economic Projections, Press Conference, CA CPI, NZ GDP


Thursday: JN BoJ Interest Rate Decision, CPI, AU Employment Change, Unemployment Rate, Philly Fed Manufacturing Index, Current Account, Leading Index, CA New Housing Price Index


Friday: JN Holiday, GE PPI, EU Current Account, UK Inflation Expectations, Public Sector Sector Net Borrowing, US Existing Home Sales, Baker Hughes Rig Count, CA Retail Sales



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