09-Mar-2020

1) Coronavirus Goes Front & Center Of Trader’s Minds
2) What You Should Know About The Other Shock: Oil Prices
3) EUR/USD Trades Around 1.14 Amid Extraordinary Volatility
4) GBP/USD Battles 1.3100 Amid Broad US Dollar Weakness

 

 

1) Coronavirus Goes Front & Center Of Trader’s Minds

The danger that appears to be spreading, is the Coronavirus.  Keep safe and keep your hands washed!

So, the Coronavirus, is on everyone’s minds now, and on every news stations, tv and radio, and so on… There are even thoughts about major sports venues playing games without fans attending. We hope it doesn’t come to that, because if it does, it means the virus is out of control here in the U.S. Overseas travel is a no-go right now, and it seems to me that anyone coming home from overseas would be kept in quarantine until they can prove they’re not carrying the virus.

While gold had its best week since 2016, stocks did not… The roller coaster ride that is the stock market has really taken a deep dive with lots of selling…. The price of Oil didn’t have a good week either, as the price took a deep dive, and our friends at OPEC (NOT!) decided to make huge cuts in production, but even that announcement couldn’t help the price of Oil.

The Oil price drop has caused major collateral damage to the Petrol Currencies, led by the Russian ruble, who saw a muliti-figure drop last week to a 68 handle, and the Mexican peso fall to a 20 handle once again, and even the Canadian dollar/ loonie, which had seemed to be inoculated from this illness, gave up the 75-cent handle and trades this morning down two full cents from a week ago… And the Norwegian krone has weakened to a price that’s weaker than its kissin cousin, Swedish krona, which Wereally don’t every remember seeing in the past before now.

The other big winner, besides Gold last week, was the euro and in a very different trading pattern than what we normally see, when the euro rallies it takes all the other currencies along for the ride… But not this time… Stranger than fiction folks, but it’s what is happening… But there are a few currencies going along with the euro for a ride higher VS the dollar. The “safe haven” currencies of Swiss francs, Japanese yen, and euros have been bought like funnel cakes at a state fair.

Everyone and their brother know the Fed cut rates ½ point or 50 Basis Points last week, as they pointed to the Coronavirus disrupting economic development around the world as their reason for the “emergency cut” Of course the POTUS didn’t think ½ point was enough, and once again pointed to countries with negative interest rates, as if they are doing well with them, while they are not!

OH! and don’t look now but the 10-year Treasury’s yield has dropped to just 45 basis points! This is crazy folks and Serious, and serious times call for serious people, of which I’m usually not one, but I can be as a serious as a heart attack when I need to be. So, serious it’ll be.

Remember a couple of weeks ago when I told you about how famous economist, David Rosenberg, had talked about (on Twitter) how bonds had outperformed stocks? He had said, ” Bonds have more fun”. Well, he was back on Twitter this past weekend talking about how bonds continue to outperform stocks. Oh, and this just flashed across my screen. Stock index futures are trading at max down this morning, indicating a very nasty start of the day and week for stocks.

We had a discussion with my wife last night about a person that had come from Italy back to St. Louis, and now she has the virus. We have some serious thoughts on this situation, that I’m not going to get into now, and the Butler patio is not open yet, but my deck down here is. so join me if you can and I’ll impart my opinions on this situation!

So, getting back to the negative interest rates discussion. We truly believe that negative interest rates will appear here in the U.S. during the next recession, that should be the recession of all recessions. We said that in an interview with Dennis Miller of: Milleronthemoney.com for his weekly letter a couple of months ago. Why did We think that then? Well, I’ve explained this all before folks. We see things that are coming for the markets. Sometimes I’m way ahead of the crowd or the event if you will, but eventually my calls are bang on. And We truly believe that my call for negative interest rates here in the U.S. will also be bang on.

Is there danger in negative interest rates? Ahhh grasshopper, I’m glad you asked, for the answer is a simple: Yes there are dangers in negative interest rates. Think about that for a minute, if the savings you have in the bank account, which aren’t getting paid diddley-squat, begin to have charges on these balances, thus reducing your savings holdings, would you continue to keep your funds there?

What would happen to banks if there were runs on deposits? Armegeddon, that’s what! And the Fed would begin with helicopter money and attempt to head off the depositors before they reach the bank, and then the whole shooting match, the big enchilada, the economy comes to screeching halt, and the financial system collapses, and new system has to be thought of.

Now, how’s that for being serious? Wouldn’t you rather have fun-loving, Chuck back?

The U.S. Data Cupboard last week had us looking at a negative print for Factory Orders in January, and a Markit ISM (manufacturing index) print below 50 at 49.4, and finally a Jobs Jamboree where the BLS claims that 273,000 jobs were created in February. Never mind that 143,000 jobs were added out of thin air by the BLS after the surveys were received!

There’s not much for us to see in the Data Cupboard this week, so the markets will be on their own, which doesn’t bode well for the dollar, Oil, the Petrol Currencies and stocks.

To recap. It was a wild trading week last week, as the Coronavirus has taken over the minds of traders, who have exited dollars, bought the safe haven currencies, led by the euro, and bonds, and have sold stocks, Oil and Petrol Currencies. Oil saw its largest 1week drop since 1991. The 10-year Treasury’s yield has dropped by a HUGE margin to just 45 basis points folks. That alone should tell you just how serious this virus has become.

 For What It’s Worth. Longtime readers of this letter will recall me going ballistic on Janet Yellen a few years ago, when We said she was greasing the tracks for the Fed to buy stocks. Well, here we are a few years later, and the Fed’s Rosengren believes that the Fed will have to buy stocks.

Or, here’s your snippet: “Three weeks ago, former Fed Chair Janet Yellen incepted the idea that during the next crisis, the Fed should consider expanding the range of assets it would purchase, most notably buying stocks. Our comment to this was that “thanks to Janet Yellen, we now we know that before the current fiat regime of central banks finally ends and before stocks go limits up as the revolution starts, the Fed will order a POMO of, well, everything in one final, last ditch effort to keep social stability by creating the impression that stocks are stable and rising even as society implodes.”

Well, thanks to experiments conducted in a Chinese P-4 bio-lab, the next crisis appears to have arrived in the form of the coronavirus pandemic, and the idea of the Fed buying stocks is now on the agenda, case in point Boston President Eric Rosengren, who echoed Yellen, and said the Fed should be allowed to buy a broader range of assets – either by change of mandate or through a facility that allows it to buy stocks – if it lacks sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases. In such a scenario, the U.S. Treasury should indemnify the Fed against losses, Rosengren said in the text of remarks scheduled for delivery Friday in New York.

“In a situation where both short-term interest rates and 10-year Treasury rates approach the zero lower bound, allowing the Federal Reserve to purchase a broader range of assets could be important.”

Excerpt: “In such a case, as Marvin highlighted in his 1999 article, we should allow the central bank to purchase a broader range of securities or assets. Such a policy, however, would require a change in the Federal Reserve Act.  Alternatively, the Federal Reserve could consider a facility that could buy a broader set of assets, provided the Treasury agreed to provide indemnification.”

Rosengren also warned the Fed would face greater challenge than in 2008 crisis when Fed’s benchmark rate was cut to nearly zero, because yields on longer-run Treasuries have fallen below 1%.

Chuck Again. Ask the Japanese and Swiss just how great it is that their Central Banks own a majority percentage of their stock markets. I’m just saying.

Currencies today 3/9/20 American Style: A$.6604, kiwi .6334, C$ .7341, euro 1.1415, sterling 1.3090, Swiss $1.0780, European Style: rand 15.9330, krone 9.5232, SEK 9.3730, forint 294.57, zloty 3.7828,  koruna 22.3650, RUB 68.77, yen 102.40, sing 1.3829, HKD 7.7690, INR 74.35, China 6.9310, peso 21.53, BRL 4.6249, Dollar Index 95.21, Oil $32.55, 10-year 0.45%, Silver $16.96, Platinum $875.54, Palladium $2, 425.45, and Gold $1,.677.65

That’s it for today we are heading north again this morning, so I’ve got to get this out the door and get on the road! Our Blues won a good game in Chicago last night VS the Blackhawks! Always a “good game” when the Blues beat the Blackhawks! And the NCAA major conference championships will go on later this week, with “selection Sunday” scheduled for this coming Sunday, and then the brackets get printed and office production goes to the wayside. Thanks to good friends Kevin, Lisa, Gus, Diane, Duane and Rick for their visits down here these past couple of weeks.

 

2) What You Should Know About The Other Shock: Oil Prices

The outbreak of Covid-19 continues to be the major disruptive force, impacting households, investors, businesses, and policymakers.  The virus hits vulnerable individuals and institutions.  Monetary policy, and in some places, including Italy, fiscal policy will be deployed too.  The handling of the crisis could shape both Chairman Xi and President Trump’s political futures.

The coronavirus is disrupting supply and demand.  The near shutdown of the world’s second-largest economy and the downgrade of global growth prospects lowered the anticipated demand for oil.  It exposed an underlying problem of coordination among the OPEC and its allies (OPEC+), especially Russia.  An agreement was struck among 20 countries to reduce output by 2.1 mln barrels per day.  The deal expires at the end of this month.  Russia was believed to have been violating its agreement, and most of the cuts were borne by the Saudis.

The Saudis seemed to overplay their hand last week and failed to roll over the old agreement, let alone get secure a deal that would have support oil prices going forward.   By tieing an agreement to the Russian participation, which was always questionable, Saudi Arabia deferred the initiative to Moscow.  There has been a regime change of sorts in Riyadh.  The Crown Prince Mohammad bin Salman, who seems to be in yet another effort to enforce loyalty within the extended royal household, and Energy Minister Khalid Al-Falih, are both relative novices in the game of great powers.

In 2014, the challenge of supply was posed by US shale producers. Now the underlying supply problem has been exacerbated with a demand shock stemming from Covid-19.  Saudi Arabia is ambivalent.  Its instincts and traditional modus operandi are for production cuts, of which as the largest OPEC producer bears the bulk of adjustment.  However, the new leadership seems particularly sensitive to the fact that there is a free-rider problem.  Most of OPEC continues to produce near capacity, and non-OPEC countries have been consistently complying with the existing agreement, even after Russia got exceptions for its condensate.

The governance failure at OPEC+ means starting April 1, countries are free to produce at will. The Saudis produced about 9.7 mln bpd in February, and officials claim it can produce as much as 12.5 mln bpd.  Outside observes suspect near-term capacity is probably limited to around 11 mln bpd.  Besides it, the other two that could increase output would be the UAE and Russia, and that appears limited to about 100k bpd on top of current production.

In 2014, as the Saudis struggled to regain control/influence over the oil market, US shale producers proved amazingly resilient. The shale revolution was facilitated by three factors, innovation, cheap credit, and a certain attitude about the environment.  The fracking, horizontal drilling, and other technical developments made possible getting oil out of rocks instead of practically sticking a straw in the ground in Saudi Arabia.

Access to cheap credit was also critical.  It appeared that banks and other investors for willing to fund operations not based on the creditworthiness of the borrower, but on the value of the collateral, which is similar to what financial institutions did in housing previously.  US shale production is capital intensive, and debt servicing made for high fixed costs.  Even before the latest shocks, shale producers were struggling.  Estimates suggest that in 2019, there were 42 failures on $26 bln, twice the dollar hit as in 2018.

Not everyone with shale formations is willing to make the environmental trade-off. New York, for example, prohibits fracking, on such grounds.  A different calculation of the trade-off is necessary for the capability (formations and funds) to be realized.

Putin may be clever than the new generation of Saudi leaders or maybe just luckier. The Saudi-led attempt to dislodge the American producers in 2014 proved for naught, but maybe the try in 2020 will be more successful.  US shale explosion is slowing.  The Energy Information Agency expects US crude output to rise by about 300k to 13.2 mln bpd. The entire increase is from the Permian Basin. Several large producers have announced lay-offs.  Baker-Hughes oil rig count as of March 6 stood at 682, which is almost 20% less than a year ago.  The EIA estimates that drilled but uncompleted wells have fallen by about 10% as companies seek to defer drilling costs, which are nearly a third the total for a fracked well.

It appears shale productivity may be slipping.  As fields mature, competing wells are too close to each other, according to reports.  Fracking often produced steep falls in output quickly, but it appears to be happening faster than many companies anticipated. That means that new production is necessary to replace the old to the tune of about 1.5 mln bpd, according to some estimates.  Investors do not seem to be getting returns they expected.

The past three US recessions (1991, 2001, and 2008) were preceded by significant rallies in crude oil prices (~135%, 200%, and 100%, respectively).  It is possible, with the US becoming a net oil and gas exporter, and the important role of shale in US capital expenditures and growth over the past decade has changed the dynamics.  The past and future drop in oil prices accelerate the consolidation in the industry through failures and acquisitions, which over the medium-term may make the sector more resilient in the next cycle.

Different market measures of inflation expectations closely linked to oil prices.  The precipitous decline will weigh on headline measures of inflation and will hamper monetary officials’ efforts to reach inflation targets.  Although most of the decline in US Treasury yields can be accounted for by the dramatic swing in expectations of overnight money (i.e., Fed policy), the decline in inflation and inflation expectations exert downward pressure on yields.

Since oil is mostly traded in dollars, a sharp decline in oil prices is thought to weigh on the dollar.  However, this factor should not be exaggerated.  Oil is a small part of the dollar-trade in goods and services and accounts for a small part of the demand for dollars, which is on one side of around 90% of the trades in the $6.6 trillion-a-day foreign exchange market.

A sharp decline in oil prices leads to s transfer from producers to consumers.  China is the largest importer of crude, and its recent trade figures suggest oil and gas imports rose in the January-February period even though overall imports slipped.  However, refineries reportedly are reducing their demand, and storage facilities are being filled.  East Asia as a whole is a large oil importer, while several countries in Latam (e.g., Mexico, Colombia, and Brazil) are producers.   The Russian ruble is one of the most sensitive currencies to oil prices.  The correlation of the percentage change of the ruble and the percentage change of oil over the past 60 days is around 0.5, near the most over the last couple of years.  Among the major currencies, the Canadian dollar and Norwegian krone are often the most sensitive to the price of oil.

 

3) EUR/USD Trades Around 1.14 Amid Extraordinary Volatility

EUR/USD is trading around 1.14 after nearing 1.15, the highest since January 2019. Fears of an outright recession have gripped markets as coronavirus continues spreading and investors are panicking. Volatility is extreme. Eurozone Sentix Investor Sentiment fell to -17.1 points in March, the worst since 2013.

In the wake of the dramatic moves, the daily chart is more useful than the four-hour graph. The Relative Strength Index is above 70 – indicating overbought conditions. While the RSI implies a correction, these are abnormal days. EUR/UDS is trading above the 50, 100, and 200-day Simple Moving Averages, and momentum is to the upside.

Resistance awaits at 1.1450, which was a peak in March. It is followed by 1.1495, the daily high, but more importantly, by 1.1520, a high point in January 2019. Next, we find 1.1575 and 1.1620.

Some support awaits at 1.1410, which was the high point in June 2019. IT is followed by 1.1285, a stubborn cap from July, and by 1.1240, which held it down in December, followed by 1.1160, a cap from January 2020.

How low can US yields go? The crash in returns on US debt is weighing heavily on the dollar and pushing EUR/USD to new highs – even though one of the largest sources of worry comes from the eurozone’s third-largest economy.

Bond markets are pricing a sharp reduction of interest rates – 75 basis points – by the Federal Reserve in its scheduled meeting next week. The bank slashed borrowing costs by 50bp last week, in an extraordinary session. The benchmark ten-year yield dropped below 0.50%, and the whole yield curve fell under 1%.

Italy has decreed the lockdown of vast areas in the north of the country, including Milan, the country’s second-largest city, and the country’s industrial heartland. While reports suggest that the severe restrictions are not thoroughly followed, paralyzing the lives of 16 million people – a quarter of the population – is weighing heavily on markets. Rome said that the death toll jumped from 233 to 366 on Sunday, with over 7,000 cases.

Italy – whose economy was stagnating before the crisis – will likely suffer a recession, and other countries in the eurozone will likely follow. Nevertheless, the Fed has more room to cut than the European Central Bank. The Frankfurt-based institution convenes this week and may announce a new stimulus. However, the ECB’s deposit rate stands at -0.50%, and its bond-buying scheme is at €20 billion per month – leaving it little room to act.

Investors are also worried about the spread of the disease in the US, where a lack of test kits for the respiratory illness is raising fears of a widespread outbreak. So far, 554 infections and 21 deaths have been confirmed in the US. President Donald Trump attended a conference alongside a person that was later confirmed positive for coronavirus. However, that person was probably far from the president. Senator Ted Cruz shook hands with a person that was later diagnosed with the disease – and the senator is now in quarantine.

 

4) GBP/USD Battles 1.3100 Amid Broad US Dollar Weakness

GBP/USD is trading around 1.31, a five-week high as investors flock into the safety of US debt, pushing yields and the dollar down. Coronavirus fears are growing.

The Relative Strength Index on the four-hour chart is above 70 – pointing to overbought conditions that imply a downside correction. GBP/USD was rejected at 1.32, which now turns into a triple top after holding the currency pair down in January and in February. It remains critical resistance.

Other indicators are positive, with pound/dollar trading above the 50, 100, and 200 Simple Moving Averages and momentum pointing to the upside.

Above 132, the next line to watch is 1.3285, a peak from December, followed by 1.3310, which also dates back to the same time. The next levels are 1.3420 and 1.3510.

Support awaits at 1.3070, which was a stubborn cap in February. It is followed by 1.3040, the daily low. Next, we find 1.2950,  a pivotal line in recent weeks. 1.2850 and 1.2825 are next.

Markets are in a panic mode– and this is no exaggeration. Growing fears over the spread of coronavirus have triggered a massive stock sell-off in Asia and Europe, with investors flocking to US bonds. The consequent fall in US treasury yields – with the full curve crashing below 1% – has sent the dollar tumbling down. GBP/USD has hit 1.32 before retreating.

Bond markets are pricing a massive 75 basis point rate cut by the Federal Reserve on March 18 – on top of last week’s emergency 50bp reduction. In the UK, the Bank of England’s borrowing cost stands at 0.75%, leaving it limited room to act. Moreover, both outgoing BOE Governor Mark Carney and his successor Andrew Bailey have seemed calm and in no rush to announce unscheduled moves.

On the coronavirus front, there are multiple developments. Italy’s decision to lock down a quarter of its population – including the industrial heartland around Milan – is one of the major factors. Fears about the spread of the outbreak in the US which is slow to test people and the crash in oil prices are also weighing on sentiment.

Petrol prices have tumbled amid expectations for slower demand and the breakup of the OPEC+ alliance. After Russia refused to extend and deepen production cuts, Saudi Arabia announced an increase in production and higher prices.

In the UK, the number of cases reached 273 and three deaths have been reported. The infection in the UK is low and cannot be attributed to the fall pound’s inability to extend its gains. However, Brexit remains a downside factor. British and European negotiators concluded the first week of talks with little progress.

Michel Barnier, Chief EU Negotiator, expressed pessimism about reaching a deal on future relations before year-end. The UK left bloc on January 31 but retains its rights and obligations during the transition period which expires at year-end.

Overall, coronavirus headlines, from health updates through lockdown measures and to central bank action are all in play.