10-Mar-2020

1) Asia Emerges from The Rubble
2) USD/JPY Jumps Back Above 104.00 Amid Risk Rebound
3) Dollar Falls As US Yield Curve Hits Record Low As Well As Selloff In Oil Prices And Global Equities

1) Asia Emerges from The Rubble

After the strong earthquakes that shook financial markets yesterday, Asia appears to be emerging from the rubble and dust clouds. US equity indices futures, oil and Asian stock markets are all moving sharply higher in the last hour.

The reason for the sharp moves higher appears to be the press conference in Washington DC, held by President Trump and Vice-President Pence that has just concluded. Perhaps reflecting the strange times, we live in. Both gentlemen outlined potential fiscal stimulus measures, including payroll tax relief they hope to clear through Congress. Offsetting it is supposed, the coronavirus/oil price shock that has roiled markets.

Additionally, VP Pence gave the impression that the US is finally getting its act together on the coronavirus containment front. In times of turmoil, nothing is more important in restoring confidence, than the government appearing calm and in control of the situation, how tenuous that control may be. Both gentlemen seem to have pulled that feat of this morning.

That does not mean that the world is out of the woods after just one day. Far from it. A coordinated response will be required from monetary and fiscal authorities around the world to achieve that. It is also important to realise that any moves made, will not be a magical panacea to the ills sweeping the globe. They can only mitigate the situation, not make it go away.

With interest rates at records lows around the world, central banks are running dangerously low on monetary ammunition. That does not mean though we are low on fiscal ammunition. Those same low rates make it a perfect time for governments to undo the purse strings with debt never cheaper to fund than it is now. The major roadblock to this approach is off course the austerity mindset prevalent in certain quarters of the world’s ivory towers. (Yes, we are talking about you Germany) Those politicians and bureaucrats would be well advised to understand the value of work to the average person on the street, before sticking stubbornly to their ideological guns.

Issuing a trillion dollars or euros of 30-year debt at near-zero per cent interest rates into a deflationary environment would be the deal of the century. If interest rates rise once the world recovers, the opportunity presents to repurchase it at a much lower price than you sold it. To paraphrase President Trump, “it would be a wonderful trade, wonderful.”

Readers for now though should be a little cautious about getting caught up in the hype of a relief rally. If we are indeed entering structural bear markets across the world, we will see plenty of these false dawns along the way. A payroll tax relief in the US will not single-handedly save the economy from a recession. We also note that coronavirus is still well and truly with us still. Italy is effectively trying to lock down the entire country overnight to combat its spread there. Copy that playbook to other major economies around the world, and throw in a deflationary shock from oil’s collapse, and we can see that the world is nowhere near being out of the woods yet.

We was asked by many reporters repeatedly yesterday, how long can this oil-price war go on. And how long can this coronavirus emergency last? If the world’s containment measures are effective over the next two months, and if after a month of chest-thumping, Saudi Arabia and Russia get back to the negotiating table, then the world will move on rather quickly. That’s a huge “if” though isn’t it? The honest answer is that nobody really knows yet how this will all play out; we just don’t have that data available to us, no matter how learned. The best answer, we believe, is to plan for the worst and hope for the best.

2) USD/JPY Jumps Back Above 104.00 Amid Risk Rebound

USD/JPY is closely following the action on the Japanese indices. The spot jumps back above 104.00, tracking the solid comeback in the Nikkei 225 index. Further, the rebound in the S&P 500 futures and Treasury yields keeps the spot underpinned.

Fear more than technicals are the critical driver at the moment for USD/JPY. The decline found support above 101.00. The rebound that followed was not strong enough to change the short-term bearish bias. Price is offering some signs of stabilization, but a decline below 101.80 could activate more volatility and a test of 101.55. Below the next support area arises at 101.00. A slide below 101.00 would set the attention on 100.00. If risk aversion persists volatile and prices under 100.00 should be on the cards. Over the short-term, a recovery above 102.80 (14.6% Fibonacci level of the slide from February 20) it could extend toward 103.50. Above, the upside should be limited by 104.20/30.

In the US for the first time, the entire curve fell below 1%. The fly to safety benefited the yen that rose sharply across the board. The currency was the best performer on the day Wall Street tumbled again. As long as market sentiment remains dominated by risk aversion, the yen will remain strong. A decline of USD/JPY below 100.00 is not seen as something improbable at the moment and more events like the 300-pips decline of Monday’s Asian session should not be ruled out. Fear is driving investors currently. A rebound in equity markets or even in USD/JPY, will likely be seen as a correction and probably as an opportunity to sell again. Potential announcements like bold monetary easing or a coordinated global fiscal expansion could spark a recovery of the dollar versus the yen.

3) Dollar Falls As US Yield Curve Hits Record Low As Well As Selloff In Oil Prices And Global Equities

The greenback fell against its G4 peers on Monday due to selloff in U.S. Treasury yields, where the entire yield curve dropped below 1% record together with more than a 30% plunge in oil prices as Saudi Arabia and Russia began an oil price war that threatened to overwhelm global oil markets with supply, resulting in the biggest daily decline since 1991 Gulf War as well as weakness in global equities as the coronavirus spreading continued to spread across the globe causing more economic damage.

Versus the Japanese yen, dollar went through a volatile session. The greenback opened lower and dropped to 103.54 in New Zealand on active safe-haven jpy buying. Despite recovering to 104.26 at Tokyo open, the pair then tumbled to 101.57 in Asian morning on sharp decline in Asian equities before rebounding to 102.06 on short-covering. However, price later tanked to a 39-month bottom at 101.19 in New York morning as entire U.S. yield curve fell below 1% for the first time ever as well as sharp fall in U.S. equities. Later, the pair recovered to 102.68 before moving broadly sideways.

The single currency opened higher and gained to 1.1395 in New Zealand, price then jumped to a 13-month high at 1.1494 in Asian morning on usd’s broad-based weakness. Despite retreating to 1.1366 in Europe on profit-taking from its recent gains, the pair then rose to 1.1484 in New York morning before easing.

The British pound went through a hectic session. Although cable opened higher and gained to 1.3125 in Asian morning on usd’s broad-based weakness due to selloff in U.S. Treasury yields, oil prices, and Asian equities, price met renewed selling and fell to 1.3035 ahead of European open on profit-taking from its recent gains. However, the pair then erased its losses and rallied a 5-week high at 1.3200 in European morning but only to weaken again to 1.3063 on speculation that the Bank of England will cut interest rates at its next meeting later this month. Later, the pair rebounded to 1.3150 in New York and then moved sideways.

In other news, Reuters reported the Italian government urged the European Union on Monday to adopt a package of measures to counter the impact of the coronavirus outbreak on the economies of the block.     Italy has been hit harder by the crisis than anywhere else in Europe, with 7,375 cases and 366 deaths, and Rome imposed a virtual lockdown across a swathe of its wealthy north on Sunday.

Prime Minister Giuseppe Conte said on Monday that the government would further increase spending in a “massive shock therapy” to offset the economic impact of the epidemic.

In a separate statement, the economy ministry said that “the government will spare no effort to ensure that a package of measures is agreed at the EU level in coordination with the whole international community”.