Global equities went into free-fall overnight after a series of communication blunders triggered pandemic pandemonium on global markets. In mere weeks the market has shifted gears from a transitory health scare to a full-blown global recession. The White House imposed travel bans and provided the match in the powder barrel. But the market had been rapidly moving into combustion mode all week after Italy severed connections with the rest of the world, and closing all shops except food stores, pharmacies, and banks.
Global supply chains are no longer just “disrupted” but are now in the process of shutting down completely.
And even more worrisome is that the worst-case scenario and the sum of all fears are culminating with the view that policymakers remain well behind the curve.
The US government failed to impose any intra-US restrictions on travel, or large gatherings which were viewed as being entirely out of touch with reality. It provided the market with a hefty sell trigger. Everyone knows the number of reported cases in the US will skyrocket soon because proper testing has begun. So logically, without imposing the necessary containment measure, the US administration’s prevention strategy is extremely porous.
In what was otherwise a well-designed policy package, Lagarde’s communication misfire provided the market will not comfort. What spooked investors was a lack of signaling the ability or willingness do more – may be much more – if necessary. The market doesn’t need a boy who cried wolf response; it requires a considerable number, maybe something in the zillions.
But the ultimate in worrying signals comes after the markets failed to launch after the Fed announced their intention to flood the repo market cash. The move comes a day late, and a dollar short as the Fed action is being viewed as a bridge to get market into the weekend.
The market’s greatest fears are coming to fruition. Not only are Airline and Oil executives lining up at the Wall Street bankers’ doors. But now the who’s who of corporate America are drawing down on revolving credit lines.
Withdrawing dollars from the global banking system is triggering a massive dollar shortage, as seen by the widening in cross-currency basis.
Since the mad dash for cash has only started, things could likely get worse before better, so get ready to dip into your piggy banks just in case your local ATM runs dry of greenbacks.
But at the end of the day, the biggest issue in the market is not the impact of the virus itself, its the lack of monetary policy wiggle room to fight it, especially in the context of a collapse in inflation expectations.
Trading these markets is crazy as even I was getting scared of the volatility in my PnL yesterday. Maybe because it’s my own money now and not the banks !! But on that same note, last night did bring back memories of being on the desk through 1987 and 2008. Where trading too big is not OK, you might blow up or get fired. Too small is not OK either; you need to seize the moment. Trading in fast markets is when the most money gets made, and the alpha traders and the cream of the crop rises.
Oil Market
With Jet fuel demand falling off a cliff and recessionary fears moving like a wrecking ball through the oil industry, oil prices continued their decent in the abyss overnight and are now on track for a greater than 25 % this week.
The coup de grace came quickly on the heels of President Trump’s restriction on travel from Europe obliterating the outlook for near term fuel demand.
Brent crude one-year forward structure has also bearishly moved into a super contango for the first time since 2015, which has effectively relegated Bulls back to the pen.
Gold Markets
The gold market was caught in the crossfires of forced liquidation but eventually found support around $1560 a line in the sand from the previous broad asset sell-off from February 28
Asia gold buyers are likely a bit shellshocked this morning, but there were reports overnight suggesting that there was good demand into strong hands (real money funds), which could provide a backstop or even assist with a bounce.
Sill the missing element is Asia physical gold demand as even after falling $140 in a week, XAUINR is only back to levels from March 3.
Gold seems to have embarked on what looks like a reasonably steady downtrend ever since breaching $1700. I expect gold to be dragged down not just by oil, but equities as well. But in an environment where both bad news and good is bad for gold, investors still need to heed caution.
Currency Markets
Australian Dollar
Given Australia’s key role in global supply chains, the Australian dollar was pummelled overnight as global recessionary fears triggered a meltdown in the commodity market. With global investors viewing the Australian dollar as being backed by little more than a credit bubble waiting to happen sitting atop and iron ore mine, the currency received one of its worst one-day dressing downs on record plummeting to a 17-year low.
What is even more troubling, the collapse in the oil market is making things worse. With oil producers now having to operate below fiscal and current account break evens, the Australia resource sector will remain under pressure as companies will need to draw down reserves to fund their ongoing financial obligations. There is nowhere to hide this one out.
USDMYR
In a repeat of yesterday, ASIAN FX morning view.
Lower for longer oil prices will continue to stress the Ringgit. With the who’s who of corporate America drawing down on their US dollar revolving credit lines, the Global funding squeeze will dissuade investors from adding EM Asia FX risk But with the global mad dash for USD triggering the ongoing exodus of foreign money from local equity and bond market, the Ringgit as will the rest of the Asia FX complex remain under pressure until at least the US market plumbing is fixed.
