A further slowing in growth
US equities rose sharply overnight despite the news unemployment claims in the US have risen to 3.2 million for the week to March 21.
US stock post gains for the third successive session, on a day when US weekly jobless claims recorded their biggest ever jump by a factor of five – to 3,283k versus 282k the week before. The grim economic news that will continue to unfold in coming weeks is, we can conclude, largely discounted. Monetary and fiscal policy support being meted out in ever larger quantities is currently in the driving seat for markets. Bond markets continue to feed off the prospect of ever larger quantities of central bank buying not ever larger quantities of new bond supply, while the improvement in risk sentiment this week – albeit the VIX is still above 60 after a beginning of week peak above 80 – is seeing the air come out of the this month’s USD rally. The DXY index is currently off 1.6% from Wednesday’s NY close and AUD and NZD are both showing gains of close to 2%.
Note that late yesterday the Global FX Committee (GFXS) issued a statement warning of the likelihood of intense FX volatility in coming days related to end of month benchmark fixings. Viz:
“Given the intense volatility seen in global financial markets this month, it is possible that FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings. In addition, FX market participants may face more operational constraints reflecting lockdown in some financial centres. In light of these possible developments, significant volatility and price movements may be observed during FX fixings in the coming days”. You can read the whole statement here.
We can well believe that we are for an extremely rocky ride in FX markets between now and month end (next Tuesday bearing in mind that the S&P500 is currently some 20% up on the lows that we saw on Monday of this week. This follows a 35% fall since late February and which was the primary underlying source of the dramatic falls we saw in most currencies against the USD at mid-month – AUD and NZD especially – from asset managers seeking to re-set the hedges on their international equity exposures back closer to benchmark (i.e. from a position where they were significantly over-hedged given the destruction in underlying asset values). Some will not yet have adjusted, and some will now find themselves under-hedged given the big equity reversal so far this week. And, some may be looking to implement changes to strategic hedge ratios at the same time. Buckle up (and a shout out here to the spot dealers of the world (in Sydney and Wellington in particular!)
Weekly US jobless claims were the most keenly anticipated, or perhaps that should be dreaded, data point of the week. The 3,283k outcome was double the median economist forecast of 1,700k, even allowing for the fact that not everyone who could claim last week following their lays-offs was able to with unemployment insurance websites and call centres overwhelmed. Our friends at Pantheon Economics reckon that claims could rise to total between five and seven million between the March and April payroll survey dates, consistent with an unemployment rates of as high as 8% (from 3.3% in February). It could well rise further from there.
We also had the advance US goods trade deficit for February, which fell to $59.9bn from $65.9bn and $63.4bn expected, the fall driven by weaker imports as a result of supply chain disruptions out of China. March data will likely show a much bigger drop in imports.
The GfK German consumer confidence reading fell to 2.7 from 8.3, well below the 7.5 expected, while UK retail sales (ex-auto fuel) fell by 0.5% after +1.8% in January, weaker than the -0.2% expected. The Bank of England’s latest policy meeting came and went without incident, as expected given the earlier out of cycle emergency actions (including Bank Rate down to 0.1% and an extra GBP200bn of QE, recall). More significant that any of this, the UK chancellor Richi Sunak has announced that Britain’s 5 million self-employed will, if they are put of work due to COVID-19, be guaranteed 80% of their average income of the prior three years for three months, up to a maximum of GBP2,500 a month.
No surprise that the US Senate voted (96-0) to approve the $2tn fiscal package, which now moves to the House of Representatives to vote on, before President Trump (who has already said that he supports the bill). There will doubtless be more to come in coming weeks and months.
In a rare TV interview, Fed Chair Powell said that the Fed would keep supplying credit “aggressively and forthrightly” and that “when it comes to this lending we’re not going to run out of ammunition”. He noted that “this is a unique situation, this is not a typical downturn”, arguing that confidence will return once the spread of the virus is under control.
The G20 statement after a virtual meeting said that “we will continue to conduct bold and large-scale fiscal support”. With Saudi Arabia (currently chairing G20) and Russia in attendance but nothing out of G20 by way of promises to reduce supply, the oil market remains under pressure. The US suspended its plan to buy oil for its Strategic Petroleum Reserve while the IEA highlighted the free-fall in global oil demand, some 20m barrels per day. Brent crude is heading back down towards the low see early in the week and currently sits just under $27 per barrel, down 2.5% for the day, though of course oil is being supplies to some of Saudi Arabia’s major customers at well below benchmark prices.
The ECB outlined the detail of its €750b bond buying plan, which looked to throw away the previous playbook which considered legal and political implications of its actions. Most of the programme’s bond-buying limits were scrapped, including the previous cap of not buying more than a third of any country’s eligible bonds. The ECB can now also buy more short-dated bills, paving the wave for buying Germany’s planned extra €150bn in borrowing, which is to come via issuance of bills maturing in less than a year. These polices will increase the calls that the ECB is simply just funding governments, a previous no-go area, but it also highlights how serious the ECB is taking the current shock facing the economy.
US equity markets have just enjoyed another ‘hour of power’ – this time in a positive direction, the S&P and Dow closing with gains of more than 6% and the NASDAQ just under. This follows more modest gains of no more than 2.5% for the major European bourses.
US bond markets come into the last half hour with falls of about 4bps across the curve it what has been relatively subdued market in terms of daily yield ranges, at least by recent standards.
Everything is up against the USD, with the ever-sharp toy that is the NOK leading the way +3% despite the lack of positive oil price news (Norway is selling large amounts of foreign assets to meet domestic budgetary needs). GBP looks to have benefited from the news of self-employed income support, up 2.8% on the last 24 hours, while NZD is up 2.1% and the AUD to 1.9% to a high of 0.6088, so fully reversing the sharp from we saw of yesterday’s high just above 0.6070.
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