My days increasingly begin with the phrase “where do I start?” Jumping in: it is clear that the dislocation of pricing across forex, oil and precious metals markets overnight, is pointing to mass liquidation and a move to hoarding cash. Bond yields reinforced the point, with European and American bond yields racing higher as a mass culling on bond holdings took place. It got so bad with Italian government bonds, that at one point, that the European System of Central Banks (ESCB), intervened directly via the Bank of Italy, to restore order.
It was also evident where that hoarded cash was being directed. Short-term Treasury bills – sub-three months – fell to near zero per cent yields, even as long-dated bond yields climbed into the stratosphere. The U.S. Dollar swept all before as petro-currencies were crushed under the tank tracks. The same fate awaited many emerging markets and the AUD and NZD, which have sunk to previously unimaginable multi-year lows. The UK sterling has taken out its Brexit lows, sinking to 1985 lows, but probably feels like an Orwellian 1984. The Bank of Korea has already been sighted intervening by selling U.S. dollars against the won this morning.
Anyone wondering where the central bank helicopter money is, need only look up in the sky and listen. Like a pimped up scene from Apocalypse Now, the sky is dark with central bank helicopters whose sling hooks are full with bags of cash. The Federal Reserve announced it had restarted its GFC-era commercial paper programme to the tune of $300 billion initially. Emphasis on initially. Qualifying corporates can sell their commercial paper directly to the Fed in return for cash.
The ECB announced overnight, a gigantic EUR 750 billion bond-buying programmes that also includes qualifying corporate debt. It also removed its 30% ownership cap on a single country’s sovereign bonds within Europe. The ECB will be very long peripheral Europe by the time this is over.
Not to be outdone, the Bank of England announced its own commercial paper facility. The BOE is prepared to buy commercial paper from UK-based corporates in potentially unlimited amounts for as long as it takes, taking pressure of the banking sector. Now, that’s a helicopter.
The U.S finally seems to be getting its act together. The White House and the U.S. Senate have passed the first House of Representative stimulus bills with more to come. The President has also invoked the Defense Production Act, which allows him to direct companies in the U.S. to produce what he tells them to. No one should be under any illusion of the scale of the power that the U.S. can deploy in this crisis once it gets it act together. Therein lies the alcohol rub though. For some reason the House is in recess this week, meaning any follow-up legislation will have to wait, just when speed is needed. It appears that poor decision making is not limited to the White House and Senate.
Nevertheless, from all corners of the developed world, the machinery of fiscal and monetary policy is ramping up production at a frenzied rate, loadings money into the fleets of helicopters, ready to rain down on their economies. It is unlikely to be the last production cycle, but at least it’s a start. My prediction is at the very least, most of the world’s aviation industry, airlines or production, will be either nationalized, have majority government ownership, or will be on governmental life support before all this is over. Some iconic names may never return.
Today in Asia, central banks will also be busy. The Reserve Bank of Australia should shortly announce another rate cut to 0.25% with some sort of QE programme attached. The central banks of Indonesia, Taiwan and the Philippines all meet today, and universally, I expect them all to cut rates. Unfortunately, it will come just as pressure on their currencies reaches a frenzied level, but it will be the lesser of two evils.
Overall, yesterday looked like a mass capitulation trade across most markets. Unfortunately, I suspect that capitulation trade will be a multi-day one, with the end result being markets trading sideways at their lows for an extended period. Fantasies of V and U-shaped recoveries should be left in children’s storybooks for now.
Notably, the Philippines Stock Exchange has reopened today, and has already fallen 20%. Circuit breaker stop included. The rest of Asia is also suffering, notably the KOSPI, down 6.50%, Jakarta down 5.0%, Taiwan down 5.0% and Hong Kong, down 4.0%.
The rest of Asia is not immune with the Nikkei 225 lower by 2.0%, the Shanghai Composite by 2.15% and the CSI 300 by 1.20%. The authorities there are almost certainly “in the market,” easing losses. Australia and New Zealand equities seem to be gleaning some support from the collapse in their currencies, but the ASX 200 is still down 2.25%, and the NZD 50 by 2.85%.
The impending rate cuts across the region are unlikely to be supportive, even in the short-term, for regional equities. The rush to cash will swamp any attempts at rallies for now.
The currency market exploded into life for all the wrong reasons overnight. Mass capitulation in equity, commodity and bond markets saw the U.S explode as investors globally rushed into U.S. cash and short-dated bills. Only the euro showed any sort of resistance, as fund managers repatriated euros from across the globe. But it still fell 0.80% to 1.0900.
Commonwealth currencies were singled out for particular attention. The BoE’s unlimited helicopter money and speculation of a population lockdown in London saw sterling collapse to Brexit-vote lows. GBP/USD fell 3.70% to 1.1600. GBP/USD may have more pain ahead with the UK’s government perceived internationally, as having taken a woefully incorrect strategy in managing coronavirus. Time will tell.
The Australian and New Zealand Dollars both fell by over 3.0% overnight, hitting multi-year lows. The rot continues today, with the AUD/USD falling another 4.25% to 0.5530, a level not seen since 2003. The 2002 lows at 0.4800 are now not out of the question. The NZD/USD meanwhile, has collapsed by 4.40% to 0.5490, with its brief GFC lows at 0.4900 the next obvious target. I have serious doubts that we will see those levels, however.
The reason is that AUD/NZD has collapsed to 1.0060 today, touching the fabled 1.0000 overnight. Being short AUDNZD below 1.0200 in all of history has been a guaranteed death knell. For that reason alone, being short AUD, and to a lesser extent the NZD, at these levels is dangerous from past history. We may indeed see more capitulation flows in both over the next few days, but traders should be very nimble indeed if they are short. The recovery higher during the GFC was gruesome, and I would not bet against history repeating itself.
Petro-currencies such as the NOK, RUB, MXN and CAD were all cremated overnight as oil plunged to new lows. The outsized pain experienced by them is likely to continue as Saudi Arabia and Russia settle in for an extended price war as the world economy drops into recession. You couldn’t make this up.
Asian currencies have faded today as the USD/CNY hits 7.1000, still a modest fall when compared to the carnage elsewhere. While the PBOC will ensure the yuan remains a bastion of calm in a chaotic world, regional currencies are much more vulnerable. Most notably, the Indonesian rupiah, Korean won, and Philippines peso remain firmly in the centre of investors crosshairs, all falling over 1.0% today with the Bank of Korea seen intervening already. I wouldn’t be surprised to see Philippines markets close again as quickly as they reopened, and this time, stay closed.
We have not seen the end of the capitulation trade yet, and as such, the U.S. dollar will see more strength over the coming days.
Panic set in in oil markets overnight, with WTI collapsing by a gigantic 17.0% to $22.60, an 18-year low. Brent crude fared little better, tumbling by 8.0$ to $26.50 a barrel. The outsized fall by WTI reflects the news that onshore storage for excess oil supplies is running out around the world, amid the general capitulation trade.
The fact that the world is running out of onshore and floating storage has left oil falling again today in Asia. Brent falling 5.0% to $25.00 a barrel, and WTI falling 2.50% to $22.00 a barrel.
With a global recession upon us, with an indeterminate end, and a price war in full cry by oil producers, the world should probably be preparing itself for sub $20.00 oil sooner rather than later. If I were to be asked where the next strong support for oil is, I would point out the WTI has multi-year technical support at $10.00 a barrel. Enjoy.
Gold was swept up yet again, in the global rush to cash as other asset classes from bonds to equities were sold in a disorderly manner. Gold fell $41 dollars, or 2.70%, to $1486.00 an ounce overnight. That sell-off continues this morning as mass liquidation continues across most asset classes. Gold falling 0.90%to $1472.50 in Asian trading thus far.
If mass liquidation in other asset classes continues, gold will also likely see any rallies nullified, as investors desperately sell any liquid assets to raise cash. The charts suggest that gold has settled into a wide but real $1450.00 to $1550.00 an ounce range. However, we cannot rule out further extensions to $1400.00 an ounce in this environment. Maybe even lower still.
Until we see concrete evidence that the global rout in equities and bonds has eased, picking the bottom of gold prices will probably be an unrewarding occupation. Taken in context, gold is only back to November 2019 levels, quite a startling fact. That means that it will remain a favorite liquidation asset for long-term traders looking for cash. Given its relatively modest fall in the grander scale of time, it is possible that gold could trade even as low as $1300.00 an ounce before fundamentals reassert themselves with a vengeance.