Asia Update: Panic Is Giving Way, But Concerns Continue

Global investor and market participants are making a broad reevaluation of priorities and what is essential in life, from the comfort of their home mind you.

The speed-up in government handouts to pillow the economic fallout for businesses and households is supporting risk sentiment. Panic is giving way as investors take solace.

However, the question is not if there will be a recession, but how deep and long-lasting it will be. Central banks can oil the machinery of the financial markets, while governments can stem a demand shock. The economies that come out of this crisis the strongest will have enacted early monetary and fiscal responses, and imposed coronavirus testing and quarantining early, such as China, Korea, Singapore, Taiwan, and New Zealand. But the Eurozone and, maybe even the USA is worse-placed, where policy deluges are forthcoming but where tighter containment response has been lacking

COVID-19 Chaos 

S&P 500 closed 6% higher after global central banks, and G-7 leaders went The Full Monty, and now the market digests the impact of the Fed's QE and the array of White House stimulus plans.
 
To the markets cheers, while improving policy transmission, and to ensure money transfers directly and quickly into the hands of industries who need it the most. The Fed said it would launch a commercial paper funding facility to provide credit directly to a range of companies.
 
Wisely, The Bank of England has followed in the Federal Reserve's footsteps with its facility for commercial paper, to be called the Covid Corporate Financing Facility. The CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity.

Taking a page out of Hong Kong's recent efforts, the US government is working on a fiscal stimulus package centered around providing cash cheques directly to households.
 
Media reports suggest the “market carnage package” could be worth about $1.2tn, approximately 6% of US GDP. The UK government also said overnight it would provide GBP330bn in loan guarantees for businesses.
 
These are precisely the kind of numbers the market was looking for, even if the details are sketchy, dropping a colossal amount of cash in the market's lap was necessary.
 
One could only imagine how disastrous things could have become as in still difficult liquidity conditions markets would have plummeted much further absent the central bank's policy deluge action.
 
But you know things are getting weird out here when cross-asset traders start placing wagers if the Algo's can take us to limit up to limit down in one day?

What Next?

More easing and a series of drone drops around the world as the bond market now moves from a state of famine to a severe case of indigestion consistent with the transition from "traditional" monetary policy to fiscal policy. 
 
Low inflation and the exogenic nature of the coronavirus crisis have unshackled constraints on central banks.
 
And after firing their full complement of policy howitzers, this, in turn, will pave the way for an even more aggressive fiscal-policy response the likes the world has never seen before. Interest rates at the LZB or below make it a no brainer for governments to turn on the fiscal taps while the central bank will have the bond market back dealing with bond flow overload.
 
Therefore, markets should expect increasingly aggressive policy response from central banks and as core rates sell-off QE to become relevant again. 

Oil Markets

The surprise inventory draw fell entirely through the cracks. 
 
With global oil demand collapsing tangentially to the spread of the coronavirus, which looks increasingly acute, coupled with border closure and quarantines getting implemented around the world, the demand prospect looking even more dismal today as everyone rushes to revise demand growth lower. 
 
Indeed, the scale of the economic impact of Covid-19 on the major world economies is unparalleled.
 
And if you needed more reason to sell, Saudi Aramco (SE:2222)'s 4Q conference call confirmed Saudi Arabia's continuing intention to raise production to maximum levels of 12Mbd. Aa policy decision seemingly designed to drive prices to zero as storage quickly fills.

Watch out below 

 Physical " bargain hunting"  will result in large inventory builds and could trigger an even further steepening of the forward curve into super-duper contango to cover the quickly rising costs of storing all these barrels. The problem is when storage capacity is reached; (I need to defer as I'm not even sure if we have ever reached peak storage). This is when the curve likely flattens to spot and oil markets volatility moonshots. 
 
Not sure if a point of equilibrium even fits into this scenario as once the swift and savage physical rebalancing takes place  the markets could easily  topple to near cash cost below $20  or even further which is now becoming the base case for many 

Gold Markets 

Gold has finally responded to the Fed policy deluge, but it might have taken Washington’s drone drops providing cash cheques directly to households in the USA to trigger the buying. But ultimately, the near-term gold trade hasn't changed. While gold markets are showing signs of stabilizing, it took helicopter money to do so, and if drone drops don't weaken the US dollar, I'm not sure what will over the short term.

The fresh boost of liquidity and short-term rates to near zero aided an early gold rally. But whether the rally is sustainable will much depend on if the equity market declines in westerns stock markets stabilize or not. 
 
Technically as oversold gold might be, the equity market is even more so. When factoring in the volumes and velocity of the recent stock market rout, there's a good chance US markets rally into the weekend, so gold may follow in lockstep all things equal.
 
And if you’re wondering where the sovereign demand for gold is, according to Goldman, Russia demand has fallen off due to lower oil revenue.

But in my view, central banks are more concerned about increasing their USD holdings by any means and increasingly so through SWAP lines. At this stage, buying gold is well down their list of concerns. However, for the gold market concerns, hopefully, we don’t get to the stage where Central Banks need to sell gold to raise dollars as that's when the trap door most certainly springs.