President Trump just announced a suspension of all travel from Europe for 30 days except for the United Kingdom. That headline was enough to send Asian shares, already wobbling at the knees, sharply lower in early trading with commodity markets following shortly after. Apart from the usual, and unusually subtle, China-bashing, the President also announced the deferment of $200 billion in taxes. However, he did not announce any new concrete measures such as a large-scale payroll tax cut to buffer the economy against the impending coronavirus slowdown.
That has probably disappointed markets more than anything. The President will need congressional approval to enact these measures, and given the partisan nature of both Houses, this is a substantial challenge. Both in the speed of response that is required and crossing party lines. Lost in the initial noise, but far more concerning to the author, is that the U.S. Senate is not due to sit next week. That makes a rapid policy response almost impossible. You might want to reconsider that break Ladies and Gentlemen.
None of this was likely to inspire confidence in the markets, and the story won’t get better later when the ECB announces its latest rate decision. As I stated yesterday, the potential for disappointment looms large in Europe. Shaving ten basis points off the official rate, which is already at -0.50%, is unlikely to cut the mustard. An expansion of its QE program seems likely. Some additional helicopter money as well perhaps, provided directly to the banks, on the condition that it is loaned to SME’s across the continent.
What is needed, though, is direct fiscal assistance. Joint action is something ECB Chairperson Lagarde has been screaming for but sadly, it appears to be falling on the deaf ears of the austerity gnomes. A coordinated rate cut and budget assistance such as the UK enacted aggressively yesterday, following Australia and the likes of China, Hong Kong and Singapore, is the required medicine.
Italy has effectively closed the entire nation down now, except for supermarkets and pharmacies, following the China playbook. Their efforts are noble, and I am not sure how much more of a wake-up called that could be to Berlin. With the U.S. effectively building a wall through the middle of the Atlantic, Europe’s window to get its act together is closing fast. Sadly, history suggests that the wait-and-see, let everyone else do the hard work and just hope it all works out attitude, will be their likely course of action.
A somewhat perverse consequence to fiscal policy failure and an underwhelming ECB response, could be a strong rally in the euro. Just what Europe doesn’t need. U.S. yields are almost sure to fall today, and a narrowing yield gap with Europe may result in the most unintentional consequences for the euro. Berlin and its fellow austerity gnomes will have only themselves to blame.
The global press corps engaged in a collective hand-wringing exercise overnight, bemoaning U.S. stocks entering an official bear market, described as a 20% fall from its peak. Apart from making depressing headlines, it sort of misses the point. The bounce of the last two days always looked like fool’s gold, but what is important is not how far it’s fallen already, but how far equity markets could continue to fall.
Considering the Trump travel ban on Europe, Italy’s national lockdown and the price war in oil markets, that could be some way off. One thing I am sure of is that it will be unicorn hunting season in 2020 across Softbank’s start-up portfolio, and their scorched earth market share-based business models. And there is zero chance of an Airbnb IPO this year. Many unicorn business models, and the patience of their private equity paymasters, will be severely stress-tested in the coming months.
Equities
President Trump’s speech was notable for what it didn’t contain, rather then what it did. That is, concrete fiscal stimulus measures from the central government to mitigate the impending effecting of the coronavirus and oil-based slowdown on business and employment. Wall Street fell heavily overnight, and that rot has continued after the speech, with S&P futures sharply lower by 4.0% this morning.
The rout on Wall Street overnight, and the subsequent follow-through fall this morning has seen Asian stock markets marked sharply lower. Four appears to be the magic number, with Singapore, Tokyo, Seoul, Jakarta and Hang Seng all down by over 4.0%. An already negative day in Sydney has gotten substantially worse; the resource heavy ASX 200 is down by nearly 6.0%.
Mainland China is still a comparative bastion of calm, with the Shanghai Composite down on 1.65% and the CSI 300 down just 1.20%. Most likely, China’s “national team” are responsible for the muted reactions of recent times by China stocks. With a likely demand shock from the U.S. and Europe on the horizon, any benefit from a falling rate of coronavirus infections in China will be cold comfort to China’s export machine.
Reality has swamped even the most ardent optimist in equity markets now. There is no doubt that the world is grappling with a coronavirus aggregate demand/supply shock, plus a deflationary wave on oil prices launched by Saudi Arabia and Russia. The bottom will be in sight when markets stop reacting to negative news. That is likely to be some way off yet.
Given Europe’s incredibly poor response so far to the developing situation, with a flock of headless chickens running around appearing more focused, and with a U.S. travel ban in place, European stock markets could be in for an outsized drop when they open later.
Currencies
Investors have reverted to the crisis playbook of recent times in Asia this morning. They are selling U.S. dollars versus the G-7, selling Petro-currencies versus the dollar, and selling regional Asian currencies versus the dollar.
USD/JPY has fallen by 1.15% to 103.50 this morning, and the USD/KRW has risen by 0.70% to 1199.00. The EUR/USD has risen 0.50% to 1.1310 with more gains to come if the ECB disappoints later today. USD/CHF has fallen by 0.60% to 0.9340 as investors rush to the haven of the Swiss franc.
USD/MXN has risen by 2.0% this morning, climbing from 21.3800 to 21.8050 in hectic trading. The Canadian dollar has eased only slightly, but fellow Petro-currency, the Norwegian krone is suffering heavy losses. EUR/NOK has risen by 1.65% to 11.0820. The Mexican peso and Norwegian krone performances this morning point to severe losses for the Russian ruble this afternoon.
The resource-centric Australian dollar is, surprisingly, almost unchanged at 0.6470. In this climate though, both the Australian and New Zealand dollar are likely on borrowed time, with renewed selling to come.
Both the offshore and onshore Chinese yuan remain a bastion of calm, being almost unchanged at 6.9700, only slightly weaker from yesterday. The PBOC is clearly keeping a tight grip on both, on both sides of the market. That should ensure they remain relatively stable in the near-term. The same cannot be said for other emerging market currencies, which will come under serious pressure against the dollar, likely, as the day progresses.
Some central bank intervention appears to be happening locally, with USD/IDR falling by 0.60% this morning from 14,400 to 14,300. USD/IDR has traced out four daily highs at 14,400 in the last seven days, suggesting that that is the Bank of Indonesia’s line in the sand for now.
Oil
The strong recovery rally in oil after Monday’s galactic sell-off started running out of steam yesterday. Both Brent crude and WTI fell by just over 4.0% to $35.80 and $32.70 a barrel respectively.
Post the Trump address this morning, prices have collapsed yet again, as global economic fears return with a vengeance. Brent crude has fallen by 5.0% to $34.00 a barrel, and WTI is down 4.80%, at $31.40 a barrel. That has seen the full unwinding of the recovery rally with the price gaps from Mondays open appearing to be an insurmountable obstacle.
I stated yesterday morning that investors should tread carefully with the oil rally, and today I reiterate that in the current environment, a sustained rally in Brent above $40.0 a barrel is high improbably and a dangerous place to be long. More likely, if Europe has a bad day at the office this afternoon, the more likely direction for oil is a retest of the Monday morning lows.
Gold
Gold rallied to a high of $1671.00 overnight, but then as equity markets started collapsing, gold fell, finishing the day 0.90% lower from its open, at $1635.00 an ounce. Post the Trump speech, gold has surprisingly, remained unchanged at $1635.00 an ounce.
It is becoming clear that every time equities and oil are sold heavily, equally impressive selling interest emerges in gold as well. Thus, despite the moons aligning heavily for higher gold prices, whatever structures are involved within the equity markets are muting any rallies.
Eventually, the correlation will break down, but in the meantime, it is probably best not to chase prices higher. Patience is required and buying the dips is a much safer strategy. Gold has technical support at $1630.00 an ounce, but if the equity market rout pictures up further momentum, I can see gold trading as low as $1600.00 an ounce as gold is sold to cover margin calls elsewhere.