13:00 Pound sinks to multi-decade lows as King Dollar reigns
Sterling has completed one of its steepest declines in memory by hitting its weakest level since 1985, excluding if you will the brief dive of the Oct 2016 'flash crash'.
This is the worst sustained period of sterling selling that I can recall, and it points to a severe dollar liquidity crunch that central banks have yet to get a grip on. There is a synchronised rush for dollars that has caught most companies, governments and traders on the hop. Dollar funding issues have been far more serious than estimated prior to this crisis.
However sterling is also sharply weaker against the euro in recent days, with EURGBP above 0.92, so whilst the main reason for the pound's decline, there are clearly other factors at work. The UK government's massive fiscal package undoubtedly means more borrowing for the UK economy - how do we pay for all this? And in a rather bizarre turn of events - if you have been schooled in the Eurozone sovereign debt crisis a few years back - the euro has developed certain safe haven characteristics. Sterling is, on the other hand, a bit of a proxy for risk. Concerns about what the implications are on Brexit from the coronavirus may also be a factor, whilst we have also seen a sharp downgrade of UK growth forecasts - but Britain is not alone on that front by any means. Brexit though clearly created risks (and opportunities) for GBP anyway and the threat of a global recession only magnify those risks for the market.
Therefore this seems to be an offloading of risky-ish pounds in favour of safer dollars and, to a much lesser degree, euros. Meanwhile the US dollar index has surged beyond 100 to hit its highest in three years, as EURUSD also comes under renewed pressure. In a crisis like this King dollar reigns supreme.
11:00 Europe extends losses, bonds battered
Stocks are weaker, with European equities extending losses through the morning session to trade down 5 per cent on the day. US futures are limit down again after yesterday's bounce on Wall Street. The FTSE 100 broke down at the near term trend support around 5100 and is now testing and holding 5000 but could test 4900 if the US sessions turns south. The SPY S&P 500 was down 7.3 per cent pre-market, giving us our best indication of what looks set to be another day of turmoil on Wall Street. The 7 per cent circuit breaker could easily be triggered again.
ECB governing council member Holzmann made an absolute pig's ear of a central bank communication today. First he said the ECB is out of monetary policy tools, then was slapped down and had to say it wasn't. The ECB is well equipped, he was told to say. After Lagarde's mess-up last week it's clear the ECB is not that equipped to handle this crisis. It's not only communication problems, but apparently a lack of unity in the policy direction that is the worry.
Added to that the complete disarray of fiscal policy and it's evident the EU is shaping up for a bigger economic hit from the coronavirus than the US or UK. Indeed there were already signs aplenty of a slowdown in the eurozone at the start of the year before the virus hit. DB says today they see Q2 annualised contractions of 13 per cent in the US and 24 per cent in the eurozone – this is a seismic collapse in economic activity.
This mess from the ECB has created a dog's dinner of a bond market today. German and Italian spreads have blown out to 320bps, while we have seen a broad rise in sovereign bond yields as investors scramble for cash and dump government paper. As previously noted, the amount of interest rate risk in the market from a sharp snap back in yields is significant and could create further pressure on equities, at least short term. Investors are selling the most liquid assets they can - government bonds remain very liquid thanks to the efforts of global central banks in the last week or so - to cover their backs elsewhere. As mentioned in the morning note, US yields are spiking with the ten-year shooting as high as 1.23%.
This scramble for cash - US dollars we mean - is killing G10 FX. Sterling is shaky again. GBPUSD has found a base it looks at 1.20 but it's very tentative and the downside remains favoured with the pair making fresh lows at 1.1980 region. Bulls need to see the swing high at 1.2130 recovered before the turn is seen. EURUSD has stabilised tentatively at 1.10 after finding support at 1.09550.
Oil has sunk to its lowest in 17 years, with WTI taking a $25 handle this morning. I don't really need to explain again that a collapse on the demand side due to coronavirus and the eruption of a price and supply war in OPEC and Russia has created the most bearish conditions imaginable for crude markets.
Getty Images | The Trump administration is considering a stimulus package to counter the economic fallout as the coronavirus spreads
08:30 European markets slide despite helicopter money
Helicopter money: governments around the globe have woken up to the economic crisis that is to some extent of their own making. Britain yesterday launched a £330bn package, while the US is teeing up $1.2trn in stimulus, which could include sending cheques direct to every American. Even Germany is considering fiscal stimulus and joint EU bonds - anathema even during the 2008 crisis.
Wall Street liked the stimulus on offer and rallied 6 per cent, taking the S&P 500 back to 2529, while the Dow added over 1,000 points to 21,237. The market rally somewhat fizzled out in Asia overnight with broad selling taking hold. Australia's ASX 200 endured another wild session, ending down 6.5 per cent at 4,953.
After a nice little bounce yesterday, European markets are trading weaker again on Wednesday on the open, shedding 3-4 per cent in early trade. The fact that markets keep shrugging off the stimulus measures reflects the deep uncertainty about the economic damage about to be done. But these moves are not the 7, 8, 9, 10 per cent type swings. This is better - smaller daily swings are the first step to stabilisation before we can start to look at the bottom being in.
For now every rally is sold into, every financial relief effort is an opportunity to get out from positions long held. The market is behaving extremely short-term in its outlook, whilst the long-term effects are entirely unclear. The Vix remains elevated at 75, though somewhat off its highs around 85 after Wall St bounced yesterday.
The volatility persists of course. France, Belgium, Spain and Italy are all taking the route of banning short selling. US and UK chiefs say they will keep markets open. A story is only true once you get the official denials - I would not be surprised to see markets shutter for a week if there is another sharp bout of selling. The LME is temporarily suspending its open outcry pit - one of the last still standing - because of coronavirus. Sic transit gloria mundi.
There has been a rapid steepening in the 10-year Treasury yield, the most aggressive move since - no surprise - 1987. We have also noticed a big steepening in the 2s10s yield curve. These are signs the markets liked this fiscal stimulus a lot. But every US recession is preceded first by inversion of the yield and then a rapid steepening, so this is rather text book. We’re heading for recession; the question is how quick the recovery as this will determine the equity market recovery. The bond market could just be positioning early for the mothers of all rebounds.
FTSE 100 - 4900 seems to be the bottom for now. Bulls need to clear the week high at 5366, and then the Friday peak at 5695. Rallies could well run out legs at these levels. For now though the downside dominates with bulls attempting to defend 5100 and the near-term trend support line that is being tested - if this holds bulls can start to consider a bottom forming. The triangle formation requires a breakout soon.
In FX, there has been aggressive dollar bid in the last week, GBPUSD has found support at 1.20, while EURUSD is starting to show signs of firming around the 1.10 handle. Meanwhile oil continues to soften, with WTI sinking to $26. A level in the teens is not out of the question against this collapse in demand and the Saudi price war. Gold has held up at $1450 and is starting to make higher daily lows.
Neil Wilson is chief markets analyst at Markets.com
