Relief Bounce On Tuesday, but Turn Around not Secure

Overview: Bottom-picking, after officials step up efforts and some optimism creeps in, is helping lift spirits today. As one looks at the equity bounces, it is important to remember that among the biggest rallies take place in bear markets. Nearly all the bourses in Asia-Pacific rallied, led by a 7% advance by Japan’s Nikkei and an 8%+ surge in South Korea’s Kospi. Most other markets were up 2%-5%. Europe’s Dow Jones Stoxx 600 is up nearly 5% after falling 4.3% yesterday. US stocks are firmer, and early indications suggest a 3%-4% early gains. Bond markets are much quieter, and most benchmark yields are 3-5 bp higher. The dollar is seeing its recent gains pared. The Norwegian krone has been the weakest of the majors, and it is leading the move today with a nearly 6% gain, while the yen and Canadian dollar are the laggards, gaining around 0.7%. Among emerging market currencies, the Mexican peso has been exceptionally pressured, and it nearly 2.5% higher, while the JP Morgan Emerging Market Currency Index is about 0.25% higher. Gold is extending its recovery for a third session, over which time it is up around $110 an ounce. Its roughly 7.5% gain has been matched by the two-day advance in oil prices,  May WTI settled last week near $22.65 and is now trading near $24.35.  

Asia Pacific

Japan’s preliminary March composite PMI fell to 35.8 from 47.0. This reflected a fall in the manufacturing PMI to 44.8 (from 47.8) and the services PMI to 32.7 from 46.8. Japan’s economy had contracted in Q4 under the weight of the sales tax hike and damage from the tsunami. A recovery in Q2 is hoped for, but many several things have to fall into place first. The equity advance today, the most in four years, was helped by nearly 20% rally in Softbank, which announced plans to raise some $4.5 bln, with roughly half to be used for share buybacks.  

Japanese banks have been large users of the dollar swaps the Fed makes available to the Bank of Japan. After taking $35 bln at yesterday’s seven-day swap auction, they took almost $90 bln today.  In the three auctions under the modified rules (OIS+25 bp), Japanese banks have taken around $150 bln. Around minus 92 bp below LIBOR, the three-month cross-currency swap is still extreme. It was above -20 bp before the crisis broke. 

In other regional developments: South Korea announced a KRW48.5 trillion (~$38.5 bln) package to stabilize the financial markets, including funds to support the bond and stocks market and provide liquidity. Malaysia imposed a temporary ban on short-sales, and the Philippines cut reserves requirements by 200 bp, which frees up about PHP300 bln. China said the lockdown for Wuhan could be lifted on April 8.  

The use of the Fed’s swap lines have not eased the demand for dollars against the yen in the spot market. The dollar held above JPY110 in Toyko and is flirting with JPY111 in Europe. It reached almost JPY111.60 yesterday and has been up to JPY111.35 today. There are around $2.5 bln in expiring options between JPY111.30 and JPY111.60. The Australian dollar is trying to extend its recovery into a third session. It bottomed last week near $0.5500 and reached $0.5975 in late Asia today before consolidating in the European morning. If the $0.6000 area can be overcome, the next target is near $0.6100. The US dollar traded softer against the Chinese yuan and finished the mainland session, lower for the third consecutive session. The dollar settled last week near CNY7.0960 and ended the Shanghai session around CNY7.0760.  


The preliminary European PMIs are weaker than expected. The manufacturing PMIs, though, held up better than anticipated, due it appears to a statistical quirk of how longer delivery times are calculated of the diffusion index. There should be no mistake, though that a steep economic contraction is underway. On the aggregate level, the EMU manufacturing PMI fell to 44.8 from 49.2. The service PMI fell to 28.4 from 52.6.  This saw the composite tumble to 31.4 from 51.6. 

This general pattern was repeated in Germany and France, and also seen in the UK. The German manufacturing PMI eased to 45.7 from 48.0, while the service PMI dropped to 34.5 from 52.5. The composite stands at 37.2, down from 50.7. The French composite stands at 30.2 after a 52.0 reading in February. This was the result of the slip in the manufacturing PMI to 42.9 from 49.8 and a drop in the services PMI to 29.0 from 52.5. Economists appear to be looking at a 5%-8% quarterly contractions.  

In the UK, the preliminary estimate for the composite PMI fell to 37.1 from 53.0. Manufacturing dipped to 48.0 from 51.7, while the service PMI fell to 35.7 from 53.2. Separately, after first embracing the “herd containment” strategy until realizing it would overwhelm the UK’s medical capacity, the Johnson government has rapidly reversed itself and, on top of significant fiscal efforts, has announced three-week lockdown.  

Although Merkel says Germany is open to discuss a joint bond issuance, it is not ready to embrace it yet. Italy, where the fatality rate is near 8.5%, is in need of help. However, Germany is advocating that Italy is granted an enhanced credit line with the European Stabilization Mechanism, which would then allow it to trigger the Outright Market Transactions (OMT). OMT allows for ECB bond purchases. Merkel seemed sympathetic to light conditionality. The challenge here is that Italy has structural problems that need to be addressed. Separately, fatalities in Italy appear to have fallen for a second day, while hospitalization in the hard-hit Lombardy region slowed.  

The euro has based in the last two sessions near $1.0635. It is around $1.0860 in the European morning, where a 1.1 bln euro option is expiring today. The next chart points are seen in the $1.09 area and then $1.0940. Seven EMU banks took $4.12 bln at the daily seven-day swap auction. This is up from a lowly $20 mln yesterday, and the three-month cross-currency basis swap has normalized. Sterling is firm, but within yesterday’s range (~$1.1450-$1.1740). A move above $1.18 would bring the $1.1935 area, seen on March 20 into view.  


The Federal Reserve continues to offer new measures of financial and economic support, and despite claims that it is “all in,” there is more that will do. Yesterday,  it announced open-ended purchases and an aggressive action plan this week to buy $375 bln of Treasuries and $250 of mortgage-backed securities. The Fed is setting up a special purpose vehicle, like it did for commercial paper, for asset-backed securities, and for the first time, corporate bonds. Each SPV is funded by $10 bln from the Treasury’s exchange stabilization fund. A new SPV is expected to be announced shortly that would support small and medium-sized businesses.  

Meanwhile, the debate over fiscal efforts continues, and, optimistically, a resolution may be seen before the end of the week. The House Democrats have drafted a $2.5 trillion alternative to the White House/Senate version. The House’s plan calls on a temporary reprieve from personal debt (credit cards, mortgages, and car payments, and a $10k maximum write-off of student debt. 

The Bank of Canada is expanding the range of assets it can buy and sell to include corporate and local government bonds. Mexico’s President AMLO is opposed to granting company bailouts or tax amnesty. Brazil’s President Bolsonaro indicated that yesterday’s decree that allows companies to halt work contracts for four months without salary payments (that helped send BRL to new record lows yesterday) will be revoked.  

The US dollar is softer but within the range seen yesterday against the Canadian dollar (~CAD1.4335-CAD1.4660). A break of yesterday’s lows could see CAD1.4150. Initial resistance now is seen near CAD1.4450. The greenback rose to a new record high (~MXN25.4585) before reversing lower. Yesterday’s low was near MXN24.36, though initial support may be encountered around MXN24.50.    


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