Wednesday, March 18, 2020

Capital Markets: "Bonds Join Equities in the Carnage"

From Marc to Market:
Overview: A new phase of the market turmoil is at hand. Bonds are no longer proving to be the safe haven for investors fleeing stocks. The tremendous fiscal and monetary efforts, with more likely to come, have sparked a dramatic rise in yields.

Meanwhile, equities are getting crushed again. Steep losses were seen in many Asia Pacific markets, with Australia off 6% and Hong Kong, South Korea, and India down more than 4%. The Bank of Japan's ETF purchases are distorting the local equity performance with the Topix posting small gains while the Nikkei fell about 1.7%. European bourses are lower, and the Dow Jones Stoxx 600 is off about 4% to give back yesterday's gains in full plus more.

The S&P 500 rose 6% yesterday and is giving three-quarters of it back. It has not risen for two consecutive sessions since February 11-12. In Europe, the more profound carnage is in the bond market today, where Italy's 10-year yield is up over 50 bp. It is approaching 3% after being below 1% as recently as March 4. The German 10-year Bund yield is 17 bp higher near minus 26 bp. It was at minus 90 bp on March 9. The US 10-year yield rose 36 bp yesterday and is up another 7 bp today to 1.15%. 
The dollar remains firm against most of the major currencies, with the yen and Swiss franc the notable exceptions. Emerging market currencies remain under pressure, with the Mexican peso and Russian rouble posting more than 3% losses. Gold is off around $30 and continues to flirt with the 200-day moving average (~$1500), which it has not closed below for a couple of years. Crude oil prices are pushing lower. It is another 3.2% lower after losing more than 15% in the past two sessions.
Asia Pacific
Governments and central banks continue to unveil new measures to cope with the public health crisis that is shaking the financial and economic systems to the core. Japan, for example, is considering a cash payout of JPY12k (~$112) per person. Australia is expected to announce new aid efforts tomorrow.

The South Korean won has been heavily sold as foreign investors liquidate local shares. The roughly $7.5 bln liquidation this month so far, is more than half of what foreign investors have sold over the past 12 months. The cost of securing the dollar jumped to its highest since 2009. The central bank intervened and capped the foreign exchange forward position of local banks.

The dollar-yen cross-currency basis swap stands around minus 69 bp. It finished near minus 85 bp yesterday. It is still reflected in elevated pressures. Consider that the 200-day moving average is near minus 30 bp. Japanese banks rely on the US repo market and cross-currency swaps. Some large players do not have direct access to the BOJ's dollar auctions....