Monday, March 23, 2020

Capital Markets: "Greenback Demand Not Satisfied by Swap Lines"

From Marc to Market:
 In HG Wells' "War of the Worlds," the common cold repelled a Martian invasion. Now, a novel coronavirus is disrupting everything and everywhere. Global equities continue to get hammered, though the apparent relative resilience of Japan may have spurred some buying of Japanese equities.

Both the Nikkei and Topix posted gains, while equities in the regions tumbled after dropping more than 20% in the past two weeks. India's main indices were off by more than 12% today. Europe's Dow Jones Stoxx 600 gapped lower and is nursing a 4-5% loss on top of the roughly 35% markdown over the past five weeks.

The S&P 500 has also lost around 35% over the same period, and it is trading off another 4% today. Yields are falling too, but seemingly more orderly than times last week. US and European yields are mostly 2-4 bp lower. Australian and New Zealand benchmark 10-year yields plummeted around 22 and 50 bp, respectively New Zealand launched its first bond-buying program (QE). The dollar is firmer, with the dollar-bloc currencies and Scandis leading the downside, while the yen is the notable exception. Emerging market currencies continue to flounder. The JP Morgan Emerging Market Currency Index is off about 0.5% today and 11% during the past five-week slide. Gold and oil are lower.

Asia Pacific
Japan's officials gradually recognize that the Olympics will have to be postponed. It is partly a question of national pride, and also Prime Minister Abe's grandfather as Prime Minister oversaw the 1964 Toyko Olympics.
Given the athletic training necessary, some Olympic officials have warned of the difficulty in postponing and have discussed canceling the games. Separately, Japan was one of the first countries outside of China to be infected by the virus. However, Japan appears to be among the more resilient countries and some areas that had been locked down, are re-opening. Hypotheses range from the cultural emphasis on hygiene to the widespread use of masks (during allergy and cherry blossom season).

Australian Prime Minister Morrison announced a fiscal package before the weekend that brings its and the central bank's efforts to an estimated 10% of GDP. A little more than half of it is assistance for small and medium-sized businesses. It also includes expanding the eligibility of collecting benefits and doubling the income support for jobseekers allowance. The second package of around A$66 bln (~$38 bln). The first package, announced March 12 was for about A$17.6 bln. Nearly 40% of the second package is to support businesses and charities. Unemployment benefits will be doubled, and some will be allowed to access pension savings without a penalty. The government will also offer A$40 bln of loan guarantees for small and medium-sized businesses. Last week, the RBA announced it would buy three-year bonds and target a 25 bp yield.

The Reserve Bank of New Zealand announced its first bond purchase program. It will buy NZ$30 bln of bonds over the next 12-months at a pace of about NZ$750 mln a week (though this week may be a bit less at ~NZ$500 mln). Last week, the central bank slashed the cash target rate 75 bp to 25 bp and reduced capital requirements. The government announced an NZ$12.1 bln support program that had seemed to spook the bond market. The RBNZ will exclude inflation-linked bonds from its purchases, which means it will buy a little more than half of the outstanding bonds, with allowances for the April maturities.

The dollar is trading within the pre-weekend range against the Japanese yen, but that does not imply narrow price action.
Thus far, today's range has been roughly JPY109.65-JPY111.25. There are two sets of expiring options that could be relevant today. The first is at JPY110 for almost $500 mln, and the other is for about $900 mln at JPY111.00-JPY111.10. The Australian dollar is continued to the lower end of its pre-weekend range, though here too, today's range remains wide (~$0.5700-$0.5825). Last week's low was near $0.5500, while the high was set at the start of the week near $0.6150. In the second half of last week, the US dollar moved into a new range against the Chinese yuan and (~CNY7.05-CNY7.1250) and remained in that range today. The PBOC set the dollar's reference rate a bit weaker than most of the bank models implied. After falling sharply last week, money market rates stabilized today.

As German officials grasp the magnitude of the coming crisis, they have abandoned their fiscal restrictions, and the new debt issuance may help facilitate the ECB's bond purchases.
A decision to supplement this year's budget with a 150 bln euros in new borrowings to support the economy is expected later today by the cabinet. The goal is to secure parliamentary approval by the end of the week. Some of the funds will be used for the short-term work subsidies (the government picks up 60% of wages stemming reduced hours as an effort to minimize unemployment). ECB President Lagarde indicated that the self-imposed constraints of central bank bond purchases, such as the 33% issuer limit, could be suspended if necessary. The new German issuance makes this less urgent. Separately, a 600 bln euro package that would include 400 bln euros of loan guarantees and 200 bln euros to fund corporate loans (through the KfW state development bank) and to equity stakes in German businesses if necessary. All told Germany is considering borrowing 350 bln euros. The Bundesbank's Weidmann warned last week a recession is unavoidable, and the Finance Ministry warned of 5% contraction this year, which seems relatively mild. German Chancellor Merkel has entered self-quarantine after her doctor, who recently tested her, contracted the virus.....

If interested see also Mr. Chandler's March 22, "High Anxiety is Auto-Correlated":
The economic and financial reaction to the global pandemic has triggered a surge in the US dollar, which itself may amplify the disruption that is evident throughout the capital markets.  The macro analysis piece (The Economic Tsunami that has Begun and the Drive for Cash) focuses on the fundamental considerations behind the greenback's surge. This piece focuses specifically on the price action itself....