Tuesday, March 24, 2020

Capital Markets: "Relief Bounce On Tuesday, but Turn Around not Secure"

Mr. Chandler makes a funny in the headline.
From Marc to Market:
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....