Thursday, March 26, 2020

Capital Markets: "Rumor Bought, Fact Sold"

From Marc to Market:
Overview: Speculation that the US Senate would pass the large stimulus bill worth around 10% of US GDP is thought to have fueled a bounce in equities in recent days. The bill was approved and will now go to the House, where a vote is expected tomorrow.
If the rumor was bought, the fact has been sold. The first to crack was the Asia Pacific region. Equities were mixed with the Nikkei shedding 4.5% and the Kospi off 1%. China and Hong Kong markets also slipped. Australia resisted and rose 2.3%. Indonesia, returning from yesterday's holiday, played catch-up and jumped 10% (which also helped lift the rupiah).

Led by energy, materials, and financials, Europe's Dow Jones Stoxx 600 is almost 1.5% lower to snap a two-day 11.5% advance. The S&P 500 posted its first back-to-back gain since February 11-12 yesterday but is around 1.3% lower today. Benchmark yields are coming back softer with most major market yields are off 3-5 bp, while the European peripheral rates are off 9-11 bp, and Greece's 10-year yield is off 28 bp. The US 10-year yield is around 6 bp lower at 0.80%. The greenback is softer against all the majors. The yen (~+0.9%) and euro (~+0.6%) are leading the way. Emerging markets currencies are mixed with several Asia Pacific currencies outperforming, while the more liquid and accessible ones are posting modest losses. Gold is lower for the second sessions while May WTI is giving back yesterday's 2% gain in full.

Asia Pacific
Although official figures show Japan, which had been one of the first countries outside of China to be infected, it has appeared relatively contained. However, Tokyo Governor Koike is urging residents to stay indoors and is warning that a lockdown may be imposed, as cases jumped. Separately, the BOJ continues to buy a record amount of ETFs. It bought JPY201 bln of ETFs today, matching the record of the previous two purchases.

Singapore is reported its biggest rise in infections so far after improvement had been seen. Singapore reported Q1 GDP contracted by 10.6% quarter-over-quarter. Economists in the Bloomberg survey had forecast an 8.2% decline. Industrial output imploded by 22.3% in February, skewed in any event by the Lunar New Year. Still, it was half again as high as the median forecast.

The People's Bank of China appeared to protest the recent weakness of the yuan by setting the reference rate today considerably stronger (for the yuan) than the bank models suggested. The reference rate was set at CNY7.0692, about 100 bp lower (for the dollar) than the models implied. This is the most since China's markets re-opened from the extended Lunar New Year holiday on February 3. The dollar is allowed to move 2% in either direction from the reference rate, while other currencies, such as the euro, are given wider berth. There is some thought that the PBOC is more concerned here with volatility than defending a specific level....