Capital Markets: "The Dollar and Equities are Finishing the Week on Firm Footing"

From Marc to Market:

Overview: A 9.8% contraction of the Chinese economy in Q1 did not derail investor optimism today, which saw Asia Pacific stocks rally strongly after Gilead reported very preliminary positive testing of its drug to fight the coronavirus and plans to re-open are developing. Japan's Nikkei and South Korea's Kospi surged more than 3%. The MSCI Asia Pacific Index, Europe's Dow Jones Stoxx 600, and the S&P 500 are posting their first back-to-back weekly gains since the first half of February. European bourses are recouping the losses from early in the week, and the S&P 500 looks poised to gap higher at the open. Benchmark yields rose in the Asia Pacific region, and the central banks in Australia and New Zealand indicated they would buy few bonds next week. European core bond yields are little changed, while in the periphery, led by Italy, yields are softer. Despite this risk-on mood, the dollar is firm against all the majors, but the yen and New Zealand dollar, and only the yen are higher on the week. Emerging market currencies are mixed today, but the JP Morgan Emerging Market Currency Index is off about 1.5% this week. May WTI has fallen to $18 a barrel after settling in the US below $20. Gold is a little more than 1% lower and is now nearly flat on the week, a little below $1700.

Asia Pacific
China's reported contraction was not far off from what economists expected. The nearly 10% quarterly contraction translates to a 6.8% year-over-year decline in output. The bright spot appears to be that March data showed some improvement, especially industrial production (-1.1% in March). The slide in investment also moderated in March. However, retail sales were dismal (-15.8% vs. Bloomberg survey median forecast of -10%). This warns that supply may be returning before demand. We expect China to shortly announce new infrastructure measures to help stimulate the economy and absorb production internally.... 

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....Europe
The weak coordination marks the official response to the pandemic. Just like the absence of strong leadership from Washington has left the states to compete (e.g., PPE and ventilators) and to cooperate where they can (e.g., regional coordination of easing shutdowns), so too with European countries. Five European countries (France, Spain, Austria, Belgium, and Greece) imposed bans on short sales. The prohibitions were imposed in the middle of March when officials could not strike broader participation, and efforts to shut the markets in mid-March were rebuffed. French regulators extended their ban until May 18. Spain, Austria, Belgium, and Greece's blockage of short sales was to end today and next week (Greece) and have also been extended. Italy's ban runs until mid-June.

Bank of England Governor Bailey reportedly had advocated a coordinated market closure and verbally admonished against aggressively shorting stock in mid-March because it was not good for the economy. Looking at the equity market performance both year-to-date and over the past month, it is hard to make the argument that short-selling bans resulted in better returns relative to the regional benchmark (e.g., Dow Jones Stoxx 600) or Germany's DAX. To say that there were other sellers is an understatement. A more granular investigation is needed to see if bid-offer spreads widened. At the same time, if the absence of short-selling did not alter the "price discovery process" then the social value of allowing pools of capital to sell what they do not own (which requires an elaborate network of share providers, risk managers, compliance officers, back-office, etc.) may not be so obvious outside of the industry....

....MUCH MORE