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Collinson FX: March 19, 2020 - Bigger games at play

by Collinson FX 19 Mar 2020 06:16 PDT 20 March 2020
Waitangi - Mahurangi Regatta - January 2020 - Mahurangi Harbour © Richard Gladwell /

Collinson FX: March 19, 2020 - Bigger games at play

The crises is ramping up on markets, as the virus spreads to markets and human infection levels explode. Italy has experienced their biggest death rate overnight (475 deaths), as European and US cases of the coronavirus , spiral upwards. Global Governments are leading the way with massive and unprecedented fiscal stimulus packages, lead by the US with a proposed $1 Trillion plus package and the UK announcing a $400 Billion bailout package. This has been mirrored around the world, amid an ocean of financial red, across global markets.

The Dow has fallen a further 10 % and Oil prices crashed below $20/barrel. The Saudi’s have reiterated their ramped up production levels, despite the collapse in global demand, in an effort to kill the Oil price. This is working as planned and must be an opportunistic attempt to drive out global competitors from production and the market. This has hit the Oil currency of Norway hard with the NOK collapsing overnight.

Flight to the safe haven US Dollar has seen a general collapse in currencies. The GBP fell below 1.1600, while the EUR has finally succumbed, crashing to 1.0845. The trade exposed, commodity currencies have been in freefall, with the AUD falling to 0.5750, while the NZD plunged to 0.5740 (briefly achieving parity for the first time in nearly 40 years!). This is complete and utter market turmoil, as the reserve safe haven play rolls on.

The only instrument that appears to be rising (apart for the VIX) are bond yields. US 10 Year Bond Yields rose to 1.2%, a massive premium on the Fed’s cash rate. This is despite a massive supply of Government Bonds, due to issuance to cover unprecedented fiscal stimulus and thus debt. The only answer can be risk. The Bond markets is a great indicator, so the way this unfolds, will be a window to wider market plays.

The peak infection rates need to be at least in sight, while containment and control needs to be effective, to halt the uncontrolled fear shaking markets. There will be more than adequate resources for an economic rebound, it is just operating in the red-zone, clouds the perspective of many. Leadership is key and Trump must be the one to stand up and be counted.

Collinson FX: March 18, 2020 - 'Damn the Torpedoes'

The Trump administration has gone ‘all-in’, with Treasury Secretary Mnuchin, confirming support cash is going out to business and individuals now! It is ‘full steam ahead and damn the torpedoes’. The massive fiscal stimulus is being adopted around the world, as Central Banks have exhausted the interest rate options, while liquidity and ‘QE’ remains the last arrow in their quiver.

The US and Europe have quickly worked out that ‘control and containment’ of the coronavirus is the highest priority, to calm citizens and markets. The financial and monetary stimulus/support is to keep the people and business running in anticipation of a recovery. These actions are taken without fear of the consequences, as it is a problem to be addressed, after the storm has passed.

The US continues to firm as the global safe haven currency. The GBP fell back below 1.2100, while the EUR crashed below 1.1000, after surprising support throughout the market unravel. France, Spain and Germany have announced massive fiscal support for business and citizens, in an effort to keep the economy moving, until the emergency has passed. The Europeans have closed external borders and internally are employing quarantine and ‘social distancing’ to combat the spread of the virus. All measures are being taken.

The AUD crashed through major support levels, which was the 2008 GFC bottom, sending the currency into unchartered and dangerous waters. The AUD fell below the big number 0.6000, while the NZD crashed back to 0.5950, despite the Governments $12 Billion support package. These trade exposed commodity currencies remain extremely vulnerable and desperately look forward to the restoration of the Chinese supply chain, supporting an export led recovery.

Governments are relying on unprecedented monetary and fiscal stimulus to keep their economies wheels turning and positioning the consumer to lead the recovery and sustain growth. The logistics of this financial support to business and individuals is yet to be announced, but Banks and welfare lines, will be a large part of the plan. The impact on the deficit/debt levels will be worried about another day and the Government’s ability to manage this bailout, will be closely watched. There will be massive waste and plenty of corruption, theft and fraud in this process, but those stories will be for another day.

It is all about containing the spread of infection of the virus on the people and the economy. Get through the panic, calm the markets and deal with the solution.

Collinson FX: March 17, 2020 - Market Chaos reigns supreme

Market chaos continues despite best efforts from Governments and Central Banks. The spread of the coronavirus increases at an alarming pace across Europe and the USA, infecting citizens and their minds.

Global equity markets are in disarray, with Europe shedding around 5%, but the US collapsing by a further 9%. This was despite massive emergency action by the Federal Reserve. The Fed cut rates to zero and announced a further $700 Billion in QE, while the RBNZ followed the global travel ban with an unscheduled slashing of rates and further QE. These actions are designed to pump the markets full of liquidity and drive investment, but seem to have missed the mark. The NZD opened higher, then crashed below 0.6000 after the Fed’s actions were announced, then recovered to regain 0.6050. This is extreme volatility and defies logical market reaction. The RBA also announced massive QE, but this was all but ignored by markets and the AUD fell back to 0.6120.

The Central Banks have shot all their arrows now and the battle now faces Governments and fiscal actions. The US has promised bailouts for workers and distressed business, through tax breaks and direct cash injections. The NZ market await a NZ$20 Billion fiscal stimulus, as travel bans spread across the world and travel industries and banking lead markets lower. Continued fiscal action globally will flow through markets and allow a recovery, once the virus has been contained and the future is more certain.

The EUR remains strong trading 1.1150, while the GBP crashes back to 1.2225, as the UK Government take radical social action to control the spread of the virus. The surprise is the strength of the EUR, as they are the worst affected part of the world and have done the least in terms of monetary intervention (as their interest rates are already negative!). It appears the massive monetary intervention has lead to increased losses on markets.

Containment and certainty are the first step to a recovery and there will be no doubt that the monetary and fiscal actions will ensure a recovery. The question is how long will the exponential spread continue? It appears control has been established in Asia, so maybe the peak infection level will be reached soon, if the Asian blueprint is repeated in Europe and the USA.

Collinson FX: March 16, 2020 - Trump declares State of Emergency

President Trump announced a State of Emergency and introduced measures to coordinate the Private and Public sectors in response to the pandemic. The crises has spread like wildfire across Europe and the US has acted accordingly with travel bans. Travel bans and suspension of mass gatherings are combatting the spread of the virus, meanwhile some economies have virtually shut down. Testing of infections and trials for an antidote are fast moving. Calm and control are key to a solution to the market crises.

US equities rebounded strongly, after the previous days massive losses, with the biggest ever point gain on the Dow! This crises will not be resolved overnight, but gaining control of markets and sentiment is key to overcoming the crises, over the coming days and weeks. Economic data is all but irrelevant to markets, as they have been overwhelmed by the panic from the spread of the virus and the impact on markets. Data will start to reflect the economic shut downs and the destruction of existing supply chains and the free movement of people. Perception is key to market behaviour. If calm and control is established, fiscal and monetary stimulus will address the impact of the virus on the markets and global economies. The stronger economies may well avoid recession due to the timely and coordinated massive intervention of Central Banks and Governments.

The Trump administration has stepped in to buy massive amounts of oil to re-stock the ‘Strategic Petroleum Reserve’ at the current low prices. The SPR is the emergency supply the US created after the 70’s oil crises and can hold up to 727 million barrels of oil! The markets rebound included rising Bond Yields and continued flows in to the reserve currency, the ‘Big Dollar’.

The GBP crashed to trade 1.2310, while the EUR fell back to 1.1070. The trade exposed commodity currencies were also hit hard, with the AUD falling to 0.6130, despite best efforts from the Government and RBA. The inaction of the NZ Government (although rhetoric has been reactionary) and the RBNZ (who did not take emergency action along with the Fed and the Bank of England) has resulted in a stronger performance than most currencies, although it did fall to lows just above 0.6000.

Markets may anticipate a positive start to the new week, after the resurgent close to the tumultuous week, depending on events over the weekend. Roosevelts first inaugural speech warned citizens that “the only thing to fear, was fear itself”. This is a warning to avoid panic and to restore logical and reasoned behaviour and is a message for most crises.

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