Dollar Mixed, Equities Higher as Virus News Stream Improves

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Win Thin
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• It was a relatively good weekend in virus-related news; measures of implied volatility continue to trend lower
• The dollar is trying to build on its recent gains; investors continue to try and gauge just how bad the US economy will get hit
• The outlook for oil prices remains highly uncertain and volatile
• Germany signaled that its stance regarding aid to the weaker eurozone countries remains unchanged; the news stream for the UK has turned negative
• Prime Minister Abe nearly doubled the size of the next stimulus package to JPY108 trln ($988 bln); Hong Kong Financial Secretary Paul Chan offered a sobering take on the local economy

The dollar is mixed against the majors as the holiday-shortened week begins on an upbeat note.  Nokkie and Aussie are outperforming, while Swissie and yen are underperforming.  EM currencies are mixed.  ZAR and CZK are outperforming, while MXN and TRY are underperforming.  MSCI Asia Pacific was up 2.6% on the day, with the Nikkei rising 4.2%.  MSCI EM is up 1.3% so far today, with China closed for holiday.  Euro Stoxx 600 is up 2.9% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 6 bp at 0.66%, while the 3-month to 10-year spread is up 5 bp to stand at +59 bp.  Commodity prices are mixed, with Brent oil down 3.7%, copper up 0.7%, and gold up 0.9%.

It was a relatively good weekend in virus-related news. Death rates in Italy, Spain and France have declined, suggesting a plateau may be near or upon us for these countries. Of note in the UK, PM Boris Johnson was hospitalized as a “precaution” and officials said lock up rules may have to be tightened soon due to low compliance. Also of note, the numbers out of New York (the main source of infections in the US) has also shown some improvement, especially in terms of net hospitalization.

Measures of implied volatility continue to trend lower. The VIX, for example, is now at 44.7 and compares to a recent high of 85.5 and a pre-virus level in the mid-teens. Treasury market implied vol has normalized with the MOVE index at 65, right at the 5-year average. Aggregate implied volatility measures in FX markets (VXY and EM-VXY) had been relatively more contained compared to what was seen in equities and fixed income markets but has also not retreated as much during the recent days of improved risk appetite.

The dollar is trying to build on its recent gains.  DXY has retraced nearly two thirds of its March drop and a break of the 100.87 area is needed to set up a test of the March high near 102.992.  The euro remains heavy after making a new low for this move near $1.0765 Friday, and it is on track to test the Mach low near $1.0635.  Sterling has held up relatively better but feels heavy after failing to break above the $1.25 area.  Lastly, USD/JPY traded at a new high for this move but needs to break above the 109.90 area to signal a bigger move higher.

AMERICAS

Investors continue to try and gauge just how bad the US economy will get hit.  On Friday, March jobs data came in at -701k vs. -100k expected, but the worst is yet to come.  There are no US data releases today.  Indeed, this entire week is devoid of any major data readings from the world’s largest economy.  Yes, March CPI and PPI will be reported but inflation is simply not on anyone’s radar right now.

As one of the few high frequency indicators, weekly jobless claims Thursday will continue to hold the spotlight.  Consensus sees another 5 mln initial claims to follow last week’s 6.648 mln.  If so, this would mean over 15 mln became jobless in the past three weeks.  This means we will likely get a nonfarm payrolls reading near -15 mln this month, which is simply astounding.

EUROPE/MIDDLE EAST/AFRICA

The outlook for oil prices remains highly uncertain and volatile.  The virtual meeting planned for OPEC+ has been delayed to Thursday from Monday.  No reason was given, but Saudi Arabia and Russia have both been pointing fingers at each other regarding the recent collapse in oil prices.  To further muddy the waters, President Trump over the weekend threatened to slap tariffs on imported oil to support the domestic oil industry.  Contrary to our original take, we concede that some sort of agreement seems possible, even if it is fraught with challenges. Russia and Saudi Arabia are unlikely to cut supply unless it’s a global effort, including the US. There is also the issue of which level to base the cuts upon and how to distribute the burden amongst the big global producers. Lastly, it’s unclear how much support a supply deal of around 10 mln barrels a day will give in the face of this massive demand shock. Oil futures are down slightly today, but we don’t think this is any information in price movements until get more signals from OPEC officials.

Germany signaled that its stance regarding aid to the weaker eurozone countries remains unchanged.  In an op-ed piece, Finance Minister Scholz wrote that the European Stability Mechanism “already now offers the possibility for euro countries to raise capital jointly with the same advantageous terms for all.”  He also noted that there is a proposal to set up a fund that would guarantee European Investment Bank loans to small businesses.  Left out was any mention of debt issuance  to fund greater spending.  Scholz was clearly responding to a call by Spanish Prime Minister Sanchez for a new Marshall Plan burst of public spending financed by jointly issued debt.

The news stream for the UK has turned negative.  Prime Minister Johnson hospitalized due to the virus even as the nation braces for the worst to come over the next 7-10 days.  Late last week, reports emerged that UK official are showing no desire to extend the transition period beyond December 31.  It appears that the UK is willing to accept a bare bones trade deal with the EU this year.  Or worse yet, a possibility of no deal at all.  These are all reasons to be bearish sterling.

Bank of Israel is expected to cut rates 15 bp to 0.10%.  Late last month, the bank restarted QE for the first time since the financial crisis and committed to purchasing ILS50 bln ($13.6 bln) of government bonds in the secondary market to ease financial conditions and support the economy.  That helped weaken the shekel, with USD/ILS spiking to the highest level since July 2016 to trade just below 3.90.  That move has largely reversed and so an offsetting rate cut today makes sense.

ASIA

Prime Minister Abe nearly doubled the size of the next stimulus package to JPY108 trln ($988 bln).  Last week, the package was said to be a then-record record JPY60 trln ($554 bln).  It will reportedly consist of two stages.  The first one aims to limit job losses and bankruptcies.  Once the virus is contained, the second stage will try to bring about a V-shaped recovery.  Officials said the details and numbers are being debated until the last minute.   Abe also signaled that he will declare a state of emergency in seven prefectures, including Tokyo and Osaka.

Japan’s Government Pension Investment Fund (GPIF) said it will allocate 25% of its assets into overseas debt while cutting its holdings of domestic bonds.  This is a ten percentage point increase, with a matching decrease for domestic bonds.  Foreign and domestic equities will continue to make up 25% each of the portfolio.  Several other public pension funds that track GPIF are expected to follow suit.  Continued outflows should help boost USD/JPY, which is now trading at the highest level since March 27.  Break of the 110 area is needed to set up a test of the Mach 24 high near 111.70.

Hong Kong Financial Secretary Paul Chan offered a sobering take on the local economy.  He warned that it could take up to six months to reverse the impact of the virus, and that businesses and households should make the necessary arrangements.  Chan noted that the retail and tourism sectors were initially the hardest hit, but the impact has spread to “virtually all industries.”  That said, we note that there has been little pressure on the HKD peg, with USD/HKD currently trading right at the strong end of the band.

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