Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
Gradually, slowly but investors start to sign news outside pandemic ones. This week, for instance, has passed under sign of worsen PMI and Initial jobless claims data, that put the shadow on NFP numbers next week. Another event that was widely discussed is Fed and government support measures. Also analysts start to think on possible consequences of global economy halting. Thus, on a background of difficult virus situation markets step aside a bit from this topic and start focus on purely market factors.
The dollar fell broadly on Tuesday after the U.S. Federal Reserve on Monday committed to buy an unlimited amount of bonds and as investors were optimistic the American government would pass a stimulus package to offset the economic impact of the coronavirus pandemic.
"The Fed's measures are unprecedented, and they have been extremely proactive in preventing this external shock from morphing into a wider funding crisis," said Vasileios Gkionakis, head of FX strategy at Lombard Odier.
The Fed on Monday announced various programs, including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized business. While the Fed's latest measures were seen to have effectively broken the spreading freeze in the dollar funding markets in the short term, the shock to the real economy is expected to last for a far longer period. The U.S. Senate could pass a $2 trillion coronavirus economic stimulus package as soon as Tuesday, negotiators said, which analysts say is needed to blunt the economic harm from business shutdowns.
Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank, said in a note that, as more economies enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future and markets could quickly turn back into risk-off mode.
"While we think that most currencies will eventually regain much of the ground that they have recently lost to the U.S. dollar, we don’t expect that process to start until the pandemic has clearly passed its worst," Oliver Allen, assistant economist at Capital Economics, said in a report.
Some more relief was also evident in dollar funding markets, with measures of short-term funding indicators such as euro-dollar FX swaps for three-month maturities
stabilizing around 8 basis points after blowing out to more than 100 bps last week.
The dollar dropped broadly on Thursday after an unprecedented rise in jobless claims led investors to anticipate that the U.S. government and Federal Reserve would take new steps to stimulate the economy. The number of Americans filing claims for unemployment benefits surged to a record of more than 3 million last week as strict measures to contain the coronavirus pandemic brought the country to a sudden halt, unleashing a wave of layoffs that likely ended the longest employment boom in U.S. history.
“The number has sent chills through the markets. If these numbers continue for three or four weeks, there will be demand for more fiscal support,” and even more monetary support from the Fed, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
The jobless blowout was announced shortly after Federal Reserve Chairman Jerome Powell said that the U.S. “may well be in recession” but progress in controlling the spread of the coronavirus will dictate when the economy can fully reopen. His remarks were an unusual acknowledgement by a Fed chair that the economy may be contracting even before data confirms it.
House Speaker Nancy Pelosi said the next step would be legislation to address family leave, pensions, food aid and more assistance to state and local government, saying that there is no question that more money will be needed.
As a result of this week - The dollar posted its biggest weekly decline in more than a decade on Friday, as trillions of dollars worth of stimulus efforts by governments and central banks helped temper a rout in global markets driven by the coronavirus pandemic.
“What we are seeing is abating stress in the money markets. Action by central banks has been successful so far and a shortage of dollars has been taken off the table,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank. After this month’s large price swings, investors were likely to be especially active rebalancing their books for month- and quarter-end.
Speculators increased their net short dollar position in the latest week to $8.88 billion, from $8.27 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
“Now that the surge in demand for dollars overseas has been met by the Fed’s new improved swap lines, economic and medical fundamentals are taking over,” Marshall Gittler, head of investment research at BDSwiss Group, said in a note on Friday.
COT Report
Speculators increased their net short dollar position in the latest week to $8.88 billion, from $8.27 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. Speaking on EUR - it shows explosive increasing of net long position, as extraodinary USD injection and fast rate cut decrease demand for USD for investing purposes, but keep it high as serving currency.
At the same time we have to acknowledge that this happens due closing of short positions but not increasing of longs. It points that the process of unwinding of carry-trade positions still stands underway. Traders sell USD assets and change USD for EUR to close short-term loans that were taking at low rate to finance purchasing of US assets.
As we said - this process is coming to an end but looks like is not finished yet. Lack of demand for EUR purely indicates investors doubts on perspective of EU economy, which expected might drop for 5-9% this year:
Now it’s up to European Union leaders to come together, following its ECB. So far there is no united front: they’ve failed to agree on the scale of support for economies ravaged by the outbreak. The ECB’s aggressive action gives them some breathing space but, as of now, politicians are wrangling over setting up a credit line worth some 2% of annual output from the euro area bailout fund.
Many European governments urge the issuance of a joint debt instrument to face a crisis which Goldman Sachs economists estimate may shrink the euro economy by 9% this year. But Germany and some others oppose that. At stake, says France’s Emmanuel Macron, is the survival of the European project. The crisis, for sure, is far from over.
Right now guys, Fathom published a lot of articles, dedicated to relation of Covid-19 and major fundamental statistics, how it changes and what to expect. Most articles are dedicated to EU, UK and US. Here we have no ability to show all of them, so you could read what you're more interested in here. We're mostly interesting in global impact and what to expect in longer term. Thus, here we provide some extractions from different articles, that we believe to be important:
Despite the potential positive impact that the economic relief package could have, fund investors remained on the sidelines, and with good reason. There were huge red flags this week for the U.S. economy including: (1) unemployment claims of 3.3 million, almost five times the previous record high and (2) a recession seems guaranteed at this point, with major sectors of the economy being completely shut down. This second point seemed to be confirmed by Federal Reserve Chairmen Jerome Powell as he stated that he anticipated that economic activity would decline substantially in Q2 despite the unprecedented measures that the Fed has enacted over the last couple of weeks.
Fathom has suggested that the fallout from COVID-19 would lead to the biggest economic shock since the 1930s. Economic data released over the past couple of weeks help to confirm that view. Thursday’s release of US initial jobless claims showed an unprecedented spike to 3.3 million in a single week. That sort of number is multiples of the peak during the Global Financial Crisis. The US labour market has been put on sudden stop. The initial weekly spike reflects unprecedented government restrictions on movement, and the shutdown of non-essential shops in many places, job losses from COVID-19 are likely to be concentrated at the beginning — at least initially. During the previous crisis, continuing jobless claims peaked at over 6 million. It seems likely that the US will exceed this figure in April.
Even though this has been the biggest negative shock to the US labour market on record, it does not mean that the total loss in GDP will also be the largest in history. In this case, many of these job losses are by government design in order to enforce social distancing and prevent the spread of the virus. The corollary is that lawmakers have shown a keen desire to support workers and businesses through this period. Lawmakers in DC have designed a $2.2 trillion fiscal stimulus package that will increase unemployment insurance and offer loans to companies (among others). That scale of increase in borrowing is more akin to wartime measures than traditional countercyclical stimulus. The programme’s aim is to prevent businesses failing and workers losing skills, so that the economy can eventually be turned back on without the severe negative costs associated with most recessions. Whether that will work depends on the health response to the virus. It is still too early to tell.
One reading of recent movements in corporate fixed income markets, with spreads on both A and BBB rated debt rising some 300 basis points over the past month, is that investors see close to an evens chance that the global economy is set for another financial crisis on a par with that seen in 2008/09.
That assessment sounds broadly right to us. We set out three scenarios for the global economy, attaching: a 40% weight to a V-shaped recovery; a 30% weight to a U-shaped recovery; and a 30% weight to a L-shaped recovery. How have recent developments changed that assessment?But it now seems that the initial impact of COVID-19 on the global economy will be much larger than we had assumed. That is because more European countries have imposed aggressive restrictions on the freedom of movement, and temporarily shut down more industries, than we judged likely at the time. But these restrictions do appear to be slowing the progress of the disease. So, while the initial shock may be larger, the actions that lie behind it make a V-shaped recovery more likely in our view. At the same time, we have increased the weight we attach to our more severe risk scenario, making the outlook somewhat bimodal. In the event that COVID-19 returns with equal or greater vigour once restrictions that are holding back economic activity are lifted, then a severe financial crisis will be very hard to avoid. Our new fan chart for global growth is reproduced below.
I
In a shorter-term our next week should be under the sign of NFP release:
Through years of stubbornly low economic growth and inflation, the brightest spot was the U.S. labour market, with unemployment reaching half-century lows. Coronavirus may have ended that boom.
With infections surging, cities in lockdown, businesses downing shutters and most travel on ice, staff layoffs are likely to mushroom. That showed up in the number of Americans filing unemployment benefit claims which hit a record of more than 3 million. Economists polled by Reuters had forecast claims would rise to 1 million, though some estimates were as high as 4 million.
Now the wait is on for Friday’s non-farm payrolls figures that will offer a snapshot of the jobs picture over March. The government’s unprecedented $2 trillion fiscal expansion package includes a $500 billion fund to help hard-hit industries and a comparable amount to fund direct payments of up to $3,000 apiece to U.S. families.
Economists expect the payroll data to show a loss of 293,000 jobs - the largest monthly drop since July 2009. A significant overshoot of that and the $2 trillion stimulus approved by Congress could suddenly start to look inadequate.
Technicals
Monthly
Due volatility that we have - the valuable information stands only on higher time frames. Even here situation changes rapidly. Only last week picture was bearish with reversal candle, bearish trend and breakout through YPS1. But now we have different picture. With just two days till the end of March - situation is promised to be more bullish.
Downside YPS1 has not happened as price bounces up. Now we have on a horizon potential bullish grabber, that could return price back to YPR1 area around 1.15 level.
Weekly
Last week we talked about two possible scenarios - downside breakout and continuation to next long term target around par (which is our XOP), or appearing of reversal pattern. Market reaction on daily chart should have to clarify this and by the result of this week, we see that hypothesis of reversal is not totally stupid.
As market is forming widening triangle - we still could consider reversal formation in a shape of a diamond. If, within 1-2 weeks on daily chart EUR will show strong upside recovery back to 1.12 area, breaking all daily resistance levels - this could be the sign that "run into USD" is over.
Weekly upside bounce give us also huge bullish engulfing pattern. By the shape of price action we could suggest return back to major 1.14-1.1450 resistance area. To re-establish bearish context market has to drop below recent lows and erase the engulfing pattern.
Still, on next week we do not expect strong action in excess of 1.14 due existence of weekly overbought level around it.
Daily
As weekly as daily trend now is bullish. Here we have DiNapoli bearish "Stretch" pattern. Still, we think that it would be better avoid taking any short positions right now. On daily chart market breaks common technical tools, showing no proper reaction on very strong levels, say K-resistance. We talked about it in our daily video updates.
Taking in consideration this moment - despite existence of overbought around major 5/8 Fib level - it would be better to not sell around it and watch for pullback for long entry. It is too extended upside action to treat it just as reaction on weekly Oversold level, especially when it stands alone without significant Fib level.
Intraday
On Friday our H&S pattern has not been formed, saved us from wrong entry. Now market is coming to major intraday XOP target that stands in Agreement with daily 5/8 Fib resistance level. Although we do not exclude chances on pullback, and, to be honest, we would like to get it - short entry stands up to you as we just have expressed our view on this subject above. If you still intend to take it - follow the same plan as on Friday, wait for clear bearish reversal pattern here. Maybe finally H&S will be formed...
We, in turn, mostly intend to watch for pullback and first level is K-support around 1.0925-1.0955.
Conclusion:
Market is passing through difficult times. As investors just can't assess the whole complex of driving factors, markets turn from top to bottom in a blink of an eye with outstanding volatility. The positive moment is investors start to think about economy again. The impact of Covid-19 is yet to be estimated, but recent analysis by major and best analysts tells that even for them this is great challenge.
As we're not smart enough to do it and we have no tools to analyze huge amount of data to make forecasts - we could keep the nose to the wind, be patient and don't try to anticipate major market's turns, thinking that "we're smarter". Best strategy for now is provide space to big sharks and follow them slightly behind, when markets will reverse indeed. I sense that most interesting things are still ahead as we just get first data that reflects epidemic impact on major economies across the Globe.
Gradually, slowly but investors start to sign news outside pandemic ones. This week, for instance, has passed under sign of worsen PMI and Initial jobless claims data, that put the shadow on NFP numbers next week. Another event that was widely discussed is Fed and government support measures. Also analysts start to think on possible consequences of global economy halting. Thus, on a background of difficult virus situation markets step aside a bit from this topic and start focus on purely market factors.
The dollar fell broadly on Tuesday after the U.S. Federal Reserve on Monday committed to buy an unlimited amount of bonds and as investors were optimistic the American government would pass a stimulus package to offset the economic impact of the coronavirus pandemic.
"The Fed's measures are unprecedented, and they have been extremely proactive in preventing this external shock from morphing into a wider funding crisis," said Vasileios Gkionakis, head of FX strategy at Lombard Odier.
The Fed on Monday announced various programs, including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized business. While the Fed's latest measures were seen to have effectively broken the spreading freeze in the dollar funding markets in the short term, the shock to the real economy is expected to last for a far longer period. The U.S. Senate could pass a $2 trillion coronavirus economic stimulus package as soon as Tuesday, negotiators said, which analysts say is needed to blunt the economic harm from business shutdowns.
Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank, said in a note that, as more economies enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future and markets could quickly turn back into risk-off mode.
"While we think that most currencies will eventually regain much of the ground that they have recently lost to the U.S. dollar, we don’t expect that process to start until the pandemic has clearly passed its worst," Oliver Allen, assistant economist at Capital Economics, said in a report.
Some more relief was also evident in dollar funding markets, with measures of short-term funding indicators such as euro-dollar FX swaps for three-month maturities
stabilizing around 8 basis points after blowing out to more than 100 bps last week.
The dollar dropped broadly on Thursday after an unprecedented rise in jobless claims led investors to anticipate that the U.S. government and Federal Reserve would take new steps to stimulate the economy. The number of Americans filing claims for unemployment benefits surged to a record of more than 3 million last week as strict measures to contain the coronavirus pandemic brought the country to a sudden halt, unleashing a wave of layoffs that likely ended the longest employment boom in U.S. history.
“The number has sent chills through the markets. If these numbers continue for three or four weeks, there will be demand for more fiscal support,” and even more monetary support from the Fed, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
The jobless blowout was announced shortly after Federal Reserve Chairman Jerome Powell said that the U.S. “may well be in recession” but progress in controlling the spread of the coronavirus will dictate when the economy can fully reopen. His remarks were an unusual acknowledgement by a Fed chair that the economy may be contracting even before data confirms it.
House Speaker Nancy Pelosi said the next step would be legislation to address family leave, pensions, food aid and more assistance to state and local government, saying that there is no question that more money will be needed.
As a result of this week - The dollar posted its biggest weekly decline in more than a decade on Friday, as trillions of dollars worth of stimulus efforts by governments and central banks helped temper a rout in global markets driven by the coronavirus pandemic.
“What we are seeing is abating stress in the money markets. Action by central banks has been successful so far and a shortage of dollars has been taken off the table,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank. After this month’s large price swings, investors were likely to be especially active rebalancing their books for month- and quarter-end.
Speculators increased their net short dollar position in the latest week to $8.88 billion, from $8.27 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
“Now that the surge in demand for dollars overseas has been met by the Fed’s new improved swap lines, economic and medical fundamentals are taking over,” Marshall Gittler, head of investment research at BDSwiss Group, said in a note on Friday.
COT Report
Speculators increased their net short dollar position in the latest week to $8.88 billion, from $8.27 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. Speaking on EUR - it shows explosive increasing of net long position, as extraodinary USD injection and fast rate cut decrease demand for USD for investing purposes, but keep it high as serving currency.
At the same time we have to acknowledge that this happens due closing of short positions but not increasing of longs. It points that the process of unwinding of carry-trade positions still stands underway. Traders sell USD assets and change USD for EUR to close short-term loans that were taking at low rate to finance purchasing of US assets.
As we said - this process is coming to an end but looks like is not finished yet. Lack of demand for EUR purely indicates investors doubts on perspective of EU economy, which expected might drop for 5-9% this year:
Now it’s up to European Union leaders to come together, following its ECB. So far there is no united front: they’ve failed to agree on the scale of support for economies ravaged by the outbreak. The ECB’s aggressive action gives them some breathing space but, as of now, politicians are wrangling over setting up a credit line worth some 2% of annual output from the euro area bailout fund.
Many European governments urge the issuance of a joint debt instrument to face a crisis which Goldman Sachs economists estimate may shrink the euro economy by 9% this year. But Germany and some others oppose that. At stake, says France’s Emmanuel Macron, is the survival of the European project. The crisis, for sure, is far from over.
Right now guys, Fathom published a lot of articles, dedicated to relation of Covid-19 and major fundamental statistics, how it changes and what to expect. Most articles are dedicated to EU, UK and US. Here we have no ability to show all of them, so you could read what you're more interested in here. We're mostly interesting in global impact and what to expect in longer term. Thus, here we provide some extractions from different articles, that we believe to be important:
Despite the potential positive impact that the economic relief package could have, fund investors remained on the sidelines, and with good reason. There were huge red flags this week for the U.S. economy including: (1) unemployment claims of 3.3 million, almost five times the previous record high and (2) a recession seems guaranteed at this point, with major sectors of the economy being completely shut down. This second point seemed to be confirmed by Federal Reserve Chairmen Jerome Powell as he stated that he anticipated that economic activity would decline substantially in Q2 despite the unprecedented measures that the Fed has enacted over the last couple of weeks.
Fathom has suggested that the fallout from COVID-19 would lead to the biggest economic shock since the 1930s. Economic data released over the past couple of weeks help to confirm that view. Thursday’s release of US initial jobless claims showed an unprecedented spike to 3.3 million in a single week. That sort of number is multiples of the peak during the Global Financial Crisis. The US labour market has been put on sudden stop. The initial weekly spike reflects unprecedented government restrictions on movement, and the shutdown of non-essential shops in many places, job losses from COVID-19 are likely to be concentrated at the beginning — at least initially. During the previous crisis, continuing jobless claims peaked at over 6 million. It seems likely that the US will exceed this figure in April.
Even though this has been the biggest negative shock to the US labour market on record, it does not mean that the total loss in GDP will also be the largest in history. In this case, many of these job losses are by government design in order to enforce social distancing and prevent the spread of the virus. The corollary is that lawmakers have shown a keen desire to support workers and businesses through this period. Lawmakers in DC have designed a $2.2 trillion fiscal stimulus package that will increase unemployment insurance and offer loans to companies (among others). That scale of increase in borrowing is more akin to wartime measures than traditional countercyclical stimulus. The programme’s aim is to prevent businesses failing and workers losing skills, so that the economy can eventually be turned back on without the severe negative costs associated with most recessions. Whether that will work depends on the health response to the virus. It is still too early to tell.
One reading of recent movements in corporate fixed income markets, with spreads on both A and BBB rated debt rising some 300 basis points over the past month, is that investors see close to an evens chance that the global economy is set for another financial crisis on a par with that seen in 2008/09.
That assessment sounds broadly right to us. We set out three scenarios for the global economy, attaching: a 40% weight to a V-shaped recovery; a 30% weight to a U-shaped recovery; and a 30% weight to a L-shaped recovery. How have recent developments changed that assessment?But it now seems that the initial impact of COVID-19 on the global economy will be much larger than we had assumed. That is because more European countries have imposed aggressive restrictions on the freedom of movement, and temporarily shut down more industries, than we judged likely at the time. But these restrictions do appear to be slowing the progress of the disease. So, while the initial shock may be larger, the actions that lie behind it make a V-shaped recovery more likely in our view. At the same time, we have increased the weight we attach to our more severe risk scenario, making the outlook somewhat bimodal. In the event that COVID-19 returns with equal or greater vigour once restrictions that are holding back economic activity are lifted, then a severe financial crisis will be very hard to avoid. Our new fan chart for global growth is reproduced below.
In a shorter-term our next week should be under the sign of NFP release:
Through years of stubbornly low economic growth and inflation, the brightest spot was the U.S. labour market, with unemployment reaching half-century lows. Coronavirus may have ended that boom.
With infections surging, cities in lockdown, businesses downing shutters and most travel on ice, staff layoffs are likely to mushroom. That showed up in the number of Americans filing unemployment benefit claims which hit a record of more than 3 million. Economists polled by Reuters had forecast claims would rise to 1 million, though some estimates were as high as 4 million.
Now the wait is on for Friday’s non-farm payrolls figures that will offer a snapshot of the jobs picture over March. The government’s unprecedented $2 trillion fiscal expansion package includes a $500 billion fund to help hard-hit industries and a comparable amount to fund direct payments of up to $3,000 apiece to U.S. families.
Economists expect the payroll data to show a loss of 293,000 jobs - the largest monthly drop since July 2009. A significant overshoot of that and the $2 trillion stimulus approved by Congress could suddenly start to look inadequate.
Technicals
Monthly
Due volatility that we have - the valuable information stands only on higher time frames. Even here situation changes rapidly. Only last week picture was bearish with reversal candle, bearish trend and breakout through YPS1. But now we have different picture. With just two days till the end of March - situation is promised to be more bullish.
Downside YPS1 has not happened as price bounces up. Now we have on a horizon potential bullish grabber, that could return price back to YPR1 area around 1.15 level.
Weekly
Last week we talked about two possible scenarios - downside breakout and continuation to next long term target around par (which is our XOP), or appearing of reversal pattern. Market reaction on daily chart should have to clarify this and by the result of this week, we see that hypothesis of reversal is not totally stupid.
As market is forming widening triangle - we still could consider reversal formation in a shape of a diamond. If, within 1-2 weeks on daily chart EUR will show strong upside recovery back to 1.12 area, breaking all daily resistance levels - this could be the sign that "run into USD" is over.
Weekly upside bounce give us also huge bullish engulfing pattern. By the shape of price action we could suggest return back to major 1.14-1.1450 resistance area. To re-establish bearish context market has to drop below recent lows and erase the engulfing pattern.
Still, on next week we do not expect strong action in excess of 1.14 due existence of weekly overbought level around it.
Daily
As weekly as daily trend now is bullish. Here we have DiNapoli bearish "Stretch" pattern. Still, we think that it would be better avoid taking any short positions right now. On daily chart market breaks common technical tools, showing no proper reaction on very strong levels, say K-resistance. We talked about it in our daily video updates.
Taking in consideration this moment - despite existence of overbought around major 5/8 Fib level - it would be better to not sell around it and watch for pullback for long entry. It is too extended upside action to treat it just as reaction on weekly Oversold level, especially when it stands alone without significant Fib level.
Intraday
On Friday our H&S pattern has not been formed, saved us from wrong entry. Now market is coming to major intraday XOP target that stands in Agreement with daily 5/8 Fib resistance level. Although we do not exclude chances on pullback, and, to be honest, we would like to get it - short entry stands up to you as we just have expressed our view on this subject above. If you still intend to take it - follow the same plan as on Friday, wait for clear bearish reversal pattern here. Maybe finally H&S will be formed...
We, in turn, mostly intend to watch for pullback and first level is K-support around 1.0925-1.0955.
Conclusion:
Market is passing through difficult times. As investors just can't assess the whole complex of driving factors, markets turn from top to bottom in a blink of an eye with outstanding volatility. The positive moment is investors start to think about economy again. The impact of Covid-19 is yet to be estimated, but recent analysis by major and best analysts tells that even for them this is great challenge.
As we're not smart enough to do it and we have no tools to analyze huge amount of data to make forecasts - we could keep the nose to the wind, be patient and don't try to anticipate major market's turns, thinking that "we're smarter". Best strategy for now is provide space to big sharks and follow them slightly behind, when markets will reverse indeed. I sense that most interesting things are still ahead as we just get first data that reflects epidemic impact on major economies across the Globe.
