Alarms Raised due to Price Action

Coronavirus Effects Continue: Panic Shows With Price Action

Enormous moves straight from the gate, and there’s palpable panic expressed at the price action. With WTI and Brent reduced by 25%+, the largest fall since 17 Jan 1991 (beginning of the Gulf war); which has resulted in a collapse in S&P500 stocks. Which coincidentally fell by the daily limit; the first time that went on since the 2016 Presidential election in the States.

Asian stocks are getting taken to the cleaners, especially the Nikkei 225…gold traded in 1703, but has since retreated, I figure to raise money for other, perhaps not so rewarding, exposures.

(Daily of WTI)

Daily of WTI

Crude

Crude sits in the middle of this, with everyone viewing all-out warfare between big oil-making players.

On Friday we watched that the OPEC meeting in Vienna, together with the industry fully anticipating a steady answer to the decreasing demand pushed by the worldwide outbreak of Covid-19.

Expectations were high for a 600k+ barrel p/d decrease in manufacturing. But rather, Russia walked off and essentially saying from 1 April everybody is free to produce whatever they enjoy.

Saudi’s Aramco has reduced pricing to customers in the States, hence beginning a price action war with US shale. It is on, the oil economy will probably maintain a sizable excess. Everybody is chasing market share again and petroleum is getting taken to the woodshed.

FX Price Action Is Crazy

FX markets are mad now, I have not seen anything like that for ages.

Saying its intense, that’s the understatement, in which the carpet has been pulled from under the cost in several pairs. It reeks of exceptionally bad liquidity and continues to be definitely directed by motions in crude, with all US equity stocks moving down hard while following.

It’s this background of very high suggested vol and bad liquidity which has encouraged huge bidding from the JPY. Also, it appears that if USDJPY crushed through 105 and to 101.45 this resonated along with other JPY combos; that has consequentially weighed AUDUSD, NZDUSD along with the large beta pairs.

FX Actions Are Crazy

However, the moves are shocking, they’ve been violent and we ask today, what’s the answer, specifically in the Bank of Japan.

There is actually not much the BoJ/MoF can perform, as straight selling JPY from the open marketplace places them onto a collision course with different nations. Like the UST, and could stoke money warfare, that is appearing increasingly more possible.

But if this background continues we shall see a further one-way grasp of the JPY and that is going to promote a massive deflationary effect on the Japanese market.

If you would like to understand central bank limits look no farther than the BoJ.

Credit Spreads Are Essential To Broad Sentiment

The brand new development for opinion is the credit (i.e. corporate bonds) markets are growing. Mainly because lots of corporate debt has been issued by energy companies and the capability to refinance that debt is growing increasingly more costly.

What’s actually worrisome is that we’re also seeing signs of anxiety from the financing markets. Together with FRA-OIS and FX basis moving quickly and sending shock waves throughout the marketplace; maybe there are similarities between the GFC.

Falling oil isn’t great when much investment is tied into higher oil.

(Corporate credit spreads have taken account of an improvement in equity)

Corporate credit spreads
(Source: Bloomberg)

It will not help that Italy has obtained some punchy actions and limited motion, Wuhan design, to the Lombardy area, which comprises the financial center of Milan.

Italy is looking quite precarious and the stricter the steps, the larger the effect on economics. The period to concentrate on Italian politics is now, as the anti-EMU parties will utilize this to their benefit. Additionally from the previous 48 hours, 6585 new instances are reported, together with 84 countries currently confirming coronavirus cases.

The Trade by Fed QE

The Fed will cut by 75-100bp in the 18 March meeting, but lower prices aren’t a remedy here and the market understands it.

Affordable money isn’t a cure for the virus and the related behaviors we’re seeing play out in society, and also the coronavirus is exposing the constraints of central banks such as no other ‘catastrophe’ has done because of the GFC.

There’s already talk that we’ll see QE being executed at any point soon, with Boston Fed President Eric Rosengren stating if we see the US 10-year Treasury get to zero (we are currently at 51bp) they will look at suggesting legal changes to permit the Fed to purchase corporate bonds and even equities.

That might be a game-changer in my view, as nobody in their right mind would wish to be short an index when against a central bank using unlimited money. It appears the bond vigilantes are out to get the Fed to go all in here.