Author: admin

Authored by Irina Slav via OilPrice.com,

A mild winter in the northern hemisphere, the COVID-19 outbreak, and now the price war that Saudi Arabia declared last weekend have combined to produce an all-new oil price crisis just four years after the last one. And things might get worse before they get better.

After last week data from hedge funds showed a slowdown in the selloff of oil and fuel contracts, as reported by Reuters’ John Kemp, this week’s data, for the first week of March, indicated a serious acceleration of sales. During that week, Kemp reported in his weekly column, fund sold the equivalent of 133 million barrels of oil across the six most traded oil and fuel contracts. This compares with sales of just 11 million barrels of oil equivalent across the six contracts just a week earlier.

The overall long position of hedge funds on oil and fuels was down to 392 million barrels by March 3, Kemp also noted, which compares with 970 million barrels at the start of 2020. That’s a decline of as much as 60 percent, and that’s not all. The ratio of bullish to bearish positions, Kemp says, has fallen to 2:1 from 7:1 in January and is one of the lowest ratios in the past few years.

Meanwhile, the COVID-19 epidemic is marching across the world, fueling panic and dampening oil demand as people self-quarantine, flights get grounded, Italy extends its lockdown to the whole country, and a growing number of states in America declare a state of emergency.

While this was happening, Saudi Arabia fired the first shot in what many are seeing as an all-out price war. After Russia refused to take part in deeper production cuts to prop up prices, with energy minister Alexander Novak saying that from April the country’s oil producers will be pumping oil as usual, without compliance to any OPEC+ quotas, Riyadh said it was cutting the prices for its oil and planning a production increase, utilizing its full production capacity, which is about 12 million bpd.

The bad news: hedge funds were extremely bearish on oil and fuels even before OPEC+ broke down.

This suggests they might get even more bearish on oil after the latest developments there. And this, in turn, means prices could fall further despite a temporary improvement yesterday, in which Brent recouped some of its losses to trade, at the time of writing, at close to $37 a barrel.

“This has turned into a scorched Earth approach by Saudi Arabia, in particular, to deal with the problem of chronic overproduction,” John Kilduff from Again Capital told CNBC.

“The Saudis are the lowest cost producer by far. There is a reckoning ahead for all other producers, especially those companies operating in the U.S shale patch.”

“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus,” Goldman Sachs’ Jeffrey Currie said. The investment bank cut its oil price forecast for the second and third quarter to $30 a barrel for Brent, noting that the benchmark could dip even lower, into the $20s.

The situation in oil looks like a three-person staring contest. With low-cost producer but ambitious spender Saudi Arabia on one side, pumping at will, Russia on the other, braced for lower prices and its previous experience with price crashes, and US oil producing companies on the third side, grappling with insufficient cash for dividends and, for many shale producers, a heavy debt burden. For now, the analyst consensus seems to be that U.S. shale independents will be the ones to blink first.

Yesterday we reported that the perpetual sellside optimists at JPMorgan, led by Croatian tag-team of Lakos-Bujas and Kolanovic, admitted that their chronic optimism may have been catastrophically misplaced, and while repeating the bank’s year end 3,400 price target (not for long) they also said that in case they are wrong (they are) and the Covid pandemic accelerates globally, they now expect a “pessimistic scenario”, where “the equity multiple may not find a bottom until it hits 14-15x and EPS growth turns negative—implying a recession case of ~2,300 level for S&P500.”

In short, JPMorgan came this close to admitting a recession is on deck.

Now it’s Goldman’s turn.

In a note published early on Tuesday morning, Goldman’s chief equity strategist David Kostin writes that “after 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.”

As a reminder, it was just two weeks ago on February 27th, when Goldman first cut its 2020 S&P 500 EPS estimate to $165, stating that it now expects no earnings growth in 2020 (technically, that would be the second year in a row without earnings growth), however, the bank kept a cheerful perspective by anticipating a big jump in 2021 earnings.

That optimism is now gone and as Kostin writes this morning, “we are now reducing our profit forecast again. Our revised 2020 EPS estimate equals $157, representing a decline of 5% vs. 2019.”

On a quarterly basis, Goldman now expects EPS to literally “collapse” by roughly 15% in 2Q (consensus expects +3%) and 12% in 3Q (consensus expects +8%) before once again predicting a surge of 12% in 4Q and 11% in 2021 – we expect that in the next downward revision to Goldman’s base case, this 2021 V-shaped rebound will quietly disappear.

Drivers of Goldman’s reduced EPS estimate include:

1. lower crude oil prices that reduce Energy company profits;
2. lower interest rates that squeeze net interest margin (NIM) for Financials; and
3. lower volume of business activity and reduced consumer spending that curbs revenues for companies across many industries. This is underscored by reduced or withdrawn sales and earnings guidance from a number of Information Technology firms, a sector that contributes nearly 20% of aggregate S&P 500 EPS.

Alongside plunging earnings, Goldman now also expects a sharp drop in the S&P, and now sees the broadest US equity index will tumble into a bear market by mid-year and despite low bond yields, Goldman now has a mid-year S&P 500 target of 2450 (15% below the current level and 28% below the market peak).

Translation: After 11 years, the longest bull market in history is coming to an end.

Some more observations here from Kostin:

Ten-year US Treasury yields plunged from 1.9% at the start of 2020 to an intra-day low of 0.3% this week before rising to 0.8% today. Despite this valuation support, we expect falling growth expectations and consumer confidence as well as elevated policy uncertainty will widen the yield gap to 665 bp, corresponding with a forward P/E multiple of 14x and a mid-year S&P 500 level of 2450.

Of course, just like JPMorgan, Goldman can’t leave it on a doomish note, and as such the bank sees a silver lining in late 2020 when it expects that the impact of the coronavirus will likely wane, and as a result “a recovery in earnings and sentiment will reduce the yield gap to 450 bp and lift the S&P 500 to 3200 by year-end (+31% from the trough). The sharp rebound would be modestly higher than the median 6-month return following previous event-driven bear markets.”

Bottom line: Goldman told a part of the truth, but is terrified to tell the full truth, and is why in 3-4 weeks when Goldman downgrades its earnings forecast for the 3rd consecutive time, we expect that any hint of a V-shaped recovery will be gone for good, replace with the far more appropriate “L-shaped” recovery.

After printing hotter than expected in January, headline consumer price inflation was expected to slow in February (and it did) but actually printed higher than expectations.

• Headline CPI rose 2.3% YoY (slower than the +2.5% in Januray but higher than the 2.2% expectation)

• Core CPI rose 2.4% YoY (higher than January’s +2.3%)

Source: Bloomberg

This is near the highest Core CPI since Sept 2008..

Source: Bloomberg

Under the hood, Services inflation continues to accelerate to its highest since August 2016 as goods inflation languishes…

Source: Bloomberg

The Details:

The shelter index rose 3.3 percent over the 12-month span, and the medical care index rose 4.6 percent.

The apparel index rose 0.4 percent in February following a 0.7-percent increase the prior month. The personal care index also increased 0.4 percent over the month. The index for used cars and trucks rose 0.4 percent in February after falling 1.2 percent in January. The education index increased 0.3 percent in February, and the motor vehicle insurance index rose 0.5 percent. The indexes for household furnishings and operations, for new vehicles, for tobacco, and for alcoholic beverages also increased over the month.

The medical care index rose 0.1 percent in February with its major component indexes mixed. The index for physicians’ services rose 0.2 percent, while the index for prescription drugs fell 0.8 percent and the index for hospital services declined 0.1 percent. The recreation index was one of the few to decline over the month, falling 0.3 percent after increasing in each of the previous 4 months. The index for airline fares also fell in February, decreasing 0.3 percent after rising in January. The  communication index was unchanged over the month.    

Of course all of this is before the coronavirus really starte to take effect – which will have very ‘odd’ effects in terms of both inflation (some goods) and deflation (services)

 

 

 

 

Authored by Sven Henrich via NorthmanTrader.com,

I sense there is a tendency right now to say that this correction is just similar to the Q4 2018 correction. And it’s true on the surface you can make that argument. 20% decline on $SPX, oversold readings similar on several indicators and all that could make the case for business as usual.

After all the Fed has cut and will cut some more and stimulus bazookas will get launched all over the place. I get it.

But I want to add some nuance to all this and that is to state clearly: This is not anything like the Q4 2018 correction. It’s worse, much worse and it’s left utter destruction in its wake and I want to highlight some of this so everyone can get get an appreciation for what just happened and why we may not expect a magic recovery similar following December 2018.

For one, back then we went from a tightening environment (brief as it was) to an easing one. The jawboning force was strong. The liquidity multiple expansion was as awe-inspiring as it was fool hearty.

But it has turned into an utter disaster for investors. Index chart after index chart containing stocks of the broader market highlight that the entire 2019 rally was in essence the biggest bull trap in many years.

Here, stand in awe at the utter capital destruction that has just taken place.

$DJIA back to January 2019 levels:

What a chart like this basically says is that every buyer in the past 13 months (who didn’t sell) is under water. That’s a lot of buying.

Anybody that has bought stocks in the past year has been taken to the cleaners. ETFs, pension funds, institutions, hedge funds, buybacks, retail, you name it.

This is mass destruction. And ALL are praying right now for a big rally to break even or recover some of these losses. Heck any buyers over the past 2 weeks just got hammered.

And the destruction is even worse in many other indices.

Small caps:

Financials:

The banking index:

Transports:

It’s a complete horror show.

Now, this is not anything like Q4 2018. This is deeper, steeper, and it happened so fast most didn’t get out. They’re trapped and hence any rallies in the future are subject to major resistance.

Perhaps the broader picture can be best highlighted with a chart of the broader $NYSE index:

Just 3 weeks ago people were celebrating the greatest bull market ever. This here is a shock, full blown shock to the entire asset spectrum.

A shock like this does not magically “V” shape itself out of trouble.

Sure, the charts are massively oversold and the printing bazookas will come. The problem is of course, they’ve already done all that:

Fed policy failure in one chart.
And now they will be forced to launch the final bazookas to try to save it all.
The hubris of it all.$SPX. pic.twitter.com/anE5RfJfsn

— Sven Henrich (@NorthmanTrader) March 10, 2020

All for naught and now their stimulus efficacy is greatly diminished. I was highly critical of last year’s Fed induced liquidity driven multiple expansion rally.

Frankly I thought it was stupid, but participants embraced it and now people paid the price and are hoping for the Fed to bail them out again.

The entire spectacle is quite unseemly to me. Again they’re talking tax cuts and bailouts and I’ve made my views clear on this.

They just had the biggest tax cut handout ever.
If they can’t manage through a crisis because they didn’t plan and just squandered cash on buybacks I say let them fail.
It’s called capitalism. Right?
Let’s stop with this constant subsidy bailout nonsense. pic.twitter.com/YHfH7qXoPi

— Sven Henrich (@NorthmanTrader) March 10, 2020

So let’s be clear: This was not a garden variety 20% market correction. This was a crash in multiple and widely held asset classes.

And as Dan Nathan mentioned today, these type of events come with a very specific risk:

This is pretty much what a financial market crash looks like…at this point the worry is that recession fears cause a protracted bear market, a series of lower highs & lower lows that only heals with time (see 2000-2003 & 2007- 2009) or you know BTFD because don’t fight the Fed pic.twitter.com/Xwb2EyKQQY

— Dan Nathan (@RiskReversal) March 10, 2020

So indeed it’ll all come down to efficacy. Can they bail the construct one more time or is this all destined for failure, a global recession unavoidable now this long in the tooth and highly indebted business cycle?

It’s the biggest question with far reaching consequences. The up trend is busted. Big time. Price needs to get back above the megaphone trend line or the technical picture suggests a much more dire conclusion if a global recession unfolds:

If they cannot avert a global recession here’s a technical scenario for you.
Have a nice day.$SPX pic.twitter.com/Fc0vFeD6pB

— Sven Henrich (@NorthmanTrader) March 10, 2020

We have ECB, FED and BOJ meetings coming up. None can afford to disappoint markets. Their job is now to restore confidence into badly damaged markets and hurt investors. If rally attempts fail then what we’ve seen here in Q1 2020 is not the end. It’s the beginning.

I repeat: This is not like Q4 2018. The damage is much more pervasive. Last year’s central bank interventions trapped investors in some of the highest market valuations in history, but produced little growth. In fact they’ve produced no growth. None. And now growth is slowing anyways implying this was a policy disaster that has hurt people as it encouraged investors to chase stocks.

What’s the old saw? Fool me once shame on you, fool me twice shame on me.

Or the George Bush version if you prefer 😉

*  *  *

For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

Mortgage applications in the US exploded by 55.4% last week as rates collapsed to record lows amid global growth fears and monetary policy response expectations.

Source: Bloomberg

The massive spike in applications was dominated by refinancings, which jumped a stunning 78.6% WoW, new home mortgage apps rose 5.6% WoW.

Source: Bloomberg

The sensitivity to the drop in mortgage rates to record lows is astounding as the following chart shows…

Source: Bloomberg

Outside of the post-9/11 refinancing boom and the chaos of November 2008, this is the biggest spike in refinancings ever.

This should get the market’s attention.

Seemingly answering Christine Lagarde’s call, European media organizations are reporting that Chancellor Merkel has signaled that she is ‘open’ to suspending Germany’s ‘zero-deficit rule’ – better known as the ‘debt break’ – to bolster the fight against the coronavirus.

A few days ago, Germany announced the first coronavirus death on German soil, and a German traveler also reportedly succumbed to the virus in Egypt.

This isn’t the first time that Merkel has hinted at fiscal stimulus in recent months, and her finance minister has said that scrapping the debt break would be necessary to avert a European recession. Now, the virus has seemingly given Germany and other spending-averse European nations the excuse politicians needed to open the taps. After all, interest rates are so low, people are practically being paid to borrow.

#BREAKING German Chancellor Merkel says open to scrapping zero-deficit rule to fight #coronavirus pic.twitter.com/SWz9tp5EZm

— AFP news agency (@AFP) March 11, 2020

Reports about Merkel’s comments hit just after she held a press conference where she warned that up to 70% of Germans could contract the virus, according to the most severe predictions, and that Germany must do everything in its power to slow the spread.

However, even as Italy’s neighbors closed their borders and Italy’s leaders impose travel restrictions internally across the entire country, Merkel insisted that closing borders within Europe is not the answer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First the good news: after S&P futures crashed limit down on Monday, then rebounded limit up on Tuesday, on Wednesday the market’s unprecedented volatility has been just a bit more contained, and futures have so far failed to drop or surge by the 5% limit. Now the bad news: after yesterday’s tremendous surge (which in turn followed Monday’s near record drop), after Trump promised late on Monday that he would unveil a “major” stimulus package on Tuesday, only to be a no-show yesterday and failing to outline any tangible steps, the futures rollercoaster is back, with the Emini down sharply overnight, sliding by over 2.6% and cutting yesterday’s gains in half.

“Despite the hopes for fiscal stimulus everywhere, we see significant downside risks,” said Guillaume Tresca, a strategist at Credit Agricole SA in Paris. “As long as uncertainties remain on the number of cases, and central banks’ actions and fiscal stimulus plans are not lifted, we see few reasons for a protracted and long-term rebound.”

As Reuters puts it, the latest plunge was due to “investors growing frustrated about the lack of details on fiscal stimulus floated by President Donald Trump to combat the coronavirus epidemic.” Investors also realized that any plan the White House introduces will need to be approved by both houses of the U.S. Congress, a proposition that may be challenging as flashbacks of the (first) failure of the TARP bailout, which unleashed a historic crash in 2008, floated through their heads.

Futures also shrugged off a surprise move by the Bank of England to cut interest rates by 50bps and support bank lending, which had lifted sentiment in Europe and Asia overnight, as central bank credibility rapidly fades. At 7:31 a.m. ET, Dow e-minis were down 570 points, or 2.4%. S&P 500 e-minis were down 66 points, or 2.5% and Nasdaq 100 e-minis were down 184 points, or 2.2%.

On Monday, the three main indexes came within a hair’s breadth of confirming bear market territory, implying a drop of 20% from record highs, following a collapse in oil prices. The S&P 500 is now about 15% below its all-time high hit just three weeks earlier.

In Europe, the Stoxx 600 gained as the European Central Bank indicated it may act as soon as this week and the Bank of England BoE which — on the day that Britain’s budget is set to open the taps on spending — announced an emergency 50bps rate cut and revealed measures to support bank lending, lifting shares after a lacklustre session in Asia. The BoE did not announce new quantitative easing measures but it did launch a new scheme to support lending to small businesses.

But the Stoxx 600 trimmed much of its gains as travel and leisure shares dropped and Adidas SA slumped after warning the coronavirus would cut profit. Earlier in the session, most Asian benchmarks fell amid growing disappointment with the lack of stimulus, while the yen rallied.

The BOE’s emergency move came a week after the Federal Reserve slashed its main rate, and as ECB President Christine Lagarde warned of an economic shock similar to the financial crisis unless leaders act urgently – comments which suggest the bank may join the wave of crisis easing when it sets policy on Thursday. The U.K. is expected to unveil an expansionary budget later Wednesday, and Germany and Italy have also announced fiscal support.

“It is the only thing central banks can do in a public health crisis,” said Neil Dwane, global strategist and portfolio manager at Allianz Global Investors. “They are trying to take the shackles off the banks to ensure we don’t get a cash crunch.” But after a decade of extraordinary monetary policy, investors say the impact of easier policy has clear limits and increased government spending must bear the brunt of the policy response to the economic consequences of the outbreak.

“For the ECB their problem is that there is even more pressure because they face the third-largest euro zone economy — Italy — in dire straits,” Dwane said. As of Tuesday’s close, $8.1 trillion in value has been erased from global stock markets in the recent rout. The MSCI all-country index has lost more than 15% of its value since it peaked on Feb. 12, and was 0.13% lower on Wednesday.

In FX, sterling initially fell sharply following the BoE decision before rebounding. It was last up 0.4% at $1.2925 but down 0.3% versus the euro at 87.66 pence. The dollar resumed its decline against the yen, the Swiss franc and the euro, weighed down by uncertainty about the U.S government’s response and the drop in U.S. Treasury yields. The greenback remained significantly above levels seen on Monday, however.

In rates, U.S. 10-year Treasury yields fell 5 basis points to 0.7035%, more than double Monday’s record low yield of 0.3180%. Market participants largely expect the Fed to cut rates for the second time this month at next week’s scheduled policy meeting, after it surprised investors with a 50-basis-point cut last week.  German government bond yields rose after the BoE cut supported sentiment, while Italian yields — which had shot up on worries the country with Europe’s worst outbreak of the virus is sliding into a recession — tumbled 20 basis points as bets on ECB stimulus grow.

In commodities, WTI slid 2.5% to $33.49 per barrel, while Brent crude dropped 2.31% to $36.36 after Saudi Aramco announced plans to raise its production capacity at the same time as the coronavirus was set to weaken demand. On Monday, oil prices plunged as Saudi Arabia and Russia clashed openly over management of supply. Spot gold rose 1% to $1,665 per ounce as investors sought safety in the precious metal.

To the day ahead now, where data releases include January industrial production and trade data for the UK, as well as the February CPI report and monthly budget statement in the US. The aforementioned UK budget will be a focus while the OPEC monthly oil market report will be released.

Market Snapshot

• S&P 500 futures down 1.7% to 2,816.50
• STOXX Europe 600 up 1.5% to 340.70
• MXAP down 1.6% to 148.53
• MXAPJ down 1.1% to 488.53
• Nikkei down 2.3% to 19,416.06
• Topix down 1.5% to 1,385.12
• Hang Seng Index down 0.6% to 25,231.61
• Shanghai Composite down 0.9% to 2,968.52
• Sensex up 0.5% to 35,811.98
• Australia S&P/ASX 200 down 3.6% to 5,725.87
• Kospi down 2.8% to 1,908.27
• German 10Y yield rose 3.5 bps to -0.755%
• Euro up 0.4% to $1.1327
• Italian 10Y yield fell 9.5 bps to 1.158%
• Spanish 10Y yield fell 0.3 bps to 0.341%
• Brent futures down 2.1% to $36.43/bbl
• Gold spot up 0.6% to $1,658.94
• U.S. Dollar Index down 0.2% to 96.23

Top Overnight News

• The global death toll from the coronavirus climbed above 4,000, and the director of the Centers for Disease Control and Prevention said some parts of the U.S. are now beyond containment efforts. Italy cases topped 10,000 as it attempted a nationwide lockdown, while a U.K. health minister tested positive for the disease
• Donald Trump told Republican senators on Tuesday that he wants a payroll tax holiday through the November election so that taxes don’t go back up before voters decide whether to return him to office, according to three people familiar with the president’s remarks
• The Bank of Japan is considering expanding its annual purchases of exchange-traded funds from the current target of 6 trillion yen ($57 billion), Kyodo News reported, without attribution
• U.K. Chancellor of the Exchequer Rishi Sunak will promise record spending on infrastructure across the country, as the government is set to use a huge increase in borrowing to end the era of austerity
• Prime Minister Giuseppe Conte is preparing to increase Italy’s fiscal stimulus program for the fourth time in a month, officials said, after the European Union agreed to stretch its budget rules to the limit to help member states fight the coronavirus
• Oil extended a rebound from its biggest crash in a generation as the prospect of U.S. stimulus to shield against the fallout from the coronavirus tempered fears over an unprecedented supply-demand shock
• RBA Deputy Governor Guy Debelle signaled in a speech that following the Bank of Japan’s QE method, which sets a target for government bond yields — known as yield curve control — rather than buying a certain amount of bonds a month is the preferred approach
• Joe Biden won the Michigan primary over Bernie Sanders, taking the biggest prize in Tuesday’s six-state round of primaries and further widening his lead in the Democratic nomination race

Asia-Pac stocks were lower as the prior session’s firm rebound on Wall St that was spurred by stimulus hopes, failed to resonate across the region and US equity futures also pulled back after the White House press conference provided very few details regarding economic measures and where President Trump was a no-show, which overshadowed the Democrat Primaries where mainstream candidate and former VP Biden is set for another decisive victory. ASX 200 (-3.6%) and Nikkei 225 (-2.2%) were lower with the former dragged by heavy losses in gold miners and its largest weighted financials sector to finish in bear market territory, while the Japanese benchmark extended its retreat from the 20k level to reach its lowest level since 2018 as USD/JPY slipped back below 105.00. Hang Seng (-0.6%) and Shanghai Comp. (-0.9%) were indecisive amid a lack of fresh catalysts and as the PBoC continued to withhold from liquidity operations, while the latest update from mainland China showed a slight pick-up in the number of additional coronavirus cases and related deaths although this was only marginal and in-fitting with the stabilization narrative. Finally, 10yr JGBs traded slightly higher amid weakness in Tokyo stocks and following the swings in T-notes, while the BoJ were also present in the market today for JPY 430bln of JGBs mainly concentrated in the belly.

Top Asian News

• China’s Credit Growth Slumps as Virus and Holidays Cut Lending
• Over 100 Homebuilders Go Bust in China as Virus Strains Deepen
• Indonesian Stocks Fall After 1st Reported Death From Coronavirus
• Abe Faces Rising Calls for More Stimulus as Virus Hits Economy

Sentiment has recovered from the downbeat tone in the APAC regions as futures resurfaced into positive territory following the surprise BoE rate reduction in a bid to cushion the impacts of the virus outbreak. Cash markets also opened higher to the tune of ~2% [Eurostoxx 50 +1.8%] with broad-based gains seen across the board, but with UK’s FTSE choppy and moving from the top gainer to the laggard on Sterling action ahead of the UK budget unveiling later today (Full preview available on the Newsquawk Research Suite). Sectors are mostly in the green with the exception of the energy sector given the decline in prices in the oil complex whilst financials lead the gains. Unsurprisingly, UK banks have received a tailwind from the BoE cut – with Barclays (+1.5%), Lloyds (+2.0%), Standard Chartered (+3.3%) and HSBC (+1.6%) all in firm positive territory. However, analysts at Goldman Sachs see the announcement of the New Term Funding Scheme as a positive for smaller banks and negative for larger banks as it reduces the latter’s potential hedge from mortgage pricing. Elsewhere, Adidas (-6.4%) shares plumbed the depths post-earnings after noting that the virus outbreak had a material negative impact on China revenues – which are expected to be between EUR 0.8-1.0bln below the prior year’s levels. Similarly, Puma (-3.3%) also issued a negative warning regarding virus impacts, as such these cautious comments have brought down the likes of Kering (-0.7%) and Richemont (-1.1%) in sympathy. Other earnings-related movers include Clas Ohlson (-4.4%) and Mediaset (-0.1%). Meanwhile State-side, desks note US democratic candidate Sanders’ poor performance on Super Tuesday is a mild positive for stocks, although Biden could eventually prove to be a headwind to stocks as the market would prefer a second Trump term.

Top European News

• Telecom Italia Jumps as Carrier Ends Six-Year Dividend Drought
• European Stocks Climb With U.K. After BOE Cuts Rates on Virus
• Europe Isn’t Ready for a Full Work-From-Home Lockdown
• Swedbank Gains Amid ‘Relief’ On Scale of Potential U.S. Sanction

In FX, not the biggest net mover by any means, but the Pound has been among the liveliest majors following the pre-Liffe, UK Budget and timetabled March MPC policy meeting ½ point rate cut. The emergency action induced all round Sterling weakness akin to the Dollar’s post-50 bp FOMC ease decline last Tuesday, as Cable recoiled from 1.2900+ to sub-1.2850 and Eur/Gbp jumped to circa 0.8840 from just under 0.8800. However, as the BoE statement and subsequent presser underscored the coordinated nature of measures taken, including funding for SMEs and a 1% reduction in counter-cyclical buffers for banks to zero, and fiscal loosening to come from the Chancellor, Cable and the cross retraced all and more of their initial moves while largely if not totalling shrugging off data in the form of January GDP, IP and output plus trade.

• NZD/JPY/AUD/EUR/CAD/NOK – All firmer vs the Greenback, as the DXY fades alongside recovering risk sentiment partly due to the lack of anything material from the US in terms of major steps to counter the adverse economic/social impact of COVID-19, not to mention a degree of disappointment that President Trump was conspicuously absent from the official White House event. The Kiwi is currently top G10 performer, albeit consolidating gains on the 0.6300 handle with the aid of favourable Aud/Nzd tailwinds as the Aussie lags in wake of dovish sounding remarks from RBA Assistant Governor Debelle (underlining QE and forward guidance as potential anti-nCoV contagion tools). Aud/Usd is pivoting 0.6500 and the cross is hovering just above 1.0300, both some distance from recent peaks. Elsewhere, the Yen has pared losses between 105.67-104.11 parameters on the aforementioned flagging risk appetite after Tuesday’s part revival as the Japanese Government prepares supplementary budget initiatives, but the Euro has retreated further from Monday’s near 1.1500 highs to straddle 1.1300 awaiting tomorrow’s ECB meet and the bloc’s fiscal response to the coronavirus. Conversely, the Loonie continues to nurse losses around 1.3700 in the run up to Canadian Q4 cap u that is due alongside US CPI, but also eyeing crude prices like the Norwegian Krona and Russian Rouble that are losing momentum due to crude topping out – Eur/Nok back above 10.8500 and Usd/Rub over 71.5000 again.
• RBA Deputy Governor Debelle said coronavirus is causing large increase in risk aversion and uncertainty, while he added the global economy will be materially weaker in Q1 and period ahead but also noted lower interest rates will help offset demand shock from virus. Furthermore, Debelle also stated that there are scenarios where QE would have to be considered and that they would also consider forward guidance as well as keeping bond yields low. (Newswires)

In commodities, another wild ride so far in the energy complex with WTI and Brent front month-futures sliding from overnight highs in wake of further supply prospects and the readying from major oil producers for a prolonged period of low energy prices. Saudi Aramco has received a directive from the Energy Ministry to increase maximum sustainable capacity from 12mln BPD to 13mln BPD, with oil production capacity to be raised to 13mln BPD as soon as possible. This follows yesterday’s Aramco announcement that it will be supplying customers with 12.3mln BPD starting April 1st – the timeframe for 13mln BPD output is unclear thus far. Furthermore, Saudi Arabia has asked government departments to submit proposals for 20-30% cuts to their budgets, according to sources. This alludes to the Kingdom readying for a longer period of low energy prices to balance its books. Meanwhile, Russia has shown no signs of caving in – the Finance Ministry highlighted that Moscow is better prepared than any other country with oil revenues. That said, Energy Minister Novak stated that dialogue with OPEC will continue and representatives will be present at the March 19th JTC meeting. UAE has also become the latest producer to increase output, with ADNOC stating that they are in a position to supply markets with 4mln BPD in April and will accelerate to 5mln BPD capacity target, brought forward from 2030. As mentioned above, the contracts have wiped up overnight gains with WTI Apr’20 slipping from USD 36.28/bbl to a current low of ~USD 33.08/bbl whilst Brent Apr’20 similarly declined from a high of USD 39.60 to a low of ~USD 35.73/bbl. Subsequently, UBS lowered its Brent price forecast for end-June to USD 30/bbl vs. Prev. USD 40/bbl & WTI to USD 28/bbl vs. Prev. USD 37/bbl. Elsewhere, spot gold retains an underlying bit given the weaker Buck, with the yellow metal drifting further north of USD 1650/oz. Copper prices meanwhile remain within yesterday’s range and above USD 2.5/lb as the red metal bides time for fresh macro news-flow.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 15.1%
• 8:30am: US CPI MoM, est. 0.0%, prior 0.1%;CPI YoY, est. 2.2%, prior 2.5%
• 8:30am: US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%;CPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%
• 8:30am: Real Avg Weekly Earnings YoY, prior 0.0%; Real Avg Hourly Earning YoY, prior 0.6%
• 2pm: Monthly Budget Statement, est. $236.8b deficit, prior $234.0b deficit

DB’s Jim Reid concludes the overnight wrap

Markets yesterday saw massive intraday moves while the prospect of fiscal stimulus first disappointed and then hope came back into town late in the US session. However hopes have again faded in the Asian session with another wild ride in prospect today. To take you on a recap of the rollercoaster, early yesterday it looked like markets would stage a significant recovery and reverse over half of Monday’s selloff with S&P 500 futures up as much as +5.25% at their peak before the open. However not long after the US walked in markets quickly nosedived and went down to erase the entire day’s gain, before headlines came out of a President and Senator meeting surrounding a tax holiday for consumers and targeted fiscal stimulus to industries most affected by the virus. There was also news of a more joined up response from EU leaders and signs of big infrastructure spend in the UK budget today which we will discuss below.

The S&P 500 ended +4.94% but the futures contract are now down -3% as we type. Who knows where it will be between pressing send and you reading this. There were similar swings for the DOW (+4.89%) and NASDAQ (+4.95%) yesterday while in Europe we saw the STOXX 600 closing -1.14% which shows how much it missed the boat before the late US rally. At the highs it was up +4.09%. It was a similar story in credit where CDX HY opened some -60bps tighter in spread terms before ending the session only -15bps tighter, while Cash HY spreads ended +14bps wider which puts the overall spread level at 647bps with a three-day move of +102bps. Energy spreads were +56bps wider and now sit at 1,488bps.

This morning Asian markets are also trading lower with the Nikkei (-1.52%), Hang Seng (-0.60% ), Shanghai Comp (-0.02% ), CSI (-0.50%) and Kospi (-2.75%) all seeing losses. As we go to print, the Australia’s ASX has closed down -3.60% today and has entered what many see as bear market territory as its now down more than 20% from its peak. As for FX, all the G10 currencies except for the Australian dollar are up against the greenback with the Japanese yen (+1.38%) leading the advances.The US dollar index is down -0.43% after advancing by +1.60% yesterday. Also, as volatility continues to remain high, yields on 10y USTs are back down -14.5bps this morning to 0.660% while those on 30y are down -13.1bps to 1.15%. In commodities, brent oil prices are up a further +2.53% this morning with gold +0.88%.

The latest on the virus is that the total number of confirmed cases in the US has now reached 1,001 according to the John Hopkins University tally which includes 67 cruise ship cases. These tend to be well ahead of the official WHO numbers who have a stricter criteria. As the number of cases in the US grow, Robert Redfield, director of the US CDC said that the US had lost valuable time tracking the virus and some regions now can merely try to cope with its spread rather than stop it. My favourite headline yesterday was that the Council on Foreign Relations canceled a “Doing Business Under Corunavirus” conference this Friday due to the spread of the virus.

Away from the virus and on to the democratic primaries held yesterday, Joe Biden continued with his new found momentum as he won the primaries in Mississippi, Missouri, and Michigan – the biggest delegate prize of the night which Sanders had won in his 2016 presidential bid. The results from primaries held in North Dakota, Idaho and Washington are still awaited. Meanwhile, the RealClearPolitics is now showing that Biden is set to win the democratic presidential nomination as he polls at 53.5% vs. 35.5% for Sanders. PredictIt now have Biden at over 90% probability with Hillary Clinton now above Sanders.

Back to yesterday and it was hope of emergency fiscal spending that fueled both the early optimism during the Asian session and the late NY trading rally. However the initially underwhelming announcements and a walk back by the Trump administration quickly caused markets to reassess in the early US session. CNBC headlines mid-way through the day suggested that White House was not ready to roll out “specific economic proposals”. Germany’s Minister for Economic Affairs & Energy, Peter Altmaier, was also quoted as saying that government measures to cushion the impact of the coronavirus are worth several billion euros. That is equivalent to ‘only’ around 0.2% of GDP though. Chancellor Merkel was also reported as telling lawmakers that Germany does not need a stimulus plan now but rather liquidity injections. That didn’t suggest imminent meaningful activity. European Commission President Ursula von der Leyen said that “we will make full use of the flexibility which exists in the Stability and Growth Pact”. The Commission President also confirmed that rules will be clarified for member states and guidelines issued by the end of the week.

Markets turned when President Trump tried to offer more details by stating that he wants a payroll holiday through to the US elections. This was followed by some US Senators, especially Texas Senior Senator John Cornyn (representing his constituent’s oil fields), advocating for targeted subsidies for virus and oil affected companies. House Speaker Pelosi also met with Secretary of Treasury Mnuchin and indicated that “more would need to get done” to address the virus. Following Merkel’s comments, Italian Prime Minister Conte spoke on a call with other EU leaders on the need for coordinated fiscal and monetary stimulus and for Lagarde and the ECB to do “whatever it takes”. He was discussing stimulus leeway of up to EUR 16 billion, which would be roughly 0.9% of GDP, and would be just north of EUR 100bn if replicated across Europe. We’re a long way from that but as Mark Wall told me last night the post GFC European fiscal package was around $150bn for context.

Staying with stimulus, today, here in the UK Chancellor Sunak will deliver one of the most highly anticipated budgets since the financial crisis. See our economists full preview here. There were headlines across the board last night of a likely plan to increase infrastructure investments by £100bn over the next 5 years which would be more aggressive than most people’s expectations.

However the reason for much of this stimulus talk across the globe is that activity is soon going to see serious downside. Indeed as an example, Merkel said yesterday to lawmakers that “everything non-essential should be canceled” according to Reuters. That’s pretty aggressive language and the worry is that large parts of Europe will mirror the rise in new cases seen in Italy over the next 5-10 days and will also impose economically stringent containment and delay measures. As we said yesterday there is hope from what has happened in South Korea where although case numbers now stand at 7531, according to WHO, the rate of growth over the last 7 days are 11%, 8%, 9%, 8%, 5%, 3%, and 2% and clearly slowing for now. The same pattern has been seen in China outside of Hubei. So if Europe follows that model we will get the rate of case growth slowing by month end. By then the streets might be ghost towns anyway.

Back to yesterday where oil staged a rebound with Brent up +8.32% to 37.22$/bbl, just off the highs of the session of 38.34$/bbl. The S&P 500 Energy sector also bounced back +5% on the commodity move. In bond markets 10y Treasury yields were up +26.2bps and finished higher than they closed last Friday, up to 0.803%. Yields in Europe rose, but in a slightly more muted fashion. 10 year Bund yields were up +6.6bps to -0.79%, the first day they finished higher on the day since 26 February and only the 3rd in the last 19 sessions. Italy actually saw its 10yr yields fall -9.6bps, only the 2nd time yields fell in the last 12 sessions. With the market finishing in a risk-on fashion gold fell -1.85%, even as the VIX finished over 40 points for the second day in a row, which is the first time it has done that since March 2009.

In other news, with the ECB meeting now the next point of call for most looking for a central bank response, an MNI story out yesterday suggested that the ECB was looking at a package that could include a 10bps cut and targeted loans. The story also suggested that officials were looking at more asset purchases but further debate was needed. Meanwhile, former senior official in the ECB’s supervision arm, Ignazio Angeloni, said that the ECB could decide not to increase banks’ capital requirements on virus related new loans for a certain period of time.

To the day ahead now, where data releases include January industrial production and trade data for the UK, as well as the February CPI report and monthly budget statement in the US. The aforementioned UK budget will be a focus while the OPEC monthly oil market report will be released.