Week to Feb 28th

Worst week in markets for years on coronavirus, Huge change in rate cut expectations

MY CALL FOR THIS WEEK : SELL EURNZD

In a week where coronavirus (COVID-19) fears drove everything, and markets moved smoothly in straight lines to break post-2008, and in some cases, all time risk-off records, other news was more or less ignored, the only discernible thing being hopes and fears for the UK budget on Mar 11. Equities do have a habit of throwing tantrums, but all-time record low yield on the 10-year bond, and the unprecedented one week move from 90% hold to 95% 50bp cut in Fed futures pricing is something we have not seen before.

History shows that moves like this do not continue, and although heightened volatility (ie over 1% per day) is to be expected, it is unlikely to be as extreme as last week. Nevertheless, next week has some news other than coronavirus. 

The week opens with Chinese PMI data. The estimate is much lower than last month (45.7 vs 51.1), signifying a huge 10% contraction in manufacturing output due to the virus. A huge raft of Western PMI prints are released on Monday and Wednesday. This is all February data, and so will also show the COVID-19 effect.

Also there is an OPEC meeting where stronger cuts than normal are likely to counter the plunge in oil last week to $45 long-term lows. Rate decisions on beleaguered currencies AUD and CAD will be interesting. Any virus insurance cuts will push these currencies further down. And of course being a new month, it’s NFP week. With an exceptional 50bp rate cut currently expected per the CME FedWatch tool, there will be no ‘good is bad’ this month, so the risk is to the upside on a strong print.

Thanks to those of you who came to see me speak at the London Trader Show on Friday on Coronavirus. Click here for a copy of my slides.

Mon Feb 24

South Korea raised its coronavirus alert to the highest level at weekend, and a week of record risk-off moves opened with huge moves down in equities across the board, as you can see from the table, all indices had their worst single day in two years, down well over 3%. Oil fell in line, and as you would expect JPY, Gold and Bonds were all sharply up. There was no particular direction to other currencies, and only oil-linked CAD was noticeably down.

Tuesday February 25

Today was more of the same, with indices again down over 3% as nothing positive was reported. It was the same story in Oil, and in currencies we started to see a move which remained consistent all week, out of other currencies and into EUR as well as safe haven JPY. GBP was also strong today on UK budget hopes, whereas the antipodean currencies, more dependent on China, fell. Bonds were up again, and the 10-year yield fell to an all-time low. Unusually, Gold did not participate, and started to fall, although this is after a very strong run.

Wednesday February 26

The hemorraging stabilised today, although by the standards of the week, the day was flat, with SPX down 0.38% and NDX up 0.44%. FTSE also managed to close green as GBP fell on a report that said the UK will need to increase taxes to meet the government spending commitments. With JPY stabilising, the dollar index managed to rise for the day. Gold was up (a delayed reaction?), but Oil and yields (inverse to bond prices) continued to fall, the former despite the EIA beat. One stock deemed to be unaffected by coronavirus was NFLX, which surged 5.32% today.

Thursday February 27

After a brief attempt at a rally following the Durable Goods beat at 1330, the huge slide down continued ferociously, with a even worse day where DJIA had its large one-day points drop in history, shedding 1,190 points, beating the 1,175 point move on 5 Feb 2018. MSFT was hit particularly hard, dropping 7.05% after a profit warning. Conversely NFLX only fell slightly.

Risk-off money poured out of USD everywhere except GBP and CAD, with another hugely strong day for JPY and bonds. Gold was surprisingly flat. Oil fell 4% in line with stocks.

Friday February 28

Futures markets continued to plunge on Friday, with the SPX cash market gapping down 2%, and then immediately plunging a further 2% to an intraday low of 2855.8. This marked a 15.84% drop from the intraday all-time high of 3393.5, a mere eight trading sessions ago. SPX then rallied 3.70% in 90 minutes, and then carried on whipsawing to close 0.82% down on the day (ie into the gap). Thus February trading ended with SPX down 8.41% on the month, the worst since December 2018. Oil and yields fell as you would expect, but surprisingly, Gold was sharply down, 3.65% as markets stabilised.

The dollar volatility was the most extreme of the week, mostly because there was a whipsaw of sentiment on EUR, as EURUSD finally reacted to some other news, being a strong German inflation print at 1300 and then a US PCE beat at 1330 followed by beats on the Chicago PMI and Michigan CSI. The net result was still down overall, as USDJPY fell 1.41% its strongest day since January 2017.

The most notable statistic on Friday was the change (per CME FedWatch) in rate cut expectations. Starting the week with only a 20% chance of a 25bp cut on Mar 12, 

WEEKLY PRICE MOVEMENT

The top forex trade this week of amazing moves was to sell NZDJPY, down 4.63%, its worst week since January 2016. Our own pick CADJPY did nearly as well, down 3.87%, still 100% success rate after four weeks, with total gains of 8.03%. I was thinking of reversing the strongest move, and buying NZDJPY, but I will play safe and sell EURNZD instead, just on the off chance markets get worse.

Indices across the world tumbled, with DAX the worst, losing 12.44% partially on euro strength. The fall of 10.22% in Bitcoin seemed quite mild in comparison, with ETH also only moving like indices. FANGs of course fell brutally, with AAPL faring worst again. It looks like a technical buy again for next week. NFLX fared much better than the market as a whole, as the ‘stay in’ stock, ideal for self-isolating COVID-19 victims.

Note we use Google Finance data for daily movements, listing UUP as a proxy for DXY. All references to ‘the dollar’ are based on DXY. The equity and index prices are now based on the cash close each day.

NEXT WEEK (all times are GMT)

(Calendar High volatility items are in bold)

• Feb PMIs led by China
• Non-farm payrolls
• Australia and Canada rate decisions
• Super Tuesday

Monday March 2

Today, the OECD is expected to estimate the coronavirus outbreak's impact on global growth when it updates its forecasts for major economies. The news is all PMIs, with the China PMI estimate being massively down from last month. This print will probably set the tone for the day.

00:00 AUD AUS TD Securities Inflation

01:45 CNY China Caixin Manuf PMI (e45.7 p51.1)

08:55 EUR Germany Markit Manuf PMI

09:30 GBP UK Markit Manuf PMI

14:45 USD US Markit Manuf PMI (e50.5 p50.9)

15:00 USD ISM Manuf PMI

Tuesday March 3

All eyes will be on the Super Tuesday Democratic Caucuses, where 15 states covering 40% of the US population select their candidate, and candidate Bloomberg enters the race. The main news is the Australian rate decision. Markets are closed in Japan for Greenery Day. Fed Evans speaks, but at 2330.

03:30 AUD RBA Rate Decision/Statement (e0.75% hold)

10:00 EUR Eurozone CPI (Core YoY e1.2% p1.1%)

10:00 EUR Eurozone Unemployment Rate

14:30 NZD NZ GDT Milk Index (time approx)

Wednesday March 4

Another bumper day of February PMIs, which again should show the effect of coronavirus. Also the CAD rate decision which may give a hint as to whether the current Fed expectations (50bp cut) are justified.

00:30 AUD Australia Q4 Final GDP (QoQ e 0.5% p0.4%)

01:45 CNY China Caixin Services PMI

07:00 EUR Germany Retail Sales

08:55 EUR Germany Markit Composite PMI

09:00 EUR Eurozone Markit Composite PMI

09:30 GBP UK Markit Services PMI

10:00 EUR Eurozone Retail Sales

13:15 USD US ADP Employment Change

14:45 USD US Markit Services/Composite PMI

15:00 USD US ISM Services PMI (e55.5 p55.5)

15:00 CAD BoC Rate Decision/Statement (e1.75% hold)

16:15 CAD BoC Press Conference

19:00 USD Fed Beige Book

Thursday March 5

The OPEC Meeting in Vienna today will no doubt address further cuts, given the slump in Oil last week to $45 due to coronavirus.

00:30 AUD Aus Imports/Exports/TB

13:30 USD US Jobless Claims

15:00 USD US Factory Orders

17:00 GBP BoE Governor Carney speech

17:45 CAD BoC Governor Poloz speech

Friday March 6

All eyes will be on NFP, as usual, and it is likely that ‘good is bad’ will not apply this time, as the expectation is already for a large rate cut on Mar 12. The OPEC Meeting continues today, which is also the last day before the Fed blackout period.

00:30 AUD Aus Retail Sales

07:00 EUR Germany Industrial Production/Factory Orders

13:30 USD US NFP/AHE/UnEmp (NFP e178k p225k)

13:30 USD US Trade Balance (Jan)

13:30 CAD Canada NFP/AHE/UnEmp (NFP p34.5k)

13:30 CAD Canada Trade Balance (Jan)

15:00 CAD Canada Ivey PMI

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