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[PODCAST] US Open Rundown 9th March 2020

  • US equity futures hit limit down as the sell-off resumed driven by the virus, energy and safe-haven flows
  • WTI and Brent front month futures traded with losses over USD 10/bbl after Saudi announced supply above 10.0mln BPD from April and slashed OSP’s
  • Yields have dropped to fresh all-time lows which has seen the US curve entirely below 1.0% for the first time
  • DXY is subdued given JPY outperformance (USD/JPY low 101.58) while commodity-linked currencies are feeling the pinch
  • South Korea military noted that North Korea fired 3 unidentified projectiles off the east coast which was presumed to be multiple types of short-range projectiles
  • Note, US clocks have changed to Summer Time as such the London – New York time gap is 4-hours until March 29th
  • Looking ahead highlights include Canadian Housing Starts, US Employment Trends

CORONAVIRUS UPDATE

Mainland China reported 40 additional cases of coronavirus and 22 additional deaths on March 8th vs. Prev. 44 additional cases and 27 additional deaths on March 7th to bring the total number of cases in China to 80735 and death toll at 3119. (Newswires)

South Korea coronavirus cases rose by 344 to a total of 7478 and it had 1 additional death to raise the death toll to 51. (Newswires)

Japan's MOF's Takeuchi says that the worry about the US economy impact from the coronavirus is a major factor behind the nervous moves seen in markets; will respond to excess volatility as is appropriate. Will watch market moves with a greater sense of urgency. (Newswires)

BoJ have purchased JPY 101.4bln of ETF's today, which is the 3rd time this month. (Newswires)

Italy’s COVID-19 confirmed cases rose to 7375 from Prev. 5883 and the total death toll in the country rose by 136 to a total 366, while the country has placed up to 16mln people under quarantine in which anyone living in Lombardy as well as 14 central and northern provinces, would need special permission to travel. (Newswires)

France’s coronavirus cases increased by 117 to a total of 1126 and the death toll rose by 3 to a total of 19, while it has banned all gatherings involving over 1000 people. (Newswires)

French Finance Minister Le Maire says the ECB has room for manoeuvre on the coronavirus; European Finance Ministers need to come to an economic stimulus plan for the coronavirus, which needs to contain both budgetary and fiscal measures. ECB has margin and can support banks that lend, also calls on Europe to work on fiscal stimulus plan (Newswires)

ECB's Villeroy says the slowdown due to the coronavirus is potentially severe but is temporary. (Newswires)

Italy's Deputy Economy Minister says the government and Bank of Italy are looking into a guarantee scheme, to support banks offering moratorium to households and Co's following the virus outbreak; considering extending tax moratorium as well. (Newswires)

New York Mayor De Blasio said the city could have 100 coronavirus cases within 2 or 3 weeks and there could be hundreds of positive cases in the city at some point. (Newswires)

US President Trump aides are drafting economic measures to combat the virus including expanding paid sick leave although it has not been presented to President Trump yet. (Newswires)

US National Institute of Allergy & Infectious Disease Head Fauci said he is concerned over community spread, and has cautioned the increasing number of cases is making determining how the virus is contracted harder; adding further concern to large events. (FT)

German Chancellor Merkel’s government has loosened rules for short-term work compensation, making it easier for Co.’s impacted by coronavirus to apply for aid. Government is set to invest a further EUR 12.1bln per annum between 2021 and 2024. (Newswires)

In related news, the State Department issued a statement related to the increased risk of COVID-19 infection on a cruise ship environment in which it stated that older adults and travellers with underlying health issues should avoid situations that put them at increased risk for more severe disease. This entails avoiding crowded places, avoiding non-essential travel such as long plane trips, and especially avoiding embarking on cruise ships. (Washington Post/Newswires)

China's Civil Aviation Authority announce measures to help airlines amidst the virus; include, reducing airport/air control fees and postponing a flight implementation plan. (Newswires)

ASIA-PAC

Asian equity markets resumed their slump and US equity futures also suffered heavy losses in which the E-mini S&P hit limit down and DJIA futures pointed to another decline of over-1000 points, as oil prices slipped by around 30% after Saudi Arabia kicked off an oil price war. The kingdom announced plans to raise its output to over 10mln bpd beginning next month and it cut the OSP for all destinations by USD 6-8/bbl following last week’s breakdown of the OPEC+ output deal in which Russia rejected the proposal for additional cuts. ASX 200 (-7.3%) posted its largest intraday loss in more than 11 years amid a collapse across the energy sector although gold miners bucked the trend due to the flight to safety, while Nikkei 225 (-5.1%) gapped below 20K and continued to tumble against the backdrop of the detrimental currency flows and following the miss on Q4 GDP which further pointed to the likelihood of a looming recession. Hang Seng (-4.2%) and Shanghai Comp. (-3.0%) conformed to the sell off as blue-chip energy names were pummelled and after continued PBoC liquidity inaction, while the latest trade data from China over the weekend showed a surprise Trade Deficit and a larger than expected contraction in Exports. Finally, 10yr JGBs were higher amid the bloodbath in stocks and as it tracked the advances in T-notes which surged nearly 2 points as US 10yr and 30yr yields delved into unprecedented levels, while the BoJ were also present in the market today for nearly JPY 1tln of JGBs. 

PBoC skipped open market operations for a daily net neutral position. (Newswires)

PBoC set USD/CNY mid-point at 6.9260 vs. Exp. 6.9228 (Prev. 6.9337)

Chinese Trade Balance YTD (USD)(Feb) -7.09B vs. Exp. 24.6B (Prev. 47.21B) (Newswires)

Chinese Exports YTD (USD)(Feb) Y/Y -17.2% vs. Exp. -14.0% (Prev. 7.9%)

Chinese Imports YTD (USD)(Feb) Y/Y -4.0% vs. Exp. -15.0% (Prev. 16.5%)

Japanese GDP (Q4 F) Q/Q -1.8% vs. Exp. -1.7% (Prev. -1.6%)

Japanese GDP (Q4 F) Y/Y -7.1% vs. Exp. -6.6% (Prev. -6.3%)

US

US President Trump replaced Mick Mulvaney with Rep. Mark Meadows as White House Chief of Staff. (Newswires)

US Administration is pushing for additional trade restrictions via the implementation of national security concerns, contradicting Trump's position last-month that he was eager for US Co's to sell freely to China, WSJ. (WSJ)

UK/EU

UK Chancellor Sunak has promised “targeted” measures to assist businesses and workers “get through to the other side” of an economic downturn and warned of a shock that could be caused by a coronavirus epidemic, while he stated this week’s Budget would include plans to give firms additional time to pay tax if staff were unable to work and shoppers stopped spending money in the normal way. (Telegraph) UK Chancellor Sunak is reportedly under pressure from industry groups to not fund coronavirus measures with tax hikes on businesses. (Guardian) This comes ahead of the UK budget unveiling this Wednesday

UK PM Johnson will be chairing an emergency Cobra meeting at 11:00GMT to decide whether to bring in measures to delay the spread of coronavirus in the UK. The meeting is expected to mull whether “social distancing” measures should be introduced. (BBC) This comes amid weekend developments which saw the confirmed number of cases in the UK rising to 278 on Sunday vs. 209 on Saturday, the largest increase so far. 

Fitch affirmed European Stability Mechanism at AAA, while it affirmed Luxembourg at AAA; Outlook Stable and affirmed Ukraine at B; Outlook Stable. (Newswires)

EQUITIES

European opened substantially into negative territory this morning (Stoxx 50 -6.6%) as sentiment remains subdued on the coronavirus, but with the added development of a crude-war between Saudi Arabia and Russia after the OPEC+ bust-up on Friday (Full details available in the commodity section below). It’s worth noting that sentiment has begun to recuperate somewhat, with US equity futures trading briefly above the limit down positions that were hit overnight (Limit Down Details). Given the commitments from Saudi to increase production to over 10.0mln BPD as of next month and they have cut the official selling price for all destinations by around USD 7/bbl, crude prices are as such lower by over USD 10/bbl and the energy sector has similarly recoiled (Stoxx Oil & Gas -13%). The Oil & Gas Sector accounts for 5.5% of the Stoxx 500 itself, and the largest weightings withing the sector are Total at 29.4%, BP with 15.5% and Shell contributing 14.5%; in terms of price performance, they are currently down by 13.3%, 15.7% and 16.7% respectively. Additionally, the overall downside is exacerbated by the FTQ seen overnight which has sent the global yield complex to record lows for most core parties. For instance, the entirety of the US yield curve is below 1% for the first time and the German 10yr low thus far resides at -0.86%. The Stoxx banking sector is the sector with the 3rd largest weighting in the Stoxx 600 representing 9.4% and is currently 7.3% down on the day. Elsewhere, sectors are all firmly in the red as is every open component in the Stoxx 600 itself; note, a number of Co’s failed, at least initially, to open. Looking ahead, focus turns to how markets react to the US’ entrance, particularly whether this exacerbates the sell-off; as well as for any indicative signs from any particular Co’s in the Energy/Banking sector regarding profit warnings, guidance changes or other telling comments.

Circuit Breakers:

·       S&P 500: During non-US trading hours (Futures) – Hard upside or downside limit of 5% from 1800EST/2200GMT to 0930EST/1330GMT.

o    Midpoint of the limit is based on the futures fixing price

o    Width of limit is based on index value at 1600EST/2000GMT

·       S&P 500: During US trading hours (Cash)

o    7% fall to 2764.30 before 15:25EST/19:25GMT will prompt a 15-minute pause.

o    13% drop before said time to 2585.96 will introduce another 15-minute pause.

o    A fall of 20% within the time will shut the markets; only the 20% rule applies to the final 35 minutes of trading.

·       NASDAQ: Nasdaq futures will stop falling if the contract reaches 8093.25.

·       DOW JONES: DJ futures will stop falling if the contract trades below 24534

Apple (AAPL) - 5G iPhone release may be pushed-back to October, which would be a delay of 1-month, due to the coronavirus, according to Global Times Business Source. (Newswires)

FX

NOK/SEK/RUB/CAD/AUD/NZD - Risk sentiment has been roiled by Saudi Arabia’s decision to increase output and slash the cost of crude in response to the breakdown of OPEC+ talks last week when Russia refused to back a deeper cut in production, as prices tumble and compound fears over the economic fallout from China’s nCoV. Eur/Nok has hit highs just shy of 11.0000 and Eur/Sek topped 10.7500, while Usd/Rub peered over 75.0000 before WTI and Brent nursed some losses from just above Usd27 and Usd31 per barrel respectively. Meanwhile, Usd/Cad catapulted to 1.3750+ at one stage overnight and the Antipodean Dollars saw flash crashes that dragged Aud/Usd and Nzd/Usd down to circa 0.6320 and 0.6030, but the Loonie, Aussie and Kiwi have all clawed back some lost ground as their US peer succumbs to pressure from sliding Treasury yields and more pronounced bull-flattening along the curve, not to mention heavy depreciation vs safer havens.

JPY/EUR/CHF/GBP - In stark contrast to all the above, Usd/Jpy has been trading largely in lock-step with oil with added impetus from risk-off flows/positioning between wide 104.58-101.58 parameters and the Yen retains a strong underlying bid unlike GOLD that has faded from a few bucks over Usd1700/oz at best on profit taking and long liquidation. Elsewhere, Eur/Usd hit resistance just ahead of 1.1500 and Usd/Chf based a few pips under 0.9200 as Eur/Chf bottomed around 1.0510 in advance of Swiss jobs data and sight deposits showing another rise in bank balances. Similarly, Cable waned after touching 1.3200 with Sterling still subject to hard Brexit jitters alongside the coronavirus and crude capitulation that pose growth and financial stability threats. However, the DXY remains vulnerable itself within a 95.694-94.719 range and not far from a key technical level at worst (94.080 representing a 50% retracement from ytd peak).

EM - Severe underperformance in extreme or bordering on unprecedented levels of aversion, especially through the cross-over from Asia-Pacific to European time zones has ravaged regional currencies, though the Lira has rebounded more than most on the vastly cheaper oil price as a net importer and the Yuan is holding firmly above 7.0000 after another decline in the Usd/Cny fix.

FIXED

It may be somewhat premature or even remiss to contend that debt futures/cash yields have marked out their highs/lows for now, but as equites bounce from subterranean levels and the drilling in oil abates there is some degree of calm after the earlier storm. Hence, Bunds, Gilts and US Treasuries are ‘only’ 1-2 points ahead vs over 2 to nearly 3 big figures above parity when thinner liquidity and catch up trade exacerbated the scramble for safe-haven assets. However, it remains to be seen what happens when US participants return to the fray and an hour earlier given that clocks went forward by 60 minutes before Europe at the end of March. Ahead, some NA data due, but it’s all about risk sentiment surrounding COVID-19 and now the next manoeuvres in crude markets.

GEOPOLITICS

South Korea military noted that North Korea fired 3 unidentified projectiles off the east coast which was presumed to be multiple types of short-range projectiles, while it added this was part of ongoing firing drills and that the projectiles flew 200KM and reached 50KM in altitude. (Newswires)

Saudi Crown Prince MBS has accused two of Saudi’s most Senior Royals of treason following accusations of organising a coup against the Crown Prince; with the two royals in question regarded as among the few individuals in the way of MBS’ ascension (Guardian)

COMMODITIES

A frantic session for commodities to say the least after sources over the weekend noted that Saudi Arabia will be boosting its output to above 10mln BPD from this month’s 9.7mln BPD as a response to the collapse of its OPEC+ alliance with Russia. Saudi is also said to have told market participants that it could raise output to as much as 12mln BPD, although sources stated that the initial increase is likely to total between 10-11mln BPD in April, with the final figure contingent on refiners’ response to price cuts. Furthermore, the Kingdom slashed its official pricing for crude, with oil giant Aramco cutting its Asia prices for Arab Light crude and Medium crude by USD 6/bbl each, to discounts of USD 3.10/bbl and USD 4.05/bbl below the Middle East benchmark respectively. In a challenge to Russia, the company made the largest cut to northwest Europe of some USD 8/bbl in most grades – Russia sells a bulk of its Urals crude in the same region. Arab Light sales to Europe will be at a USD 10.25/bbl discount to Brent – levels not seen since at least May 2002. As a result of the anticipated rising production and slash in OSPs – expected to flood the market with barrels – WTI and Brent futures sank 27% and 30% respectively, with the former paused for a few minutes following its aggressive >7% move. WTI Apr’20 briefly slipped below USD 28/bbl vs. Friday’s USD 41.50/bbl close, while Brent May 20 dipping south of USD 32/bbl vs. Friday’s USD 45.50/close – with the spread also narrowing to ~USD 3.80/bbl vs. ~4/bbl on Friday. The Kingdom hopes the slump in oil prices and the expected diminishing in Russia’s market shares will prompt Moscow back to the negotiating table and force its hand to cut output. Desks note that although this may prove effective in the short-term, it is in less certain what the longer-term impact will be. The front-month energy contracts have, as European players entered the markets, pared some losses with WTI Apr’20 now back to ~USD 32.50/bbl, with the 29th Jan 2016 low at USD 26.19/bbl, whilst the Brent May contract reclaimed a USD 36/bbl status. Away from the OPEC debacle, IEA cut 2020 world oil demand forecasts by almost 1mln BPD, due to the coronavirus; envisage the first contraction since 2009, noting that Demand could drop by 730k BPD, in an extreme event where Gov't fails to contain the virus. Price action to the report was muted given the omission of a scenario that incorporates the weekend Saudi/Russian news. Elsewhere, spot gold failed to hold onto impetus from the global stock rout after prices briefly surpassed USD 1700/oz to the upside to prices last seen in December 2012. The yellow metal then waned off highs and into negative territory – potentially on profit-taking and as investors pump money into government debts in search of safe-haven assets. Meanwhile, copper conformed to the overall risk tone and gapped lower at the open, losing the USD 2.5/lb handle to a current low of USD 2.4675/lb.

Saudi Arabia launched an oil price war to punish Russia following the breakdown of the oil deal in which the kingdom announced it will offer deep discounts by lowering OSP to all destinations by USD 6-8/bbl, while it is to raise crude output to more than 10mln bpd next month. (Newswires/FT)

IEA Monthly Report: cut 2020 world oil demand forecasts by almost 1mln BPD, due to the coronavirus; envisage the first contraction since 2009. (Newswires)

-        Q1 oil demand to drop by 2.49mln BPD vs. Prev.

-        Q2 oil demand to drop by 40k BPD, then rising to 1.35mln BPD in Q3 and by 800k BPD in Q4

-        Forecast oil demand at 99.9mln BPD in 2020, -90k vs. 2019

-        Demand could drop by 730k BPD, in a extreme event where Gov't fails to contain the virus

Calls on OPEC crude is anticipated to increase by 2mln BPD to 30.6mln in 2025. World oil production capacity is set to increase by 5.9mln BPD by 2025, which will driven by Non-OPEC growth

IEA's Chief Birol says prices below USD 25/bbl would stop new US shale developments, sees the potential for a oil overhand of 3.5mln BPD in Q1 due to the coronavirus. (Newswires)

At least 4 Asian refineries reportedly aim to maximise purchases for April following Saudi Arabia's price cuts and Goldman Sachs Commodities Research lowered its Brent crude price forecasts to USD 30/bbl for Q2 and Q3. (Newswires)

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