Monday, March 23, 2020
Please
find below our latest Weekly Trend Update Report covering major
asset classes and currencies.
Stay
safe.
Marc
Bentin
Bentinpartner
GmbH
Trend
Status Update
The following day, the Fed unveiled a third emergency credit program,
the Money Market Mutual Fund Liability Facility, aimed at supporting the
USD3.8trn money market fund industry and help financial institutions meet
redemptions or help banks buy those assets from mutual funds as investors
rushed for the exit to generate liquidity. These efforts helped preventing
money markets funds to “break the buck”. Many other funds traded (and for some
of them still trade) at a deep discount to NAV. At some point the largest ETF invested
in long dated (20-30Y) US treasuries was quoted with a 5% discount to NAV. This
was a week where most ETF’s ranging from those trading relatively illiquid gold
mines to those invested solely in the most liquid US Treasuries faced liquidity
problems.
Friday looked set for a day of recovery caused in some ways by a “quadruple
witching” of derivatives and investors having to decide whether or not to roll
hedges. The day started with the hope that some would not but those hopes were
dashed at the end of the day as the S&P closed 4% lower.
It was not only the Fed that unleashed the bazooka last week as the ECB
announced late on Wednesday a new EUR750bn QE plan one day after taming the
widening in spreads initiated on peripheral bonds.
The week finished with the good news that the German government readying
to vote on Monday a special budget of EUR150bn including EUR50bn of emergency
funds allocated to small businesses. By so doing Germany triggered an exception
to a rule written in the Constitution which only authorizes the Federal State
to issue new debt within a limit of 0.35% of GDP, baring natural disaster or a
situation of exceptional urgency. In actual fact, the Bundestag is expected to
grant an additional leeway of EUR200bn which came as a credibility support for
the ECB which committed to an unlimited support to States of the Euro area.
This will come in addition to the EUR500bn protective shield already
decided. Analysts opined that the
financial mobilisation of the German government to bring 10% of its GDP on the
table, came in support of the ECB’s credibility to live up to its promise to
absorb a large part of the new issues from States of the eurozone.
During this exceptional week, German Chancellor A. Merkel also opened
the door to the possibility of joint European debt issuance.
Over the past week, the S&P500 sold off by -15,0% (-28,9% YTD) while
the Nasdaq100 sold off by -11,3% (-19,7% YTD). The US small cap index sold off
by -15,1% (-38,8% YTD). CBOE Volatility Index rallied 14,2% (379,2% YTD) to
66,04. The Eurostoxx50 dropped -1,8% (-31,8%), outperforming the S&P500 by
13,2%. Diversified EM equities (VWO) sold off by -13,3% (-30,0%), outperforming
the S&P500 by 1,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7
currencies rallied 2,1% (7,9%, Z-score 2,1).
In FX, liquidity also evaporated and some extraordinary moves were observed
across DM and EM crosses. Norwegian krona plummeted 13% to a record low while
GBP dropped 5% to its lowest since 1985. NZDUSD sold off by -6,9% (-16,5%, Z-score -2,1). EURUSD
sold off by -4,5% (-4,7%) while most other EUR pairs were stable, confirming a
USD move. Interestingly, the COT report showed on Friday a major squaring off
speculative positions which were mainly long USD the week before. Speculators even
went net long EUR with 32.5k contracts (from short -12.7k contracts). These
inversions are rare enough to be noted. Similarly, JPY speculative long exposure
increased (vs. USD) from +8.2k to +32.9k. Speculators also found the courage to
go long GBP with +18.6k (from -7.7k short the week before).The only exception
involving buying of USD was a large reduction (stopping out) of MXN long positions
from +112.5k contracts to 33.8k.
The MSCI EM currency index (measuring the performance of EM currencies
vs. the USD) dropped -1,6% (-6,1%) with most EM currencies dropping with oil
and risk appetite amidst a dash for dollar liquidity which abated towards the
end of the week with the fed liquidity enhancing measures which seem to at
least have stopped the bloodshed on EUR. USDBRL rallied 4,6% (25,8%). USDRUB
rallied 8,4% (30,4%). USDMXN rallied 8,3% (30,9%). USDINR gained 1,7% (5,3%). USDCNY gained 1,2% (1,9%,
Z-score 2,0). USDZAR rallied 6,0% (26,4%).
Volatility in US government bonds reached its highest level since the
2008 financial crisis and was accompanied by concerns about the proper
functioning of the world’s most liquid debt market. 10Y US Treasuries rallied
-11bps (-107bps) to 0,85%. 10Y Bunds climbed 22bps (-14bps) to -0,32% only
recovering on Friday after climbing for seven consecutive days. 10Y Italian
BTPs rallied -15bps (22bps) to 1,63%.
US High Yield (HY) Average
Spread over Treasuries climbed 286bps (677bps, Z-score 2,0) to 10,13%. US Investment Grade Average OAS climbed 149bps (276bps,
Z-score 2,3) to 3,77%.
In European credit markets, EUR 5Y Senior Financial Spread dropped
-10bps (82bps) to 1,34%.
Gold dropped -1,6% (-1,8%) while Silver sold off by -3,6% (-30,3%).
Major Gold Mines (GDX) rallied 8,2% (-29,8%). Large backlogs of buying orders
were reported in the physical markets with French newspaper les Echos reporting
that the quotation of Franc20 Napoleons being suspended for the first time
since second world war as a result of a large offer problem and fear of an explosion
in their premium. Similar offer disruptions were reported in silver coins
(despite the paper silver metal getting crushed last week).
Goldman Sachs Commodity Index sold off by -6,3% (-40,8%). WTI Crude sold
off by -26,7% (-65,5%).
Over the week end…
US futures hit limit down (-5%) overnight (then recovered by 1.5%) as
did Korea and Hong Kong (and Australia by 8%) after a surge in the global death
toll from the coronavirus and a failure as yet by Congress to agree on an aid
plan, Bloomberg reported. A deal could still be expected…today…which would
herald a bounce.
Federal Reserve Bank of St. Louis President James Bullard
predicted the US unemployment rate may hit 30% in Q2. Otherwise FX is
mostly stable with the dollar index even dropping slightly (in line with a
mirror like move for EURUSD) while yields were slightly lower this morning.
Germany moved to banning gathering of more than 2 people in an effort to
contain the virus.
German Chancellor A. Merkel decided to self-isolate after her doctor was
tested positive.
Chinese officials, including Premier Li Keqiang, have pointed to
claims the outbreak has been controlled and signs of a resumption of activity
as reasons for optimism with regards to China’s outlook.
Trend Score Card
Click here for technical annotations.
US
& International Equities
Check out US and International Stocks’ Technical
Trend Status.
Sector
Trend & Momentum
Check equity sectors’ trend and performance …and when
they break out!
Fixed
Income
Check out 10Y US Treasury and Bund yields, their
trend, expected Fed rate moves and speculative positioning in 10-year Treasury
Futures.
US
Recession Risk Radar
A comprehensive list of
economic indicators to compare the current situation with previous recessions.
The
Dollar
Check out where the Dollar stands Trendwise and Breakoutwise vs. G7 and EM counterparts.
Precious Metals
Check out where precious
metals stand Trendwise and Breakoutwise. Get a sense of options
(cumulative open interests on calls and puts) and futures traders’ sentiment
(non-commercials open positions).
Check out how precious metals, the dollar and the
Stock market correlate with each other and speculative futures positioning
on Gold and the Dollar.
Why Trend Following Matters and How It Can Help
You?
A disciplined and rule-based
trend following investment approach can serve as an effective portfolio
insurance technique.
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