First the good news: for the first time in a week, there were no overnight limit up/down trigger halt in the S&P500 future.

Now, the not so good news: the global dollar margin call/short squeeze escalated even more overnight, resulting in total chaos in Asia, as multiple regional indices hit circuit breakers, the Korean Kospi was halted after falling more than 8%, Indonesian stocks triggering limit down at 5% and the Philippines market reopened only to drop 24% on the open triggering a circuit breaker. The panic dollar scramble also led to a flash crash in the Aussie, Kiwi and various other EM currencies as reported overnight.

Worse, this happened even as the Fed stepped in with yet another Lehman-era facility, a Money Market backstop (MMLF), which however did nothing to convince panic-stricken equity markets that a coronavirus-driven global recession could be averted, or to ease the record $12 trillion dollar funding squeeze, as measured by the surge in the FRA/OIS…

… or the Bloomberg dollar index, which just hit a new all time high.

The result was chaos in US futures, which while not trading outside the +/- 5% band got close, and after initially surging, they then tumbled, reversed and surged again, then tumbled some more, as traders weighed the growing likelihood of a global recession and a cascade of corporate defaults triggered by unprecedented lockdowns and supply-chain disruption. Overall, the S&P has now traded in a “narrow” 200 point sinewave for the past 3 days.

“It’s a good start and a step in the right direction with the tools that they have available, but they can still do more,” Sue Trinh, global macro strategist at Manulife Asset Management in Hong Kong, told Bloomberg TV. “There’s much more need for U.S. dollar liquidity to get to where it’s needed the most,” she said. “At the moment the markets are screaming it’s not enough — we need to see more of that.”

The latest plunge took place even though earlier on Wednesday the U.S. Senate cleared the second major bill responding to the coronavirus pandemic and White House economic adviser Larry Kudlow said the government might take equity positions as part of corporate rescues.

The meltdown in global markets, which has brought back memories of the 2008 financial crisis, has pushed Wall Street’s three main indexes down about 30% from their record closing highs last month and erased the Dow Jones Industrials’ .DJI gains since the President Donald Trump’s 2017 inauguration.

There was some more good news in the euro zone, where sovereign bonds soared from France and Italy to Greece after the region’s central bank boosted its efforts to stabilize the economy and capital markets, by announcing a €750BN “pandemic” QE, coupled with a commercial paper purchasing facility. The move rippled across debt markets, with the cost of insuring high-yield bonds in Europe dropping from a seven-year high, and peripheral bond yields tumbled.

Unfortunately whatever firepower the ECB deployed only made its way to bonds, with European stock markets staging a feeble attempt to rebound only to sink shortly after the open.

And speaking of recession, Europe is already in it with German business confidence in free fall, as the March Ifo index fell to 87.7 in March from 96 in Feb, the lowest level since 2009 (Ifo expectations dropped to 82.0 from 93.2, while current conditions to 93.8 from 99).

Even as Donald Trump dubbed himself a “wartime president” and joins foreign policy makers in hurrying to counter an abrupt economic shock, investors seemed largely underwhelmed by many of the actions taken so far. The rush into cash and havens has battered risk assets almost everywhere, particularly equities, high-yield bonds and non-dollar currencies.

There were more bizarre moves: the yen, often a haven amid market stress, slumped in a sign of the extraordinary demand for the greenback, which strengthened for an eighth day versus a basket of its major peers to its highest in at least 15 years. Of course, the dollar was untouchable, rising against virtually every currency in the world.

In commodities, WTI oil futures rebounded after their 24% drop in prices in the prior session – with underlying themes still failing to fade but with sentiment supported by the ECB’s PEPP announcement. WTI has clambered of its near-multi-decade low after testing USD 20/bbl to the downside, whilst its Brent counterpart drifts closer to the USD 25/bbl, albeit ultimately in positive territory on the day. Meanwhile, spot gold remains sub-1500/oz with prices subdued amid the flight for cash. The yellow metal meanders around 1475/oz in early EU trade and sees a recent low at USD 1452/oz. Finally, copper prices see detrimental downside amid the overall demand implications of the virus and a firmer Buck. The red metal briefly gave up the USD 2/bl level during overnight trade before trimming some losses as European players entered the market.

Market Snapshot

• S&P 500 futures up 0.1% at 2,403.75
• STOXX Europe 600 up 1.3% to 283.20
• MXAP down 2.5% to 123.18
• MXAPJ down 3.9% to 391.94
• Nikkei down 1% to 16,552.83
• Topix up 1% to 1,283.22
• Hang Seng Index down 2.6% to 21,709.13
• Shanghai Composite down 1% to 2,702.13
• Sensex up 0.02% to 28,875.07
• Australia S&P/ASX 200 down 3.4% to 4,782.94
• Kospi down 8.4% to 1,457.64
• German 10Y yield fell 8.0 bps to -0.315%
• Euro down 0.4% to $1.0877
• Brent Futures up 6.8% to $26.57/bbl
• Italian 10Y yield rose 7.9 bps to 2.254%
• Spanish 10Y yield fell 41.8 bps to 0.803%
• Brent Futures up 6.8% to $26.57/bbl
• Gold spot down 0.4% to $1,479.80
• U.S. Dollar Index up 0.2% to 101.42

Top Overnight News

• The economic impact of the growing coronavirus outbreak is shifting from service-driven industries like hotels and restaurants to the manufacturing sector on both sides of the Atlantic, leading to a synchronized shutdown of heavy industry that historians and industry experts say is unlike any seen since the 1940s
• Boris Johnson’s U.K. government is mobilizing military personnel and preparing to put London in lockdown as it battles to slow the spread of the coronavirus
• The global currency market appears at breaking point yet there is a tool that could help. Trading currencies through the spot market seems pointless and options may present the best choice. Even though hedging costs have risen, volatility is coming up from record lows. That means in comparison to historical levels and to gauges in other asset classes, currency turbulence remains inexpensive on a relative basis
• A sell-off in the supposedly safe government bond market this week has unnerved investors looking for a haven amid the risk-asset storm. A slump in open positions in bond futures suggests a rush to meet margin calls may be partly responsible
• In a sign of the daunting challenges authorities face as the coronavirus pandemic fuels a stunning surge in financing costs, spreads on even the safest corporate bonds in dollars in Asia blew out the most in seven years. The price of insuring against default in the region jumped to the highest since 2016

Asian equity markets extended on losses with price action turbulent as ongoing coronavirus fears and disruptions, which now threatens to lockdown New York and London, offset the various global policy efforts to tackle the fallout including the ECB announcement of a EUR 750bln Pandemic Emergency Purchase Programme and RBA rate cut with QE. The announcement by the ECB initially boosted US equity futures and propelled Euro Stoxx 50 futures higher by over 3%, although the momentum then waned which fully wiped out the earlier gains. ASX 200 (-3.4%) swung between gains and losses heading into the off-schedule RBA monetary policy announcement which despite the RBA actions, did little to support the Australian benchmark which was heavily pressured by a collapse in the real estate sector, energy and financials. Nikkei 225 (-1.0%) also gave back opening gains with Tokyo exporters weighed by the safe haven flows into the domestic currency and with participants diminishing risk ahead of tomorrow’s holiday closure. Hang Seng (-2.6%) and Shanghai Comp. (-1.0%) were subdued as the coronavirus jitters continue to ruffle markets and as earnings also entered the fray including Hong Kong heavyweight Tencent which missed on its Q4 net. Finally, 10yr JGBs were subdued and continued to test support at 151.00 where prices have found a base. The BoJ were also active in the market today in which it announced 2 unscheduled special operations to purchase a total of JPY 1.3tln of JGBs although this only briefly underpinned prices, while Japanese CPI data and outdated BoJ minutes from the January meeting were largely ignored given that the data was mixed and meeting was prior to the blow up of the coronavirus pandemic.

Top Asian News

• Thailand’s Biggest Jump in Virus Cases Fans Fear of Outbreak
• Philippines Cuts Interest Rate by Half Point Amid Lockdown
• Indonesia Cuts Rate for Second Month to Counter Virus Blow
• A Coronavirus Explosion Was Expected in Japan. Where Is It?

Major European bourses trade mixed having waned off earlier highs [Eurostoxx 50 Unch] after sentiment in the equity sphere was bolstered by ECB’s EUR 750bln PEPP announcement, which at the time prompted European stock futures high and US futures to follow suit, although the latter failed to climb to positive territory. UK’s FTSE 100 (-1.7%) lags despite the GBP weakening to multi-decade lows, as the announced European package failed to reverberate into the sentiment across the channel. Meanwhile the DAX 30 (-0.6%) lost steam amid a bleak Ifo Survey and a string of downbeat economic forecasts from various institutes, all forecasting a 2020 German recession. Italy’s FTSE MIB (+2.1%) remains underpinned by the 3-month long short ban sale coupled with the ECB announcement. European sectors are all higher and largely reflect risk appetite, although Consumer Staples and Telecoms outperform given as the ongoing lockdown prompts additional broadband usage and stockpiling of staple goods. Swiss Banks meanwhile received a fleeting boost in light of the SNB monetary policy announcement in which it sweetened its tiering terms to a multiple of 30x from 25x, Swiss Banks remain supported with UBS higher to the tune of 7%. In terms of individual movers, Next (+13.0%) shares are supported post-earnings.

Top European News

• Europe Can’t Stop Pandemic From Rocking Its Very Foundations
• Babylon Testing Chat Room for Doctors to Track Symptoms
• Johnson Urged to Support Pay, Benefits to Ease U.K. Virus Shock
• Prudential Signs $753 Million Thai Deal With Tycoon Li’s FWD
• Virus Cuts Burberry Sales in Half as Next Withholds Guidance

In FX, In spite of concerted if not quite coordinated attempts to intervene, the Greenback remains on an upward trajectory and extending gains vs all G10 counterparts plus the bulk of EM currencies, with very few exceptions, like the Rouble that has clawed back some losses following CBR buying aimed at preventing Brent and Ural crude from caving too far below Usd25/brl. Indeed, the DXY has just posted a new ytd peak at 102.020 and closer to the next bullish technical objective at 102.260.

• NZD/JPY/EUR/AUD/CHF/GBP – All trailing further behind the Buck, as the Kiwi lags within a gaping 0.5472-0.5748 range and Yen loses even more of its safe-haven premium alongside Gold between 109.55-107.87 parameters. Meanwhile, the Euro is testing bids/support around the 1.0800 handle in wake of another bleak German business survey (Ifo echoing downbeat ZEW sentiment readings) and multi GDP downgrades via economic institutes, and the Aussie is languishing just above 0.5700 after RBA QE and more emergency funding, albeit off worst levels close to 0.5500 at one stage overnight. Elsewhere, the Franc is still mixed around 0.9750 and 1.0550 against the single currency following the SNB maintaining policy and only reinforcing NIRP intentions alongside stronger FX interventions despite upgrading its valuation of the unit to even more high from high. Last, but by no means least, scant reprieve for Sterling as Cable only clambers back from circa 1.1475 lows to 1.1500 awaiting a probable London lockdown and a likely further delay to Brexit negotiations resuming given that the EU’s chief representative Barnier contracting COVID-19.
• CAD/SCANDI/EM – The Loonie is doing better than most to resist its US peer’s advances, but still prone either side of 1.4500 if oil prices tank again and/or risk aversion really picks up, in the same vein as the Norwegian and Swedish Crowns as the former has only gleaned a degree of support from the Norges Bank hinting an direct intervention to supplement increased regular daily foreign currency purchases announced yesterday. As noted above, the Rub is the notable ‘outperformer’, though not before more pronounced weakness that triggered CBR action, while the Zar is trading defensively in the run up to the SARB that is expected to cut rates by 50 bp.

In commodities, WTI and Brent front-month futures experience a day of reprieve in the aftermath of the 24% drop in prices in the prior session – with underlying themes still failing to fade but with sentiment supported by the ECB’s PEPP announcement. WTI has clambered of its near-multi-decade low after testing USD 20/bbl to the downside, whilst its Brent counterpart drifts closer to the USD 25/bbl, albeit ultimately in positive territory on the day. Meanwhile, spot gold remains sub-1500/ozwith prices subdued amid the flight for cash. The yellow metal meanders around 1475/oz in early EU trade and sees a recent low at USD 1452/oz. Finally, copper prices see detrimental downside amid the overall demand implications of the virus and a firmer Buck. The red metal briefly gave up the USD 2/bl level during overnight trade before trimming some losses as European players entered the market.

US Event Calendar

• 8:30am: Current Account Balance, est. $108.6b deficit, prior $124.1b deficit
• 8:30am: Revisions: Jobless Claims
• 8:30am: Philadelphia Fed Business Outlook, est. 8, prior 36.7
• 8:30am: Initial Jobless Claims, est. 220,000, prior 211,000; Continuing Claims, est. 1.74m, prior 1.72m
• 9:45am: Bloomberg Economic Expectations, prior 57.5; Bloomberg Consumer Comfort, prior 62.7
• 10am: Leading Index, est. 0.1%, prior 0.8%

DB’s Jim Reid concludes the overnight wrap

Over the past three weeks I’ve kept light hearted introductions to a minimum as I’m sure you’ve got more important things to worry about. However I must tell you about the stresses of working from home yesterday and also highlight that I’ll be live from home on Bloomberg TV this morning at 9am GMT assuming I can keep the twins at bay and my Wi-Fi works. Last night my wife helped me replace all the sports and music books with business ones on the shelves behind my desk. I’ve left one rogue book. See if you can spot it. Anyway, yesterday my mobile reception suddenly decided to die at home and I got kicked off an internal conference call and couldn’t get back in as I had no reception. With an hour to go until my client credit conference call with nearly 1500 registered I realised I couldn’t do the call. We don’t have a landline so my wife offered to drive to buy a phone. On returning 20 minutes before the call we realised that the builders hadn’t created the phone port properly. We found that the only available socket was in our boiler cupboard where all the electrics and internet/phone line come in. With 10mins to go we unwrapped the phone and discovered it needed 16 hours of charge! So we put it on charge and I used my wife’s mobile instead. Reception cut out just as I started the call. So I then had to tuck myself into the boiler cupboard and gamble that one bar of battery was enough. I also had to turn the central heating off so it didn’t fire up during the call. My family froze for the benefit of our clients. I’m not sure other brokers can match that for commitment. It was a very stressful hour. Anyway if you want to hear the replay, register here to get the number. See you live from my home at 9am.

The main news overnight is that after an emergency ECB phone meeting last night they’ve agreed to launch a temporary APP of private and public sector securities worth €750bn and named the Pandemic Emergency Purchase Program (PEPP). The program, which will run until the end of this year, is equivalent to 6 to 7% of GDP – that is on the scale of what was seen during the last systemic crisis. The fact that they have the ability to buy over the year, means that they will purchase as and when is needed giving it an important element of flexibility. The ECB basically said that it would do all it could under its mandate – increase size, adjust the security mix, continue as long as necessary and would tolerate any impediments. The capital key is still the PSPP benchmark rate, however the language suggests that there is very flexible implementation. Eligible CSPP assets will also be extended to commercial papers of sufficient credit quality while Greek government debt will also be included for PSPP under a waiver from current rules. Following the announcement, Lagarde said that “there are no limits to our commitment to the euro”.

Just hours after the ECB statement, the Fed announced that it is launching a program to support money market mutual funds called the Money Market Mutual Fund Liquidity Facility. Like the CP facility, the treasury department will provide $10bn of credit protection towards it. The Fed stated that “The MMLF will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.” A similar version of the facility was set up during the global financial crisis.

Despite the announcements, there is little sign that sentiment has started to turn overnight in markets. In fact the price action would suggest the opposite with early gains for futures fading with the S&P 500 now down -3.89% as we go to print while Stoxx 50 and DAX futures are down -4.22% and -4.16% respectively. Asian equity markets are also continuing through their downward spiral with the Nikkei (-1.54%), Shanghai Comp (-2.14%), Hang Seng (-2.74%) and Kospi (-7.99%) all at their lows for the session. The ASX is also down -3.44% after the RBA cut rates by 25bps and introduced yield curve control by setting a target for the yield on 3y AGGBs of around 0.25%. Earlier, trading on the Kospi had got halted after it reached the limit down of -8%. Meanwhile, stocks in the Philippines slumped -24% after reopening markets following a controversial market shutdown move earlier in the week. In FX, the US dollar is continuing its unabated march up with the dollar index up a further +0.18% this morning. Yields on 10y USTs are also up +5.5bps as we type to 1.250%. In commodities, Brent crude oil prices are up +3.30% this morning to 25.69 after sliding to lowest level since September 2003 yesterday. Elsewhere, most base metals are down with iron ore trading down as much as -4.35%.

Also worth noting this morning, the BoJ has also offered to buy JPY 1tn ($9.2bn) of JGBs in an unscheduled operation while the central bank of Brazil also reduced rates by 50bps overnight. On the fiscal side, South Korea’s President Moon Jae-in has announced a KRW 50tn ($38bn) package to aid small businesses facing a credit crunch triggered by the coronavirus outbreak. At a more micro level, Qantas Airlines announced that it has furloughed two-thirds of its 30,000-strong workforce and scrapped all international flights as travel demand dried up while its CEO said in a note that “We have no work for most of our people.”

This follows another remarkable day in markets with global equity markets falling to their lowest levels of the crisis so far in spite of the continued policy response from governments. Even with a late rally the S&P 500 fell a further -5.18% to put the index just under -30% down from its closing peak on 19th February and seeing the 4th circuit breaker level breach over the last two weeks. It is the 4th worst day of the overall selloff, and it could have been worse – with just under a half hour left to trade in the US session the index was down -8.82%. However news right at the end of the day that the Senate was passing the House bill that was agreed to last week and also that a Gilead Covid-19 drug may get FDA approval sent US stocks 4% higher into the close. Not sure I would get too excited just yet on the latter.

Meanwhile in Europe the STOXX 600 shed a further -3.92% as it reached levels not seen since June 2013 in the aftermath of the taper tantrum. Was it really that long ago? Elsewhere the US dollar has surged amidst the turmoil with the US dollar index up +3.15% over the last 2 days, making this its second highest 2-day gain based on daily data back to January 1971.

Given all the market dislocations, last night we put out a quick note looking at the times through history markets that have closed. It has in the past due to things like natural disasters, terrorism and wars. Given that many politicians are saying we’re on a war footing it’s not impossible this topic will linger. Keeping markets open while you close economies is pretty one-sided. There are very valid arguments to keep them open too but food for thought. See the note here. Even if exchanges do not close people may not be there as after the NY close the NYSE announced that it will temporarily close its trading floor and move fully to electronic trading after traders tested positive for Covid-19.

Overnight, the US President Donald Trump has signed an executive order giving the federal government broad powers to direct the production and distribution of health protective gear, ventilators and other supplies if the coronavirus outbreak in the US gets far worse. The White House cited the Defense Production Act of 1950, as a legal basis for the new authority. The US economic adviser, Larry Kudlow later said in a Fox News interview that the administration was already in discussions with General Motors Co. and other automakers to start producing ventilators vital to treating people affected by the virus. So remarkable times. He also added in the interview that the administration may consider asking for an equity stake in corporations that want help from taxpayers but cautioned that the idea was one of many, and the ultimate form of the coronavirus stimulus legislation would depend on negotiations with Capitol Hill. Meanwhile, yesterday President Donald Trump declared that he has become a “wartime president” leading the fight against an “invisible enemy” in the virus.

Speaking of wars, a reminder that we published a piece ( link here) on Tuesday looking at war deficits and the likelihood of exploding central bank balance sheets as a result of this crisis. As we discuss, deficits are going to balloon, with war time annual deficits typically over 10%. It seems yesterday that government bonds increasingly priced this in. Europe saw the biggest swings, with 10yr bund yields ending the session up +19.9bps, their biggest daily move upwards since November 2011 and their 7th successive move higher (which itself follows a run of 8 moves lower). Spreads also had a volatile day, with the Italian 10yr spread over bunds widening to over 320bps (from 279bps at the open) at one point in trading, before actually ending the session tighter at 267bps, which just shows you how large the swings were. After the ECB announcement overnight expect to see Italy tighten today. Over in the US, 10yr Treasury yields actually ended the day up +11.3bps at 1.19%, though the 2s10s curve steepened by 7.8bps to its steepest since February 2018. Treasuries hit a low of 0.33% a week before so in one of the worst weeks for risk in financial market history (if not the worst), it has been stunning to see a near +90bps rise in US yields (+123bps intraday trough to peak on the 30yr). This move may also hint at liquidations and deleveragings. Overall this will be a worry for the authorities. There’s little doubt that this will ultimately lead to QE and helicopter money, but it shows that the aggressive supply of bonds down the line is starting to be priced in. The ECB move overnight is another step towards monetising debt in my opinion.

Talking of deleveraging, credit had another brutal day with HY cash spreads in the US +63bps wider to 904bps and IG +31bps wider to +303bps and now just wider than what we thought were incredibly bearish forecasts. In Europe cash HY spreads widened by +64bps to +819bps and IG spreads were +24bps wider at 225bps. Euro IG has held in better than most in this sell-off – partly because of the CSPP. Like Italy there will be hope the new ECB money will help. As we’ve been saying in recent days, IG is getting closer to our bearish targets and if the plumbing is increasingly being sorted out we move more onto the economic impact of this crisis. That might be worse from this starting point for HY than IG.

Over in oil, Brent Crude fell a further -13.40% to close at its lowest level since September 2003, at just $24.88/barrel, while WTI was down -24.42% at $20.37/barrel. It came as Saudi Arabia showed no sign of stopping their price war, with a statement from the Saudi Ministry of Energy saying that it “directed Saudi Aramco to continue to supply crude oil at a level of 12.3 million barrels a day over the coming months”. The oil moves meant it was another rough day for energy companies, with the Stoxx Oil & Gas index down by -9.42% to its lowest level since 1996 yesterday, while in the US the S&P 500 Energy index fell by -14.3% to its lowest level since 2003. The Norwegian Krone was hammered yet again as a result, weakening by -7% against the US dollar yesterday, which is its biggest one-day fall against the dollar in data we have going back to 1971. Looking at other commodities, silver was down (-5.03%) for a 9th consecutive session, reaching its lowest since April 2009.

Speaking of multi-decade FX records, the British pound fell to its lowest level against the dollar since 1985, surpassing any lows we saw during the Brexit crisis, even if much of the story this time around is a result of dollar strength. UK gilts also saw a selloff larger than their continental peers, with 10yr gilt yields up +24.2bps yesterday. It came as the Telegraph reported that the London mayor’s office expected there to be a shutdown of the capital over the coming days, while it was also announced that schools throughout the country would be closing from Friday. Overnight, Transport for London has decided to close as many as 40 London Underground stations that don’t interchange with other lines and added that public transit should only be used for essential journeys. The release further said that from March 20, there will be no service on the Waterloo & City line and from March 23, the frequency of other services will be gradually reduced.

Here at DB the latest developments on the coronavirus have led us to substantially revise down our global growth forecasts in the first half of the year, and we now see a severe global recession in H1 2020. The coronavirus has spread further and more rapidly than was expected just a few weeks ago, and the early evidence of negative impact on the Chinese economy has been far in excess of our initial projections. The quarterly declines in GDP growth we expect will substantially exceed anything seen since WWII, and given the degree of uncertainty it is easy to imagine that the outcome will be worse still. You can find the latest report here link here.

Meanwhile on fiscal policy, as mentioned briefly above the US Senate passed the House bill from last week providing paid sick leave, food assistance and financial help for coronavirus testing. This occurred in the last few minutes of the US session – the motion passed with a 90-8 vote count showing how strong bi-partisan support is to get a fiscal package out to Americans. Senate Majority leader McConnell and Minority leader Schumer were already working on the nearly $1.3tn bill that has been mentioned this week with checks being sent directly to the populace. Some Senators indicated that a vote could take place this weekend.

Backward-looking data seems increasingly redundant at the moment, though we did get new car registrations in the EU27, which fell by -7.4% yoy in February, and the STOXX 600 automobiles and parts index lagged the overall index yesterday to fall -6.75%. Over in the US meanwhile, February’s housing starts rose to 1599k (vs. 1500k expected), down from an upwardly revised 1624k in January, with that January number being the highest since 2006. Building permits fell however, down to 1464k (vs. 1500k expected). Finally, Canadian CPI fell to 2.2% in February (vs. 2.1% expected).

To the day ahead now, and there are a number of data releases out, of which the highlight may well be weekly initial jobless claims from the US. Is it too early to see a virus lay-off spike? From the US we’ll also get March’s Philadelphia Fed business outlook, the Q4 current account balance and the February leading index, while there’ll also be the Euro Area’s construction output for January. From central banks today, we’ll get rate decisions from Switzerland, South Africa and Indonesia.

END