In a preview of what’s in store for investors this week, assets were whipsawed in Asian trading Monday.
Bond yields plunged as market expectations for central bank easing are now squarely in mania territory, with Goldman tweaking their Fed call for the second time in three days – the bank now sees a 50bps cut this month.
Risk assets trimmed early losses after the BoJ promised to stabilize markets and moved to provide liquidity in what was widely seen as the opening salvo in a coordinated effort from monetary policymakers.
Read more: ‘Defining Moment’ For Markets As BoJ Kicks Off Central Bank Response After Dire Weekend News Flow
The RBA is seen cutting this week and the market is foaming at the mouth for the Fed to pull the trigger. US 2-year yields plunged double-digits at one juncture, bull-steepening the curve, in a continuation of last week’s action.
“The Fed should let the financial markets work off their excesses and save its monetary policy ammunition for a point in time when the consumer is in a position to spend and may need a boost getting started”, JonesTrading’s Mike O’Rourke said, in a Sunday evening note, adding that “the Fed’s early easing has a history of trapping bullish speculators at terrible prices at the start of a downturn and only fuels the re-rating of asset prices”.
True to form, equity futures rebounded after the BoJ news, but around the same time, a series of headlines crossed in rapid succession which together served as a stark reminder about the gravity of the current health crisis and its likely ramifications on the global economy.
South Korea reported hundreds of additional infections, bringing the country’s total to more than 4,200, while New York reported its first case when Gov. Andrew Cuomo said a woman contracted the disease while traveling in Iran. She’s now isolated in her New York home. Meanwhile, a pair of health care workers in the San Francisco Bay Area contracted the virus after being exposed to a patient who’s now being treated in Sacramento. Washington State reported its second death in King County.
Meanwhile, the Caixin China manufacturing PMI printed the lowest on record, coming in at 40.3, well below the 46 consensus was looking for, although not as terrible as it could have been, I suppose.
The release was chock-full of language you’d expect given the circumstances.
“Efforts to contain the recent outbreak of the coronavirus in mainland China weighed heavily on manufacturing sector performance in February”, the press release reads. “Production, new work and staffing levels all fell at the quickest rates since the survey began nearly 16 years ago as companies extended their usual Lunar New Year shutdowns to help stem the spread of the virus”.
Really, though, it could have been worse. The official gauge certainly was. And the release contained some upbeat language on the outlook.
“The economy will be able to see a significant rebound when the epidemic is gradually contained and companies accelerate the resumption of business amid more proactive fiscal and monetary policies”, Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group, said, stating the obvious.
Finally, just as the market was attempting to digest all of the above, Pete Buttigieg formally suspended his presidential campaign. At a speech in Indiana, he told supporters he’d come to the conclusion that the path ahead had narrowed to a close.
This comes less than a month after he carried Iowa and less than 24 hours after Joe Biden’s left-for-dead campaign rallied to a landslide in South Carolina. Here’s how the betting market sees things headed into Super Tuesday:
Again, all of the above came across roughly in the same half-hour window, underscoring just how precarious and manic this week is likely to be for markets which are still reeling from last week’s abject insanity.
“While lots of market uncertainty continues to permeate, one aspect that’s a certainty is that global central banks aren’t about to let COVID-19 snatch defeat from the jaws of victory”, AxiCorp’s Stephen Innes said Monday, adding that we’re “either in the midst of one of the most significant gap traps on record, or we’re on the precipice of the equivalent to a modern-day market doomsday prophecy”. He thinks it’s the former, but notes “that’s a story best left for a later date”.
In this situation, Central bank rate drops/balance sheet expansions are only band aids- that temporarily create the impression that bleeding has stopped. Give it a few minutes, the bleeding continues and you soon realize that band aid did nothing.
The virus is resulting in a demand problem (just beginning to unfold), first and foremost, followed by a supply problem.