Daily Market Outlook, March 12, 2020

Daily Market Outlook, March 12, 2020 

Global equity indices continued to spiral downwards after President Trump’s statement in the early hours of this morning failed to soothe the market. He announced restrictions on travel from Europe (excluding the UK) to the US will be suspended for the next 30 days. His initial comments that there would be restrictions on trade, later retracted,seemed to contribute to the sharp fall in risk appetite. 

UK PM Johnson will chair an emergency meeting later today, with the government expected to move the coronavirus response from the “contain” phase to the “delay” phase which involves social distancing including restrictions on public gatherings. That follows the World Health Organization’s declaration yesterday that Covid-19 is a pandemic.

Following decisions by other major central banks, including the Bank of England yesterday and the US Federal Reserve last week, to ease policy, attention turns to the ECB today with a policy announcement expected at 12:45GMT followed by the press conference with President Lagarde at 13:30GMT. 

Lagarde said yesterday that the Eurozone economy faces an economic shock due to the coronavirus similar to the financial crisis. That, at least in part, is a call for governments to play their part in supporting the economy through the crisis. The ECB has pledged to take “appropriate and targeted” measures. But with limited firepower remaining and interest rates already in negative territory, economists are divided over whether it will cut rates further today. Markets nevertheless have fully priced in a 10bps reduction to -0.6% and have partially priced in a 20bps cut, which would likely be accompanied by a tweak to the two-tier system. An increase in the pace of monthly bond purchases from the current €20bn is another possibility, though potentially more controversial (neither the Fed nor the BoE have as yet gone down that route). There will be a focus on the ECB’s “targeted” measures to support the economy. Reports suggest that it is looking into an emergency loan programme for banks to provide support for SMEs that are likely to be particularly affected by the impact of Covid-19.

BOE made an emergency rate cut after Fed’s: The Bank of England unexpectedly cut its Bank Rate by 50basis points from 0.75% to 0.25%, way ahead of a scheduled 26 March meeting in a bid to combat Covid-19 related economic fallout. The decision was unanimous among the MPC and was accompanied by the introduction of a new Term Funding Scheme for SMEs. BOE said that the magnitude of the economic shock from Covid-19 is highly uncertain and activity is likely to weaken materially in the UK over the coming months. The move will help to support business and consumer confidence at a difficult time to bolster cash flows, reduce cost and improve availability of finance. However it added that the disruption caused by Covid-19 could be sharp and large but should be temporary. The reduction was significant in the sense that it was the BOE’s first cut since Aug 2016 in the aftermath of Brexit referendum to stave off recession although the magnitude of the cut at that point however was smaller at 25bps. It was also its first off schedule move since the Global Financial Crisis more than a decade ago. The central bank has since then embarked on a policy normalization path in late 2017 and was among the few that had refrained from easing policy amid weaker 2019 environment. In fact it was the only major central bank to have maintained its hawkishness throughout 2019, reiterating its stance to raise rate after Brexit uncertainties dissipated. This was markedly in contrast with the Fed which had trimmed rates for 3 times in 2019, the latest being its emergency 50bps cut just last week.  

US inflation remained low; higher food and rest cost offset by cheaper US gasoline: US consumer price index rose 0.1% MOM IN February (Jan: +0.1%) as rising cost of food and accommodation offset cheaper gasoline. Cost of food gained 0.4% MOM, its largest increase in a year due to higher grocery prices. Core CPI rose 0.2% MOM (Jan: +0.2%). YOY, CPI picked up 2.3% (Jan: +2.5%) and core CPI edged up 2.4% after staying consistently unchanged at 2.3% for four successive months. US inflation nonetheless has remained low and is expected to turn weaker this month and next in response to the collapse in oil prices and weaker demand stemming from Covid-19 outbreak.  

US refinancing applications jumped nearly 80% amid record low rates: The MBA mortgage applications spiked 55.4% last week (previous: +15.1%), reacting to the significant drops in US treasuries yields to record lows that had resulted in much cheaper borrowing cost. Gains came mostly from the refinancing category that registered a phenomenal WOW 78.6% increase.  

UK economy stagnated in Jan: The UK monthly nominal GDP growth disappointed with a flat reading in January versus 0.3% MOM growth prior. This reflects softer services sector growth (+0.1% MOM vs +0.3%) as well as contraction in industrial output (-0.1% MOM vs +0.1%) of which construction recorded decline while manufacturing slowed down. Visible or goods trade deficit widened to £3.7b from £1.4b) mainly because exports plunged 5.6% MOM after a post-election surge in Dec (+7.9%) while imports gained less than 1% MOM (Dec: -0.3%). Overall weaker showing for January confirms expectations that the post election and Brexit boost is set to fizzle out especially with Covid-19 weighing on demand.  

Further recovery in post-Brexit UK housing sector: The Royal Institute of Chartered Surveyor reported that its House Price Balance Index jumped to 29% in February (Jan: 18% revised), its highest level since Apr-16 prior to the Brexit conundrum. The stronger than usual print reflects solid price and sales expectations, buyer enquiries and new instruction as well as higher agreed sales. The housing market had commenced its much overdued and needed recovery following Britain’s formal withdrawal from the EU in late January. 

Japan factory gate inflation lost momentum: Japan producer prices index slipped 0.4% MOM for the first time in six months in February (Jan: +0.1% revised), thanks to a fall in manufacturing prices, leaving the annual gain at a smaller 0.8% YOY (Jan: +1.5% revised) and pointing to a continuous lack of inflation momentum going forward.  

Japan MOF’s gloomy quarterly business outlook survey: The MOF’s quarterly Business Outlook Survey paints a picture of downbeat sentiment across all sectors amid the Covid-19 outbreak. The All Industry Present Condition Index for large firms dropped to -10.1 (4Q: -6.2) with the reading for manufacturing plunging sharply to -17.2 (4Q: -7.8). Nonetheless, according to the outlook index, these large firms across industries expect weaker outlook to only last through 2Q, before conditions set for a rebound in 3Q. 

Today’s Options Expiries for 10AM New York Cut (notable size in bold)

• EURUSD: 1.1165 (EUR682mn); 1.1300 (EUR882mn); 1.1325 (USD728mn); 1.1350 (EUR784mn)
• USDJPY:  104.50 (USD576mn); 105.75 (USD400mn); 106.00 (USD730mn)
• GBPUSD: 1.3000 (GBP351mn)
• AUDUSD: 0.6585 (AUD409mn)

Technical & Trade Views

EURUSD (Intraday bias: Bullish above 1.1275 neutral below)

EURUSD From a technical and trading perspective, prices spiked higher overnight to test 1.15 some initial profit taking and supply have capped the overnight advance for now. As 1.13 now acts as support look for a test of the yearly first resistance pivot point sighted at 1.1560. From these levels we witness some consolidation,corrective action before the next leg higher. Only a close back through 1.12 would concern the bullish bias.UPDATE price testing pivotal trendline support failure below 1.1240 will suggest correction is underway UPDATE Tuesday’s key reversal pattern was given additional conviction with Wednesday’s inside reversal candle suggests further corrective action to test bids below 1.12. Currently consolidating within yesterday's range. Headline risk abounds this afternoon on the day a breach of 1.1385 will open a run at 1.1550

GBPUSD (Intraday bias: Bearish below 1.2910)

GBPUSD From a technical and trading perspective, initial test towards 1.32 saw decent supply as 1.30 supports intraday there is a window for another run at stops above 1.32 however look for a fade here and a deeper correction to develop to test support back to 1.2950 UPDATE as 1.2970 now acts as resistance look for another leg lower to develop as per Weekly Market Outlook highlighted the next frustration phase for both bulls and bears, only a close through 1.30 would negate this thesis. UPDATE prices look poised to test bids and stops to 1.27, on the day only a close back through 1.30 would negate the downside

USDJPY (intraday bias: Bullish above 104.50 bearish below)

USDJPY From a technical and trading perspective, major gap lower in asian trade takes out the 104.50 support, as this level now acts as resistance bears will look to target the psychological 100 level. Only a close back through 105 would suggest a false downside break.UPDATE a late 2018 redux appears to be in the offing, pivotal will be a breach of 106 to the upside targeting 109 before the next leg lower commences UPDATE overnight weakness in risk sentiment has weighed on the pair and we didn’t get the topside confirmation yesterday, however, there is still a window for upside correction, a failure below 103 would negate the upside and open a retest of 101 support en-route to a tet of the psychological 100 level

AUDUSD (Intraday bias: Bearish below .6550 Bullish above)

AUDUSD From a technical and trading perspective significant reversal in fortunes for the AUDUSD as .6530 continues to attract buyers look for a move to test offers and stops above .6700 UPDATE bids fail to support look for a test of .6450 failure here opens a retest of Asian low towards .6300

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