Alternative Markets Update And Macro Outlook March 2020

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RESEARCH PERSPECTIVE VOL. 127 February 2020 Alternative Markets Update March 2020 Since the last week in February 2020, markets across several assets plummeted. Main driver of this development is certainly the coronavirus cover-19, more specifically the increased number of infections outside China, and the response of the FED and BoE to cut interest rates by 0.5% each as a response. Furthermore, a disagreement among Russia and Saudi Arabia arose during their OPEC+ meeting about the oil price strategy, which lead to a 30% loss in oil prices. The major indices of most countries lost more than 10% and face a high volatility since the virus outbreak outside China with a WHO classification as epidemic. It is expected that the interest rates in the positive yielding countries like US, Uk, Australia and New Zealand are lowered further. Safe haven assets, such as currencies like CHF and JPY or commodities like gold continuously increased in value. Bitcoin, oftentimes referred to as digital gold, could not establish itself as safe haven asset, as it decreased substantially to $6,105 on 12th March 2020 and other cryto assets followed in a similar fashion with declines. Macro Outlook March 2020 by Aquila Markets The current situation is now comparable to 2008 in terms of the potential shock to the global economy. Whilst the initial shock of the virus on global supply chains, the ongoing ramifications are significant. In the GFC, within a few short weeks, Lehman went bust, Banks merged, AIG was bailed out amongst many other companies. Rates were slashed globally. The world “survived”. But the policy responses – QE in waves in the US , austerity in Europe, the rise of China , US monetary policy, has defined the past decade. But, because failure was banned and assets supported, we have fuelled yet another credit driven boom especially in the US.   So - when I see the CEO’s of US banks sitting with Trump and saying “this is not a financial crisis” – you recognise that nothing has been learned in the US. China recognised that the reopening of the economy was PARAMOUNT, and I am sure draconian measures were used and we don’t know even the tip of how many have probably died. Yet in a centrally planned totalitarian regime this can be managed.   Around the world, early and quick responses have been followed by some: the UK coordinated response has been impressive, combination of monetary and fiscal policy responses. Australia have engaged a fiscal package of 1.2%, and more will follow. ECB today – we could find no rate cut on the docket, which would be a sign that recognition of the damage of negative rates has been seen. Instead measures to support the banking sector and SME’s are more likely, and could be very sizeable.   This is all in contrast to the disastrous response in the US. Trump has found something that he cant cut the tax for, do a trade deal with, or belittle on twitter. Trump’s presidency is defined by exaggerating good outcomes into great ones created by him, and sowing discord when harmony was preferable. You cant do that with a virus. He belittles his own central bank, who are trying to act (although I think the nature of the announcement did nothing but promote panic). When this virus effect passes, as it surely will, the damage done to the US will remain.   Of course we have the other shock – the oil price war between Opec and non-Opec. But, both Saudis and Russia have a common enemy here: the US. The destruction of US as an energy exporter alone is a powerful incentive. Think the indebtedness of US shale, which directly employs 6.5mio people and supports tens of millions of indirect jobs in the US, and has been a cornerstone of the Trump “job miracle”. Additionally, the US bond market, both government and corporate, has been in turmoil for months, indicated by the Fed balance sheet expansion out of the blue 6 months back as repo activities ratcheted up. The Fed emergency cut was clearly in response to concerns over credit, and not just the levels of rates.   There is a longer goal here though – and that is finally end the role of the USD as the globe’s reserve currency, which has existing since WW2. Whilst the US has persisted since the crisis (that it undoubtedly helped to create) in engaging in beggar thy neighbour policies to support the US, the Trump presidency has openly attacked other nations over many factors. I have written about China playing the long game, but that they would never allow another nation to control their destiny; Putin is still fighting the cold war, and MBS is cementing his hold over the Middle East region, with the region falling into line over rapidally increasing production. I don’t believe they are going to let the US off the hook this time.   I would make the following observations : How many weeks behind Italy are other countries, including the US? Its not a case of if, but a case of when. ECB today; but it would be no surprise to see FOMC cut rates again today. FED provides the rate cut, ECB provides the funding to the EU. The VIX is at the highest levels seen since 2008 and is sustaining those levels. I had felt a spike above 50 would signal the top. That was wrong. This sustained strength is significant. (the CME has closed Chicago office – this is negative for liquidity). Financial market liquidity – from what I gather – is very poor. This is a direct result of policy makers who prevented banks from making markets. For years markets have mistaken volumes, for liquidity. As we all know – they are NOT the same thing. USDCNH is gone bid this week with oil coming down, when China is reopening. Coincidence? I don’t think so. USDMXN is at all time highs. Latam EM could be the worst affected by a severe US slowdown. Would you rather put your money in a European bank or a US bank ? It’s an interesting question and I think I would rather put it in the former! Because they WILL be bailed out and owned (RBS is still mostly owned by the UK government). The US banking sector has much further to fall especially with the potential for credit disruption in the US. In a supply shock, responding with demand side policies simply doesn’t work. Solving the supply issue first is key. Xi gets this. Boris Johnson gets this. Donald Trump does not. The curve is steepening in the US – could this be down to market looking through to the colossal issuance that will happen in the longer dates The next bailout will be governments owning whole companies – Banks, airlines etc. We could go directly from owning equities, to full blown nationalisation of businesses, especially in Europe. Just one chart… Copper. I wrote about this couple weeks back, that a sustained break below 250 zone signals a global recession, seen only in Copper during the GFC and during the China slowdown on 2015-2016. Copper is breaking down. Good luck out there. Figure 1: Price Development of Copper Futures, Source: Aquila Markets, March 2020 The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Chris Eagle Aquila Markets E : chris.eagle@aquilamarkets.com M : +447712885718 Chris is an experienced executive who runs his own consultancy service which focuses on business development, market structure, financial market analysis and training. He worked on the sell-side for twenty years. He left Jefferies in 2015, where he worked in the Global Foreign Exchange and was Head of FX product distribution. This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: research@stonemountain-capital.com under Tel.: +442037228175. 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