Alternative Markets Update And Macro Outlook March 2020 II

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RESEARCH PERSPECTIVE VOL. 128 March 2020 Download Research Perspective Alternative Markets Update March 2020 The current market environment is highly unstable. The coronavirus remains the most discussed topic, as the number of infections keep increasing at a fast pace. Within the last two weeks, most countries in Europe have declared a state of emergency alongside a lockdown, which only allows people to go outside, if they need food or medication. The number of deaths increases faster than ever, as the health care system in the most affected countries in Europe, Italy and Spain, are overrun. The virus in the US is spreading fast and the number of infections rose above 50,000, despite being severely behind Italy in the infection curve. In Asia, the situation is different in each country, as India just declared a lockdown, while China partially removed the lockdown in Wuhan and has had no new cases since last Thursday. The market environment is difficult to evaluate, as different asset classes correlate to a high level and the situation we are experiencing is unprecedented. Many governments and central banks are issuing rescue packages to add liquidity to the market and help businesses to overcome the close future. Central banks have also cut rates multiple times, if they could without falling to negative interest rates. The US provides $2tn to boost the economy, while Germany agreed on a package worth €750bn to fight the impact of coronavirus. Since Tuesday, the markets have been gaining substantially, despite high daily volatility. The Dow Jones for example, rose from almost $18,000 back to $22,000 and European indices have seen similar developments, although their upward movement was not as sizeable. Oil saw its highest percentage gain within a day last Thursday, while Bitcoin recovered from its $3,800 low and is back at $6,600 (as of 25th March). As of end of February 2020, the tactical trading strategies remained the most profitable, as the discretionary global macro strategy and the Bitcoin Altcoin actively managed strategies are up almost 23% in 2020. The equity strategies had huge deviations, whereas the strategies, which could hold their gains from January are up 7%. The remaining equity strategies were the biggest losers in February, as they lost from 5% up to 8%. Credit strategies remained relatively stable, as most of them either lost a few basis points or they gained some basis points. Macro Outlook March 2020 by Aquila Markets We are entering the “whatever it takes” response phase, and whilst I believe that more countries will enter full lockdown, and more cases will grow in Africa and India (potentially a true catastrophe), for markets in the short term the huge Fed package announcement yesterday does change the game somewhat.   The Fed is saying – the US economy can pay this back, we just need to give it some time. Couple that with the Fed USD swap lines last week which have acted to being basis swaps back into line and alleviate USD funding issues in the short term, and stocks have rallied along with the USD softening. Asian markets have rallied, VIX and FX vol measure are falling, Fixed income is pausing. Even risk proxies like Gold-Silver ratio are putting in short term reversal signals – this based last week before stocks based last week. The DXY and US rate correlations broken down with the USD funding issues we highlighted last week. If we have a pause period, I expect this to converge once again especially if stocks rally. We recognise we are moving into a different phase of what we continue to believe will be a prolonged period of deleveraging, in an environment of not knowing how long the virus will causes the global economy to remain shut. We advocate taking profit USD longs or bring in stoplosses as we run into month end which could herald huge rebalancing of portfolios which would involve buying stocks and selling bonds. As a pure personal note – the market is “tired” running into quarter end, and the weak side for markets now would be a recovery in risk assets, which can be spun in a variety in ways. I am fearful, that the US administration would see a recovery in equities as vindication for its strategy which would hasten its desire to relax social distancing which seems to be the way the administration is leaning. If that is the case, we could see significant issues on the healthcare system in the US. I hope not. However, given our core view that this event is simply the most significant of our lives, we would see significant rallies as opportunities to reengage with the short side in equities. For now though, we do not want to fight a period of recovery. Figure 1: Gold-Silver Ratio (Inverted) vs US500 – Pointing to Equity Recovery, Source: Aquila Markets, March 2020 Figure 2: DXY-Potential Convergence to US Rates in a Period of “Pause”, 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. 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