Fed Cut Rates To 0% & Restart QE

Okay, good morning, Monday, 16th of March. Getting straight into the briefing, and there's obviously plenty for me to talk about. And starting off with this graphic, this is really dominating market psychology at the moment, and also that of the consumer. As you probably saw at the weekend, quite phenomenal scenes really. I mean, when I was going around, just generally supermarkets being completely wiped out in terms of the shelves. And you know, this, this is it. This is what's further fueling really the economic reality of what it means when we have these kind of quarantined measures put in by national governments, now increasing in how stringent they're becoming across the globe. And I'm going to get you up to speed with some of the major countries we've been, we've been monitoring And then also reviewing what the central banks have been doing. We've obviously had an emergency, another Fed cut. The BOJ have been active overnight. And what have we got to look out for going forward, not just in the session but the, the week ahead? So quick spot check on the numbers. With total confirmed cases now just short of 170,000, and for the first time deaths now outside of China. So, you including particularly mainland Europe and America and so on, now supersede that of mainland China. So you can see down here, if I just make this a little bigger, there's been a distinct overlap, as you can see on the far right-hand side here, which is basically the yellow line is other locations, the orange line being that of mainland China. And you can see China, given the fact that they've been several weeks ahead of the curve in terms of the development of this particular virus, and also the kind of how strict they were in locking down the kind of epicenter, if you like, in Wuhan, but other areas of China. Again, I'm sure, yes, people will comment and say, can you believe the Chinese numbers? But that aside, the, the exponential growth now of outside of China, that's the number that's going to continue to rise sharply here forward. And therefore then the responses now from these national governments across the globe is going to create further economic damage to the global economy. So what are we looking at from an overall point of view? Let's talk about borders and lockdowns first before we actually start looking about what the central banks are doing and also incorporate this into how markets are trading this morning. And starting with that continued risk-off theme to proceedings, the DAX I think is already in the futures down about 12%. US index futures have hit limit down pretty much straight away last night, meaning that they've hit their 5% circuit breaker. Treasury markets, bottom right-hand corner here, sharply higher overnight. They have given back some of those gains that were held during the Asia-Pacific session as Europe has come in, but we're still up over a full point at the moment. And a fairly similar price pattern in gold. Which was quite sharply higher up at around, uh, the initial opening prints were being seen at around $1574. So it's already off a decent amount, you know, $30 or so from those highs, but still up 23 on the session. So perhaps just a little bit of calm restored for, for the moment, albeit we're in a fairly depressed position already stocks off sharply. As I just said, the DXY, the dollar index, is down over 1.1%. Again, largely a reflection as well of the— as I'm going to go through in a second— rates now in the US back to zero, and they've restarted QE, of course, which we'll look at. But in terms of the, the borders and lockdowns, so to give you a quick run-through of what's been going on, I'm going to start with Well, let's start with Australia because overnight the Australian stock market was down in double-digit percent losses. So what's been going on? Well, in Australia they're tightening their borders, and this is something you're probably going to see replicated elsewhere across the globe as well. Their PM saying on Sunday that everyone arriving from overseas must self-isolate for a period of 14 days. So if you think about as well what this means for countries which are heavily dependent on tourism, as someone like Australia is, this is going to have a massive impact on their economy. I think I saw a stat this morning in Hong Kong, tourist visits to Hong Kong in February were down 97%, to give you an idea about how radical this is at the moment. Australia themselves though are considering preparation of a second round of economic stimulus according to sources this morning. They're planning already to inject about 17.6 billion Australian dollars into their economy. That equates to about 9.25 billion if you were translated to UK pounds. We also had last night the RBNZ, they slashed rates at an emergency meeting as well, so another sharp cut to their interest rates as they continue to want to get ahead of the impending and inevitable downturn, uh, as this situation on the coronavirus is, is going to get worse before it gets any better, I'm afraid, is the current status. Um, looking elsewhere in America, you've probably seen this as well, an overnight development. New York and Los Angeles now are going to shut all bars and restaurants, uh, is the current plan. So Several nations in South and Central America have also closed their borders in order to combat the spread of the virus. And then if we move more to mainland Europe, a couple of things. Italy, their government ready to intervene again if needed, as measures approved so far proved not enough to sustain a lot of businesses. And this is the real area of concern, is these small to medium-sized businesses which are going to suffer probably the most and And then those related industries where credit is already, already being squeezed on a much more bigger, broader level, that being in the areas of tourism, travel, and also in energy as well, where there's a lot of kind of growth that's being built on debt over recent years. And that's what's going to be under pressure, whether they can service that debt going forward, because oil as well still heavily depressed this morning, down trading around a 30 handle. Spain, meanwhile, they're going to declare today a 15-day national lockdown. And the UK's Health Secretary Matt Hancock over the weekend talking about the expectation in the coming weeks that they're going to tell every Briton over the age of 70 is going to have to stay at home for an extended period. So again, this is what's continuing to drive markets. It's this whole idea about then given this reaction that has to happen now in order to contain and delay this virus being worse than it possibly could be, is going to impede economic performance sharply going forward. Now, what's happened then? Well, the Fed have gone again, another interest rate cut. I mean, their, their rate meeting actually wasn't scheduled until Wednesday, and that's now been basically called off and brought forward. Um, Sam and I were just having a live chat on Sunday night, getting people— getting some of our traders ready for the, the week ahead, and then literally as we hung up the phone, the Fed cut rates, uh, 100 basis points. So what does that look like? Well, I mean, this is probably the chart to, to really look at. This is the Fed's benchmark rate being cut, slashed 100 basis points, and You know, this was after the 50 emergency cut we had at the beginning of the month and follows the 3 rate cuts we had through 2019 with things like the trade war at that point slowing the potential and the risks for economic prosperity. And now look where we are. We are back to ground zero where we were immediately after the collapse of Lehman Brothers in the depths of the financial crisis. So zero interest rate policy has returned. And not only that, The Fed have restarted quantitative easing to the tune of $700 billion. They're going to lift its holding of Treasury securities by at least $500 billion and mortgage-backed securities by $200 billion. And so if you think about it, they, they really have thrown everything at this now. And, um, the other details are that they've announced with several other actions, including letting banks borrow from the discount rate window for as long as 90 days, reducing reserve requirement ratios to 0%. They've also united with 5 other central banks to ensure dollars are available via worldwide swap lines to add continuous and continuity of liquidity into the market. And then Powell, though importantly, did say that even though rates have gone down quickly to zero, that they are— they do not think think that negative rates would be appropriate in the US, as like what we've seen in other nations like in Europe and in Japan, for example. But this is quite important, I think, for where we go from here, because with the Fed now having done what they've done, and they've literally gone— they've gone big, they've gone hard, and they've gone fast with their monetary response. And I know that there will be those that criticized thinking, well, perhaps they should be— they should leave some back, they should have some ammunition perhaps for accelerating the not V potential U-shaped recovery in future. But ultimately, I think if you were trading in the period of 2008, you'll remember that, you know, the action comes swift and fast and they need to get it into the system as quickly as possible. The idea here being is that we haven't even seen the worst of it yet. Economically, globally, things are going to get a lot worse before they get better. So I think it is the right thing for the Fed to do. They need to do this, and now it's up to the administration and Donald Trump to really deliver on the fiscal side. And that's probably what you're going to hear from the G7 ministers who are all meeting on a teleconference call today at 2 PM London time. That includes US President Donald Trump, as they're set to discuss their, their methods of trying to counteract and have a coordinated response to this new global issue. The Bank of Japan also came out overnight. They were due to have a meeting later on in the week, but again, just wanting to get things right in at the beginning of the week. The Bank of Japan has strengthened its stimulus but stopped short of cutting their rate further into negative territory. They said they're going to buy more assets including exchange-traded funds or ETFs and corporate bonds, and they're going to offer a new zero-interest rate loan program to ensure companies have the financing that they need. Under active buying of ETFs, the central bank will be able to buy an annual pace of ¥12 trillion That equates in dollar terms to around $113 billion. That's double their annual target of $6 trillion. So again, uh, this whole idea or mantra of whatever it takes has been adopted now globally by every central bank. So again, just over the weekend you've had the RBNZ slash rates, you've got the BOJ ramping up their basically buying of ETFs annually, they're doubling that. and the Fed have cut down to ground zero and restarted QE. So everything has been done, and, and now for sentiment for this week, I really do feel that whether or not that's going to be enough or whether we continue to see high levels of volatility, I think that's guaranteed. Whether or not that's to the downside again, as like what we saw last week, I think is highly dependent now on how national governments tackle this situation. Now, people like the UK, for example, have been a little bit more light-touch than some of the more aggressive measures, albeit we are slightly earlier in the phase of the development of the virus. But I do think it's all but inevitable that these numbers will go far north of where they are at the moment, leading to these kind of national lockdowns like that are being observed in Italy and and are going to be observed in the likes of Spain and probably France and so on. So, yeah, I would say my bias still is there's more downside risks to come and therefore a natural flight to quality kind of theme probably going to dominate the week until we get more concrete evidence about the fiscal measures and how forthcoming and to what size they're going to be going forward. So that means that's, that's pretty much the overall summary at the moment. This was one other thing I wanted to, to mention though, and this was looking at a research note out of Goldman Sachs. Their main US equity analyst, Costin, came out in a note, and I wanted to bring up the chart and let's have a look at things. So let me just, just bear with me while I just get my S&P chart fixed, and I'm going to keep this briefing very much centered on the fundamentals rather than technicals. Sam's gonna come on after on Trading Live and have a quick chat, but just going to— let's remove my camera feed for one second here if I can so you can see the entire chart. And this was the, the level really around 2,400 that we got to last week. You can see that was a real key level for the markets to target, giving back some of the 2017 highs that we had Again, resistance here, support then touched back in the summer of '17, briefly breaking through that in the big sell-off that came in Q4 of '18. And then we tested it pretty much to the tick on the 2400 before a meaningful bounce that occurred on Friday. Remember, we had that Thursday almost 10% sell-off, then a 10% reversal following some of the things that were happening towards the end of last week. But what Goldman's are saying basically in this latest research note is that they think that the S&P will likely head back down by almost 10% in the next 3 months. So they're looking at 2450. So, you know, that, that, that's not, I don't think, an unreasonable call, but that's not really what we're looking at here. It's the latter part that they say, that if the economic fallout from the spreading coronavirus deepens The route could take the S&P down another 26% from Friday's close. That would put us down at 2,000. So they're looking at more of a worst-case scenario. The S&P 500 comes all the way down to that area. And if we start looking at what does that mean from a, from a peak all-time high, that we were, we were trading an all-time high less than a month ago. I mean, it's quite incredible. And if we got to 2,000, um, that would be 41% lower than where we were from the all-time high if they are proved right. However, one thing that they do say, and they go on to say, is if we did get down that low, um, that he reiterated the stance that a V-shaped recovery in stocks usually follow event-driven bear markets, and they would then basically a 60% rally from 2000 to finish the year back up to here. So again, just having a look at this, that would be their bear case scenario of 2000. But if that were to occur, they're basically saying then that they would, they'd be looking for this to happen in the second half of this year, to finish the year at that level. I mean, that would be an incredible year of price activity activity if that were the case. So yeah, I guess the big question mark is, you know, do we this week— first of all, you know, X-ing out what Goldman Sachs is saying— is that low that we printed towards the end of last week, does that get retested? And I think yes, I think it will, um, is my, my kind of base case view. If we break that, then obviously you've got the '18 low that comes in here, and that starts to bring in some of that activity of the low of of that consolidation phase that we had at the beginning of 2017. And then a break of that, you're looking at these other areas where you've had those similar moves when we were trading, of course, all-time highs at the time. And that's how I'd be kind of playing these, these kind of bigger, broader targets if we do start to see significant downside. So yeah, these levels here look quite clustered, but don't forget these are big price points. I mean, we're talking about another 300, 400 points to get down to here. So. But as we've been seeing, if it decides to go that way, things can move very quickly. And if markets have really lost a lot of confidence and central banks have now shown their hand, then that's when the whole thing could materially worsen quite quickly, uh, in that sense. Um, quick look at the calendar and then that's it, gonna wrap things up. Um, one thing I would say is that when it comes to economic data 'Cause even though this week we've got things like Empire State Manufacturing this afternoon, you've got US retail sales coming out this week, quite frankly, it's not important. It's not what's gonna move markets. Don't forget, things like retail sales, these are backward-looking numbers. The market is forward-looking. If there was one kind of litmus test for how severe could the economic fallout be from coronavirus, Well, look no further than China. Chinese data, a whole slew of data points came out of China overnight, and basically this is what it looked like. Here you've got industrial production, retail sales, fixed asset investment, property investment, and jobless rate. And you can see here absolutely catastrophic drop-offs in all of those measures, and obviously a spike up in the jobless rate. You know, and this is what— this is why the market sell-off has been so violent, because this isn't going to be just the Chinese thing. This is going to be every single major economy in the world is going to experience something very similar to this. The idea as well of a V-shaped recovery, I would say, is probably getting more and more stressed as a view, given the fact that it's more likely to be a more protracted but albeit recovery that will be over the long term, given how severe this is likely to be at that point. So going back to the calendar, I wouldn't get too bogged down into this, to be honest. Things like further US primaries happening on Tuesday, which is the Democratic race for who's going to run against Trump. You do have things like Florida, Illinois, Ohio. They are big in terms of their delegate representation within the party. But quite frankly, all of that is a side issue to the much bigger dominant macro theme at play. And even with that, you know, Biden has this pretty much wrapped up now in that respect. So yeah, that's it. I would say stay tuned, make sure you subscribe to the Amplify YouTube channel. Obviously you can follow me on here on Twitter, and do leave any comments or questions on our videos. I'll always respond to everyone, but One thing I'll finish with is really a word of advice, I guess. I mean, having been an analyst through the financial crisis back in 2008, all I can say is the market becomes very behavioral at certain points. I think it's hard to try and pinpoint buying the low in, in that instance. I think sometimes, rather than pushing your view on the market, You've got to be a lot more agile, a lot more open to the fact of kind of just trading the market as you see it, not what you think is going to play out. I think it's probably the astute thing. A couple of key points: the end of the Wall Street session has seen on average 300-point swings in the last 30 minutes. So I think if you're looking, or if you're involved in US equities at the end of the day, just be particularly cautious at that point for big swings in activity. Don't be surprised as well if you see big counter-logical moves in assets like gold, which have seen big dumps on kind of Friday afternoons on the back of liquidation of large positions as margin calls start to ramp up given the equity falls that we have been seeing. And then things like other indicators, I'm looking for any further signs of distress in the market. Bond yield spreads in Europe. We've obviously seen that blow out in the likes of Italian yields and BTP movement after some of Christine Lagarde's comments last week. The performance of high yield and leveraged loans, particularly those tied to energy, retail, and leisure industries, I think as well could be a meaningful thing to monitor just to get a sense of just general risk appetite. So again, Be careful out there. These are quite unprecedented market conditions, and I think this week is going to be set for continued large-scale movement. So, so do keep that in mind, and I wish you all the best both in markets and just generally good health to you and your family as well. So that's it. Any other questions, let me know. Otherwise, have a good session ahead. Thanks very much, guys.