Helicopter money: governments around the globe have woken up to the economic crisis that is to some extent of their own making. Britain yesterday launched a £330bn package, while the US is teeing up $1.2tn in stimulus, which could include sending cheques direct to every American. Even Germany is considering fiscal stimulus and joint EU bonds - anathema even during the 2008 crisis.
Wall Street liked the stimulus on offer and rallied 6%, taking the S&P 500 back to 2529, while the Dow added over 1,000 points to 21,237. The market rally somewhat fizzled out in Asia overnight with broad selling taking hold. Australia's ASX 200 endured another wild session, ending down 6.5% at 4,953.
After a nice little bounce yesterday, European markets are trading weaker again on Wednesday on the open, shedding 3-4% in early trade. The fact that markets keep shrugging off the stimulus measures reflects the deep uncertainty about the economic damage about to be done. But these moves are not the 7,8,9,10% type swings. This is better - smaller daily swings are the first step to stabilisation before we can start to look at the bottom being in.
For now every rally is sold into, every financial relief effort is an opportunity to get out from positions long held. The market is behaving extremely short-term in its outlook, whilst the long-term effects are entirely unclear. The Vix remains elevated at 75, though somewhat off its highs around 85 after Wall St bounced yesterday.
The volatility persists of course. France, Belgium, Spain and Italy are all taking the route of banning short selling. US and UK chiefs say they will keep markets open. A story is only true once you get the official denials - I would not be surprised to see markets shutter for a week if there is another sharp bout of selling. The LME is temporarily suspending its open outcry pit - one of the last still standing - because of coronavirus. Sic transit gloria mundi.
There has been a rapid steepening in the 10-year Treasury yield, the most aggressive move since - no surprise - 1987. We have also noticed a big steepening in the 2s10s yield curve. These are signs the markets liked this fiscal stimulus a lot. But every US recession is preceded first by inversion of the yield and then a rapid steepening, so this is rather text book. We’re heading for recession; the question is how quick the recovery as this will determine the equity market recovery. The bond market could just be positioning early for the mothers of all rebounds.
FTSE 100 - 4900 seems to be the bottom for now. Bulls need to clear the week high at 5366, and then the Friday peak at 5695. Rallies could well run out legs at these levels. For now though the downside dominates with bulls attempting to defend 5100 and the near-term trend support line that is being tested - if this holds bulls can start to consider a bottom forming. The triangle formation requires a breakout soon.
In FX, there has been aggressive dollar bid in the last week, GBPUSD has found support at 1.20, while EURUSD is starting to show signs of firming around the 1.10 handle. Meanwhile oil continues to soften, with WTI sinking to $26. A level in the teens is not out of the question against this collapse in demand and the Saudi price war. Gold has held up at $1450 and is starting to make higher daily lows.