Echoes of meltdowns past
Echoes of 2008, when money-market mutual funds 'broke the buck' continue to resonate following the Fed's latest policy backstop.
The Fed announced a Money Market Mutual Fund Liquidity Facility (MMLF).
The Boston Fed will be able to make loans available to eligible financial institutions secured by purchases from money market mutual funds. The US Treasury will provide $10 bn of credit protection from the Exchange Stabilization Fund.
The Policy deluge (again)
G-7 governments and central bank policy are attempting to support the flow of credit while providing liquidity in financial markets. However, they appear mostly defenseless against the super steamroller of extreme weakness across equity, bond, and credit markets. Simply put, it's a liquidity mismatch as there are far more US dollars in demand than currently on offer. Yup pretty simple.
The ECB is praying that it's "Whatever It Takes" sequel doesn't disappoint as an enormous global recession is underway.
Markets will be shocked by the extent of job losses to come in North America and Europe as the over, and under straw poll, on next week's US jobless claims are fully subscribed above the 1 million marks.
Policymakers have acted massively, but they can only pillow and not forestall a demand shock at the pogey window. Markets will take solace from policy action but only once the new Covid-19 case peak Europe and the US. China provided that roadmap.
Asia Markets
The good news is that China reported no new case counts cases (34) were imported. Less encouraging news on the secondary spreader front came out of Korea, which reported a third consecutive rise in new case counts (152) after what appeared to be a downward decline this week. This is particularly worrying as the secondary contagion fears are one of these things that are undoubtedly keeping health officials awake at night.
As such, foreign investors are still selling the KOSPI at $400 mn so far today, while local banks are on the USD/KRW trying to cover USD funding obligations.
EM central banks are in a world of pain, unable to justify selling their USD reserves in an environment where their local banks are seeing massive USD demand. That merely signals more USD strength to come as the buying frenzy continues.
Yuan Watch
USD/CNH followed the dollar higher. Suspected intervention pushed spot down to 7.10 from 7.11 before lunch, but firm dollar buying led to a reversal into the London open. The general market lean is that the PBoC will likely allow an orderly CNH depreciation against the dollar as the CNH it's still strengthening against the basket, but will be more active as USD/CNH approaches 7.18-7-20
Market Plumbing
Overall, market turnover is lighter, but the skew is deeper as market participants fall by the wayside. Either by their own volition, margin called out, or in the case of institutional traders, the treaded "tap on the shoulder" complete with the security guard exit.
On a call to a high touch desk this morning, the background noise was eerily quiet at the start of the day, suggesting early doors that the street was going to be a one-way ticket to hell. Everyone was looking for refuge behind the pipes knowing there was nary a dollar offer on EBS. While obliged to price the bank's loyal customers, there was little interest in making markets to other financial institutes.
Problem is the resulting liquidity void as market markers are supposed to create markets and not be a fair-weather friend. Not only is the Fed plumbing in need of repair, but this entire eFX charade where all but handful banks and one nonbank offer up little more than a pass the hot potato service leaving a market footprint the size of the Grand Canyon. That market, too, is in desperate need of an overhaul.
I realize a lot of this is anecdotal, but this is the first time in over three decades. I've been scared of the volatility in my PnL, and I'm treading small. The playing field needs to be leveled.
Oil Markets
Crude oil is having a bit of a tough day today. Much of the impetus for the fall came after the headline earlier that Saudi Arabia's oil minister told Aramco (SE:2222) to keep supplying crude at a pace of 12.3mbpd over the coming months. And it has been one-way traffic since then.
The oil markets were taken for a hectic express elevator ride overnight. Oil traders lead the recessionary charge as WTI plumed below $21 per barrel as risk sentiment remains in a foul and temperamental mood.
But causing a bit of a rollercoaster session was the fact markets were on the lookout for any progress a high-stakes game of chicken to see who blinks first after the Kremlin suggested on Wednesday that it would prefer higher prices.
Gold Markets
The gold narrative hasn't changed provided there a cause for forced liquidation of other assets; gold prices will probably remain capped over the near term.
But as the demand for cash becomes more pervasive as personal liquidity and capital preservation become a dominant consideration in investors' decision making. Bullion owners in any form physical, paper or scrap, will probably continue to liquidate to boost capital levels the more protracted the Covid19 global lockdown extends.