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Amid US phase 3 stimulus hopes, Fed cheers, and other signals, the risk rally from overnight extends in NY overnight

-->Amid US phase 3 stimulus hopes, Fed cheers, and other signals, the risk rally from overnight extends in NY overnight                         
  • G10 FX: Tuesday brings a 11.37% surge in the Dow, marking the largest one day percentage gain since 1933. This comes alongside rising yields and further support in oil. In FX, USD declines broadly (ex JPY) with Gold the primary beneficiary, anticipating the US phase 3 fiscal stimulus package that should likely contain USD liquidity enhancing measures to enable the Fed to more effectively ease USD liquidity conditions.     
  • G10 FX: Also reports overnight of leaders of the G20 countries planning to hold an emergency call on the coronavirus outbreak Thursday night, Kyodo reports. The Finance Ministers and central bank governors held a call on Monday to discuss their response, with an action plan finalized in the next virtual meeting.
  • USD: Continued anticipation for a Phase 3 stimulus bill. Per Politico – Senate minority leader (Democrat) Chuck Schumer declares senators are “on the 2-yard line” and says there are no remaining disagreements that couldn’t be resolved over the next few hours. President Trump also suggests restarting the economy needs to be prioritized – and targeting Easter (April 12) to “get people back to work”. CNBC reports - “Trump acknowledges it couldn't happen right away but that he didn't want it shut for six months.”
  • GBP: Similar sentiment expressed in UK with Cabinet Office Minister Gove having Easter in mind, saying “in three weeks’ time we will be able to say whether or not the path that we followed needs any further intensification.” He also adds that some restrictions could be lifted by then.
  • CNY: China delivers some good news with Hubei province saying it will allow transportation to resume in the city of Wuhan on April 8, effectively lifting a mass quarantine. People in Wuhan will also be allowed to leave the city and Hubei province. 
  • EUR: The euro area also receives potentially encouraging news from Italy with the increase in deaths by 608 on Tuesday declining from the day before with Silvio Brusaferro, president of Italy’s national health service suggesting Italy could finally see "light at the end of the tunnel.”             

 

Some signs of easing USD funding distress overnight as markets anticipate delivery of US phase 3 fiscal stimulus package 

  • USD: Is broadly sold Monday (ex JPY) amid the Fed, buying nearly as much assets this week as in 2010, 2011, and 2012 combined. Citi analysts in NY reports some signs of USD funding normalization in the longer term tenors amid more normal behavior in credit markets. There is also specific discussion on the Fed’s discount window – banks are increasingly utilizing the window for their USD funding needs, an encouraging sign of easing USD liquidity stress. All this comes as the Fed significantly ramps up its USD liquidity measures earlier Monday and as investors await the US Congress’s USD2trn fiscal stimulus package that would enable the Fed to do more.     

 

First set of PMI releases show deep negative impact of Coronavirus       

  • USD: US market PMI: Expected plunge in services and longer delivery times - services PMI plunges from 49.4 to 39 while manufacturing PMI holds up better at 49.2, but as has been the case, the number is boosted by long delivery times. Overall, neither the sharp drop in US service activity (indicating a significant contraction in March) nor longer supplier deliveries supporting manufacturing should come as a surprise to markets. Both are readily apparent given the significant disruptions caused by COVID-19. Citi analysts expect a sharp slowdown in US GDP, forecasting real GDP in Q1 -0.5% and Q2 -12.0% QoQ annualized.          
  • EUR; Eurozone (EZ) PMIs tumble, as service activity stops, employment already contracting - EZ manufacturing PMI drops to 44.8, from 49.2 in February with the manufacturing output sub-index falling much more than the overall index to 39.5, from 48.7 in February. EZ services output PMI however plunges to 28.4, from 52.6 in February, the lowest level since the series started and largest MM decline ever. This sees the EZ composite PMI coming in at 31.4, from 51.6 in February, the lowest level and biggest decline in the series. In the 2008-09 crisis the composite PMI troughed at 36.2 (Feb-09) and averaged 37.6 in 1Q-09 when euro zone GDP contracted by 3.2% QQ. COMMENT: Longer deliver times and slower declines in stocks of purchase are affected by supply-side disruptions in the manufacturing sector. But as expected, the largest hit from the Covid-19 lockdowns affect services activity, at least in the initial phases. However manufacturing firms have also progressively shut down in recent days, suggesting a further hit to manufacturing output in coming months. Country-wise, Germany’s Manufacturing PMI holds up better than expected, falling  from 48.0 to 45.7 (Consensus 39, Citi 38.2) but Services PMI plunges from 52.5 to 34.5 (Consensus 43 , Citi 41) with France following on a similar path.    
  • UK PMIs fall to all-time lows - the UK flash services PMI for March falls to its lowest level on record, contracting sharply to 35.7 compared to the final February Services PMI at 53.2 (Consensus 45.0, Citi 45.2). Previously, the lowest was 40.1 during 2009.  The UK Composite PMI also falls to its lowest level on record - 37.1 compared to 53.0 in February (Consensus 45.0). Previously, the lowest was 38.1 in late 2008. Further Downside – These data were collected between 12-20th March, before the most recent round of additional restrictions implemented. With further restrictions now in place, these data are likely to deteriorate further.  

 

This is an extract from the Daily Currency Update, dated March 25, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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