Issue#: 542/2020

Spot values at a glance:

USD/SGD

USD/CNH

AUD/USD

USD/JPY

USD/CAD

GBP/USD

Daily Observations:

US equity futures retreated with Treasury yields as investors awaited details from the Trump administration on planned stimulus measures to counter the coronavirus impact. Asian equities were mixed and the oil price extended rebounds with no clear trigger. S&P 500 futures fell as much as 2.6%, following a strong rebound on Wall Street after Monday’s plunge. President Donald Trump didn’t appear at a briefing on the outbreak after promising a day earlier he would announce a “major” economic package, leaving investors waiting.

 

Coronavirus Death Toll Tops 4,200:

Regions from Italy to New York amped up containment efforts as the global death toll from the coronavirus climbed above 4,200. In China, the outbreak’s epicenter, authorities reported just 24 new cases.

Italy infections topped 10,000 as it attempted a nationwide lockdown. Cases in the US topped 1,000, and the director of the Centers for Disease Control and Prevention, Robert Redfield, said some parts of the country are now beyond containment efforts.

New York became one of the first states to try to limit the movement of large groups of people to stanch the spread of the disease in a suburb of New York City. The annual New York auto show will be pushed back to August from April, while Bernie Sanders and Joe Biden canceled planned campaign rallies.

Robert Redfield said Tuesday that America had lost valuable time tracking the virus. Some regions now can merely try to cope with its spread rather than stop it, and hospitals are ill-prepared for a sudden influx of patients with Covid-19, he said.

On Tuesday, President Donald  Trump asserted again that the US had done an excellent job testing for the disease, saying it “has gone very well.” The reality is that a troubled rollout of diagnostic kits consumed weeks and meant that local health labs had little ability to conduct wide surveillance of patients. That made the number of infections look far smaller than it likely was.

It also impeded the US’s early efforts to contain the virus. The weeks of delays to get working tests meant that state and local health workers fell behind the transmission of the virus from person-to-person, hobbling attempts to identify and isolate patients. “If you’re a week late,” Redfield told Congress, “it matters.”

 

Oil Extends Rebound, Investors Hope for US Stimulus:

Oil extended a rebound from its biggest crash in a generation as the prospect of US stimulus to shield against the fallout from the coronavirus tempered fears over an unprecedented supply-demand shock. Brent crude rose 4% in London and has now recouped around half of Monday’s collapse.

US President Donald Trump pitched a payroll tax holiday and relief for the travel and hospitality sectors to combat the virus’s impact, while some Republican senators have suggested a federal bailout for the shale industry.

That was after Saudi Arabia upped the ante its oil price war with Russia over the weekend, pledging to supply a record 12.3 million barrels a day next month in a massive increase to flood the market. Russia’s top producer Rosneft PJSC is also planning to ramp up output in April, a person close to the company said.

The Trump administration’s willingness to revive the economy comes after the disintegration of OPEC+ and subsequent plunge in oil prices threatened the US shale industry and spurred an indiscriminate sell-off in markets already reeling from the coronavirus. However, investor hopes were tempered when the president didn’t appear at a White House briefing Tuesday after promising a day earlier he’d hold a news conference to announce major stimulus.

Chinese Banks Trading at Biggest Discount Since 2015:

According to Bloomberg news, while investors this week balked as US banks’ price-to-book ratio dipped below 1 for the first time since 2016, that’s been the norm in China for 2 years. On that valuation metric, Chinese financial firms are trading near the biggest discount since 2015 to the benchmark CSI 300 Index. Down more than 6% this year, the index of banks, brokers and insurers has underperformed most of China’s other industry groups, bar energy and utilities.

Banks were left on the shelf even when a $1.3 trillion rebound in Chinese equities triggered a round of bargain hunting. At the heart of investors’ reluctance to embrace bank shares is the country’s latest stimulus drive: lower rates will eat into profits just as an increase in bad loans is due to test balance-sheet strength. A new benchmark underpinning the cost of one-year corporate and household loans has been cut three times in the past 6 months.

The impact of the spreading coronavirus risks bringing to life the worst-case economic scenarios that could see a spike in bad loans and further squeeze bank margins. Last year’s stress test showed the bad loan ratio at China’s 30 biggest lenders would rise five-fold if annual economic growth slowed to 4.15%. Analysts now say first-quarter growth could be as low as 1.2%.

Banks, insurers and securities firms have all been told to do their part to help combat the virus outbreak. Banks were required by the PBOC to provide some firms with loans at preferential interest rates of no higher than 3.15%, with some as low as 2.4%. After operating expenses and potential bad loan charges, lenders may barely break even.

Shares of Bank of Jinzhou Co., one of several small banks in China that have come under extreme pressure from a slowing economy, resume trading Wednesday after being suspended since late December. The bank said China’s government will inject about $1.7 billion to bolster its capital strength.

All but five of the 24 banks on the CSI 300 Index trade at a price-to-book ratio that’s lower than 1, according to data compiled by Bloomberg. Bank of China Ltd. and Agricultural Bank of China Ltd. trade near a record low multiple of just under 0.7 and 0.8, respectively. Mainland-listed shares of Industrial & Commercial Bank of China Ltd., the 19th most valuable stock in the world, is trading at 0.85 book value. By comparison, the ratio for JPMorgan Chase & Co. dropped to 1.2 from about 2 at the end of last year.

Dollar-Funding Worries Put Investors on Alert:

A small but steady increase in the cost of dollar funding has market participants on alert for signs of stress in the financial system. The greenback is the ultimate global funding currency, with the latest data showing some $12 trillion in loans and debt to borrowers outside the US other than banks. But the cost of converting other currencies to dollars in the market for so-called cross-currency basis swaps has been creeping up during the recent market rout.

The dollar-yen three-month cross currency basis, which shows the cost of exchanging floating-rate payments between currencies, briefly hit the highest premium since 2017 on Tuesday before retreating. Funding concerns appear less grave when it comes to cross-currency swaps in the euro-dollar, where the three-month basis stands above the extremes seen in 2019.

Talk of central-bank swap lines may keep funding concerns in check. As global stocks recovered some ground Tuesday following the deepest equity rout since the financial crisis, the FRA/OIS spread, a key gauge of banking-sector risk, eased back from its highest level since 2011.

 

Biden Widens Lead Over Sanders in Michigan Primary:

Joe Biden won the Michigan primary over Bernie Sanders, taking the biggest prize in Tuesday’s six-state round of primaries and further widening his lead in the Democratic nomination race. Biden also won in Missouri and Mississippi, as his campaign looked to build an advantage in the contest for delegates that would be difficult for Sanders to overcome before the primaries and caucuses wrap up in early June.

Michigan had a third of the 352 delegates at stake on Tuesday and will be a pivotal general election state. Sanders had been looking to repeat his upset narrow win in the state four years ago to revive his candidacy after losing 10 of the 14 states that voted on Super Tuesday. But Biden’s advantage with minority voters and his ability to appeal to the state’s blue collar workforce was too strong.

“It’s more than a comeback,” Biden told supporters in Philadelphia Tuesday night, referring to the turnabout for his campaign over the past week and a half. “It’s a comeback for the soul of this nation.” Sanders isn’t planning to publicly address the results on Tuesday night, according to a campaign aide.

Democrats in Idaho, North Dakota and Washington state also were voting in primaries Tuesday. Sanders was hoping for strong performances in those western states, where he did well in 2016. Next week the focus turns to four states awarding 577 delegates: Illinois, Ohio, Florida and Arizona. The outcome of those contests could be decisive in the nomination battle.

 

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3904

A volatile past couple of weeks saw the USDSGD pair reach a 33-month high of 1.4083, before swinging 2.3% to a 4-week low of 1.3760 earlier this week. According to Boomberg, Singapore dollar put demand has approached a 3-year high amid rising expectations for policy easing by the MAS, which reviews its policy next in April. Further expected relative weakness against the greenback may drive USDSGD back towards 1.4000.

 

AUD/USD

Spot: 0.6511

Having breached below its key support of 0.6670 over the past month, the trend and momentum for AUDUSD firmly points to lower. A revisit of 0.6300 is likely again over the coming weeks. The pair could extend its drop beyond if a possible economic package due Thursday is larger than predicted. Sky News reports have forecasted the fiscal stimulus to be around A$16 billion to A$20 billion.

 

USD/CAD:

Spot: 1.3699

USDCAD gained to a 3-year high last night, to 1.3793, following oil’s recent extensive decline, although the pair has since retreated back below the 1.3700 handle. Oil jumped more than 10% on Tuesday on reports that ongoing talks between OPEC and its allies, known as OPEC+, remain possible. Notably, Russia’s Energy Minister Alexander Novak said Tuesday that Moscow had not ruled out measures with OPEC to stabilize oil markets. However, with both Russia and Saudi Arabia looking to boost output, risks for oil prices, and with it the Canadian dollar, remain prone to more weakness. In addition, Canada PM Trudeau has said the government will announce measures soon to help buffer an economic fallout of the virus and oil price shock

 

USD/CNH:

Spot: 6.9567

USDCNH remained stable, relative to other FX currencies, with market participants expecting China to be one of the first countries to recover or stabilize from the global coronavirus fallout. However, there are risks to this projection. In the immediate future, rapid increases in global market volatility may lead the dollar to re-assert its status as the ultimate safe haven currency. Further out, the very heavy toll on China’s economy from the outbreak could face fresh scrutiny if and when the market refocuses on China. Over the coming weeks, USDCNH is likely to remain below its recent high of 7.0572. Further stabilization of the situation in China and the pair could move lower to its January-low of 6.8457.

 

USD/JPY:

Spot: 104.68

Swings in the yen climbed to an 11-year high this week, and has spurred the talk of intervention by the BOJ as USDJPY fell to its lowest, 101.19, since October 2016 on Monday. The pair earlier today recovered back to 106, but has since declined back below 105 as investors continue to pile into the safe haven currency following more risk-off sentiment today. A retest of the 100 psychological level is likely over the near-term.

 

GBP/USD:

Spot: 1.2915

The pound weakened overnight and lost ground against the USD and EUR as a stronger greenback against the G10 currencies played a role in GBPUSD’s slide back to 1.2900. Brexit talks are taking place “exactly as planned” according to the UK government despite the recent turmoil in financial markets and the coronavirus outbreak. More discussions are scheduled for later in March; by that time the Bank of England might have lowered its key interest rates. On Wednesday, Chancellor of the Exchequer Rishi Sunak will present his first budget that would include considerations about coronavirus.

 

 

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