Markets Reassures Fed ‘Old Tricks Won’t Work’
The Daily Edge

Markets Reassures Fed ‘Old Tricks Won’t Work’

Authored by Ivan Delgado

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The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

The collapse in equities, 3rd biggest down day ever only rivaled by the Great Depression and 1987, continues to have serious spillover effects in currency flows as the Yen, Swissy, Euro and to a lesser extent the USD remain the group of beneficiaries. On the other side of the spectrum, the Aussie, Canadian Dollar, and Pound are the weakest links; amid the consteation, the NZD is emerging as an outlier holding remarkably firm. It is clear by now that neither the Fed’s semantics nor actions have worked as it keeps falling on deaf ears. In normal circumstances, a large policy response like the Fed had (rates at the lowest bound and $700bn in funding/liquidity available, would put a floor under risk assets. However, the market has remained unfazed, which is definitely communicating the growth shock, which is becoming exponential, far outweighs monetary policy intervention tactics. The market has been clearly discounting the lack of effectiveness of such policies in mitigating the coronavirus-induced downside risks, which leads us to the next logical question. With a VIX (fear index) closing at its all-time highs, and with conces about the normal functioning of markets as cracks in liquidity/funding channels emerge, how long until a real circuit breaker? This could include coordinated global equity market closures within the next 1 or 2 weeks or targeted stock/corporate bond purchases by the Fed, following the steps by the BoJ. These are truly ‘untested times’ as an interdependent globalized world economy is brought to a standstill.

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. If you found the content in this section valuable, give us a share by just clicking here!

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports. If you found this fundamental summary helpful, just click here to share it!

A run to the exits no matter what: The latest extreme measures by the Fed to cut interest rates to the lowest bound 0-0.25{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} alongside other measures such as purchase another $700 billion worth of Treasury bonds and mortgage-backed securities fell on deaf ears.

RBNZ, RBA readying for QE: We also leaed that the RBNZ cut the OCR 75bps to 0.25{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} and laying the ground for QE, which is the same path the RBA is about to follow by hinting they are ready to buy govement bonds. Meanwhile, the BoJ increased ETFS and REITS purchases on top of 0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} loans to banks and lending to corporates. Again, these measures were disregarded by markets.

Fed conceed about functioning of markets: “I don’t think they would have done this unless they felt the financial markets were at significant risk of freezing up,” said Mark Zandi, chief economist at Moody’s Analytics. “They’re very conceed the financial markets won’t work.”

Nasdaq records worst day in history: The bloodbath in the equity markets globally was, again, as ugly as it gets, with the only historical reference for a day as bad as this Monday’s dating back to the crash of 1987. The Nasdaq, for instance, has its worst day ever. The numbers at the close were spooky. The Dow industrial average fell -12.93{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, the S&P index -11.98{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, Nasdaq -12.32{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, and this is after multi-sequential circuit breaker periods kicked in throughout the day.

Contextualizing the stock meltdown: Amid the severity of the falls once again, more numbers for the history books were registered on Monday. It was the 3rd biggest down day for the S&P 500, only rivaled by the Great Depression and 1987. The VIX (fear index) closed at a record high, yes, you read that right, it did close above the highest close during the Great Financial Crisis. Besides, the S&P 500 broke and closed below its 11-year up-trendline from March 2009.

Global lockdown: Countries in the West keep taking more radical steps to fight off the COVID-19 crisis. For instance, Canada announced borders will be closed, as did Spain. The decision by Canada and many border closures announced by EU countries comes in contrast with the Trump administration, which is yet to decide to close borders.

IMF ready to mobilize its $1 trillion: That’s how much money the IMF is ready to commit in lending capacity to fight coronavirus to assist countries struggling with the economic impact of the coronavirus. “As a first line of defense, the Fund can deploy its flexible and rapid-disbursing emergency response toolkit,” IMF managing director Kristalina Georgieva said in a statement.

US deficit to balloon by $2 trillion plus: In the US, Senate Democrats are set to offer a $750B stimulus package to tackle the coronavirus. One should expect a cascade of companies going under and with it a multifaceted bailout program to keep certain industries running or nationalize them. A $50B aviation bailout is already being negotiated, but that’s just the tip of the iceberg. It is projected that the US deficit will balloon by $2 trillion at least.

Trump starting to sound seriously pessimistic: When asked by a reporter, when will US coronavirus cases and deaths tu a coer? Pres. Trump replied: “People are talking about July, August…” The market is now fixated in the US as the next epicentre of the COVID-19 outbreak due to the slow reaction. The data is backing that up as the CDC reports count of virus cases at 3536 vs prior 1678. One can follow all the live updates via the following blog at ZeroHedge.

What can move the needle? There seems to be two central topics on what may ultimately act as the circuit breaker if that’s still conceivable 1- Coordinated global equity market closures within the next 1 or 2 weeks ( I find it not fair as what is allowed to go up must also be allowed to be sold. Liquidations are wealth destroyers but healthy as they get rid of all deadwood even if we are in an era where too many are exposed to fail vs the GFC’s too big to fail). 2 – Targeted stock/corp bond buys by the Fed (essentially tuing the Fed into a BOJ, we call it ‘japanification’ of the policies…). For that to happen, Powell needs to first manage to cut a deal w/Congress.

Philippines first market to close until further notice: The Philippine Stock Exchange announced it is suspending trading “until further notice”. Expect more markets to follow. Read above what i mentioned about possible circuit breakers as it’s already happening in developing countries. Honestly, I am not ruling out that this will be extended to developed markets if more falls are seen. The domino effect has kicked in.

Central Bank ‘Put’ ineffective: With all the ammo by Central banks fired to tu things around yet the market unfazed, Jim Biianco, from the Bianco Research firm notes, after the latest rout, that “regulators and govement officials may have no choice but to close the financial markets to prevent chaos and lasting damage. Simply put, if this does not work, the central bank “put” no longer works.” This only leaves us, according to Jim, with “one tool left should risk markets continue to fall through last week’s low – close financial markets before they collapse.”

Shortage of USDs real as confidence lost: The indisputable strength in the USD at a time when the Fed has exhausted all its monetary weapons by making liquidity available like we haven’t seen in years, is still keeping the USD bid. This clearly tells us there is a continuous scramble to amass USD no matter what the Fed policy and the USDs in circulation. JPY and CHF still show their safe haven attributes, while the Euro remains a relatively safe play too on the basis of the insane carry trade-inspired hedges.

No liquidity anywhere: Raoul Pal, Founder at Real Vision, and someone who has been ‘bang on’, had the following waing. “With realised vols across all asset classes up 300{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in 2 weeks, VAR (Value-At-Risk) has exploded and that means liquidity is falling fast as no one can make a price in “size”. Add funding issues and voila – perfect storm – zero liquidity. This is what is happening in Chicago: VAR + Funding stress = $1.5t repo hope = no banks interested = no liquidity anywhere.” Raoul provides a video from the movie ‘Margin Call’ to put things into perspective.

Dalio conceed about what’s unfolding: Ray Dalio, the legendary investor, whose firm Bridgewater, has been reportedly caught off guard in this rout, reflected on what’s going on in a note via Linkedin. He’s out with a new note published today named “The Implications of Hitting the 0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} Interest Rate Floor.” He says what the world needs, focusing on the US specifically, is a big fiscal stimulus but has reservations of the impending risks that govements will handle it poorly. “I’m seriously conceed by what I see, which is that a number of companies and industries will have debt problems that will likely lead to restructurings,” he wrote.

Silver lining in Hong Kong: Market Watch reports that countries such as Hong Kong are retuing to semi-normalcy in day-to-day activities after weeks of confinement. “Hong Kong is definitely coming back to life” following a weeks-long coronavirus lockdown, says Adam Najberg, an American executive who’s been living in the territory for over a decade. “It’s clearly not bustling, and restaurants aren’t brimming with activity, but people are going out again, shopping again, walking on the streets.”

Recent Economic Indicators & Events Ahead

Source: Forexfactory

If interested in the best ‘free of charge’ News Indicator that can display data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes. It’s spot on!

Insights Into Forex Flows

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. The idea of this analysis is to complement one’s daily bias so that traders can make better and smarter decisions by accounting for the aggregation of flows.

If you found the content in this section valuable, give us a share by just clicking here!

The RORO (Risk-on, risk-off) conditions are just brutal. There are questions being raised about the ability of markets to be functioning properly as I expose in the narratives section. The sea of red extends to stocks, bond yields, Oil, broader commodity-complex (CRB index). This mayhem occurs at a time when the VIX closed at its highest level on record, meaning the fear is absolutely insane and it’s at these times when one wonders, how much further can things fall before authorities decide to implement more drastic measures. Remember, the two circuit breakers I envision (market closures or Fed owning stocks and corporate bonds). Either way, a bounce in stocks must come, but working out the right timing is everything. Besides, one can see Gold has not been immune to the wealth destruction seen, which suggests the true levels of panic as the global dash for cash continues to see investors liquidating major positions. Owning the USD at a time of a liquidity/funding crunch is the best play.

The EUR index keeps extending to the upside and after reaching its 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target, the price structure looks firmly en-route to make further progress towards more ambitious levels. The correlation between risk-off flows and the currency stays the course for now as the COVID-19 crisis has strengthened the notion of tapping into the single currency as a vehicle for protection as the rhetoric shifted a while ago to support funding currencies on the basis these would be most poised to see upside potential as hedges/margin calls kick in as part of one of the greatest structural unwinds in carry trade in history. Just check the price action in the MXN peso!

The GBP index continues to find willing sellers despite having reached a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target. The break of structure in recent days found a backside resistance as the perfect role reversal location to amplify the bearish move and looks like it may have further to go as acceptance was found under the symmetrical target. It also exists the possibility that the market may be taking profits at this location as the break lower on Monday has created a second drive rejecting the lows, an instance that tends to occur when liquidation of shorts occurs. We won’t know for sure until further price action clues. Fundamentally though, with the UK-EU trade talks hardline likely to extend another year due to COVID-19, the market is fixated with the risky bet taken by UK PM in the handling of the virus crisis. If cases in the UK start spiking, as one may expect, the outlook for the GBP is far from encouraging. One could argue the market has been selling off in anticipation of this political gamble by Johnsn backfiring.

The USD index has outperformed the rest of the FX market, including the currencies with safe-haven attributes such as the Yen or the Swiss Franc, not to mention Gold. This means there is a huge run to amass USD on the notion that liquidity/funding channels are not functioning properly as even the Fed ‘bazooka’ to provide whatever liquidity is necessary is not being taken up by major dealers. We haven’t experienced this acceleration in panic buying towards the USD in a long time. The fact that the Fed failed to make any difference in depreciating the currency even as it’s willing to flood the market with USD supply is the ultimate clue that the outlook for the currency is unambiguously bullish, let alone the technical backing it has. I am still expecting, therefore, the USD to be a major beneficiary of the current conditions at play.

The CAD index has suffered from a resumption of the sell-off pressures that originated the day Oil lost 30{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} as Saudis and Russians went to war price wise. A bearish outlook is undeniable, and based on technicals, we’ve seen the 50{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} fib retracement from the macro sell-off acting as a very accurate area to re-engage in the build up of CAD short inventories. The double whammy events unfolding (Oil price war and dysfunctional risk-off markets) remains a ‘ticking bomb’ for the outlook for the currency. The CAD, which has the characteristic of growth/commodity currency, is poised to be one of the most exposed to the economic downtu to come.

The JPY index remains in a phase of consolidation, hence selling at the top of the range, while very risky in nature given the broader bullish pressure, has a case. Nonetheless, the best play by far is to keep supporting the Yen on dips at key areas in your charts on expectations that further risk-off conditions will remain until hints of real circuit breakers to the equities massacre emerge. If the Fed comes up with a new mandate to own stocks, the Yen is likely to see an instant sell-off, but the jury is still out there as to whether that can be long-lasting. In the more likely scenario that markets close in the US, I have a hard time forecasting a Yen bearish scenario, as that would be the ultimate declaration of control lost in the financial system. Very interesting times to be alive indeed, but with all said and done, the index says stay bullish.

The AUD index remains a sell on rallies and I can’t envision how that changes in the very short-term based on the historical behaviour of markets when the proverbial hits the fan. The Asussie hit its lowest levels since late-2008 and that speaks volumes of the suppressed sentiment. News of RBA preparing QE measures doesn’t help AUD long holdings, even if I am the first to accept that the levels it trades at are very cheap by historical standards. However, these are extraordinary times and with a VIX closing at all-time highs, I can’t see many investors looking to take a blind shot in the dark to build AUD longs from here. Intraday news-driven sentient and shorts closing positions may see hiccups higher, but that should be, until technical improvements, be seen as selling opportunities.

The NZD index is starting to decouple a bit from the Aussie as the AUD/NZD reference rate nears the parity level. The announcement by the NZ govement of a substantial NZD 12bn economic/fiscal plan has given the NZD a nudge higher. However, as the chart below illustrates, the dire technical picture remains the norm. It’s going to take days of buy-side pressure if the NZD aims to truly revert its bearsh outlook. First battle ground would be to retake the circled level of resistance, which has proven to be a sellers’ stronghold in this COVID-19 crisis era. As I still on the camp of expecting an eventual drop towards the next 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} macro proj target, which based on where we stand, would yield more percentual movements than a resistance retest.

The CHF index, together with the USD, is the currency keeping the steadiest buy-side flows. The aggregation of flows is evidence of that, as it keeps building higher highs and higher lows. In times of risk aversion, the market will have a preference to resort to the Swissy, and there is very little the SNB (Swiss National Bank) can do about it. As a consolation, since the strength in the Swissy comes combined with fortitude in the Euro, that’s allowing fairly stable levels in the EUR/CHF, which is the rate the SNB is most fixated with. The Swissy’ bullish structure continues to suggest that to engage in buying on dips strategies holds the best prospects until there is some type of circuit breaker implemented by the Fed.

Important Footnotes

  • Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} Fibonacci Projection