It has been another hairy start to the new week, with risk off the major theme until some old friends, the Plunge Protection Teams (PPTs), showed up and began buying equities. So far, we have heard from no less than five more central banks today, all promising liquidity and market support during the crisis. Globally, assets move in handles, not tics, so stay vigilant on entire prices today. As of 9:15 AM ET, US equity index futures have moved to small better ahead of the cash open while US Treasuries are 5-12 bps lower in yield in another dramatic curve steepening.
Saturday brought the release of Chinese manufacturing PMI that printed at 35.7 from a last of 50 and an expected 45.0 (don’t know how you could have an estimate, but they did). You also continued to get one-way bad news on the COVID-19 front all weekend, so it should not be a surprise that the markets resumed trading in Asia last night under risk-off pressure. S&P futures managed to open down 60+ handles with Treasuries opening 3 bps lower in yield before the panic really set in (headlines on NY case, higher Italy totals, another US death) and then yields plunged another 9 bps to be 12 bps richer on the day.
Then just before Tokyo lunch a buyer showed up in NIKKEI and in Chinese stocks and they turned on a dime, taking US equity index futures and the rest of Asia along. The BoJ added liquidity via their repurchase operations (JPY 400BN in JGBs), and Kuroda was on the tapes acknowledging the severity of the situation and promising to add liquidity as necessary. Eventually it was announced that the BOJ had bought a (record!) total JPY 101.4BN in ETFs overnight. And they weren’t the only central bank involved. On the hand off to Europe, the Plunge Protection Team was back in action, lifting Asian equities ex-Japan and European index futures as well. That took US equity futures to their highs; unfortunately, we have been in risk off mode since then. NIKKEI ended up 1%, Chinese shares were up over 3%, KOSDAQ was up 2.75%, but rest of Asia (i.e., those that didn’t benefit directly from the PPT activity) were marginally lower. European stocks rallied on the PPT buying and central bank jawboning but have slumped since. Don’t be surprised to see the US team hard at work shortly after 9:30 AM ET.
Locally, JGB yields ended the session higher after the impressive (for the moment) rally in NIKKEI, but Aussie rates (-1.5 bps) and KIWI rates (-5.7 bps) but all these curves saw massive steepening moves as we price in “imminent” rate cuts; there was even talk last night that there would be a coordinated cut tomorrow (tonight US time) when the RBA cuts rates, but that has tapered a bit since the PPT buying showed up.
Flow-wise overnight in USD space, we had good USD swap receiving and outright buying of UST 10s and 30s by Japanese real money accounts early in the Asian session: 2s, 3s, 5s, and 7s being the flavor of the day in swaps. There was Asian bank paying in USD 5y swaps; the biggest flow after Tokyo lunch was Asian central bank selling of 3s and 5s which coincided with the PPT buying of equities (gotta fund it and you might as well make some money in the process for your local Treasury).
Comments from ECB’s Villeroy shortly after the European open (G7 finance ministers will have call this week, ready to act as necessary and may expand to G20 in necessary) reinforced the notion of coordinated intervention; of course when another round of PPT buying materialized, European equities, Chinese equities (rest of Asia was closed by then), and US equity index futures all rallied to their highs of the session. There was more selling of Treasuries, this time European central bank selling in 2s and 7s, but there was an underlying bid in 2s and 3s, along with FV futures on the pullback by European real money accounts. RV accounts added more 2s10s steepeners, front end was on fire throughout the night (continued repricing). Eurodollar call structure buying (all macro fund related), two-way block flow in UST futures, and some buying of in-the-money US calls were seen as well. Ahead of the US stock open, risk turned slightly better bid in anticipation that the PPT activity will be seen on the US open.
Today in the US, we get Markit PMI at 9:45 AM ET, followed by ISM at 10 AM. At this point, they are non-events. It will be all about watching the tape. After the unannounced statement from Chairman Powell on Friday, we have now had an additional five central banks take extraordinary steps to voice support for the market: BoJ, BOK, BOF, BoE, and BI (the latter actually cutting RRR 10 bps as well). Look for more of the same.
So what to do? Well don’t be short gamma here, that’s an obvious one, but not obvious how to deploy such a strategy given how decoupled and expensive everything has become in a short time. The steepener is the pain trade here, as structurally this is killing portfolio types and structuring. Spreads blowing out, curve steepening, structural shorts in the front end mean it’s not time to be short vol. For choice today in TYM, let’s call the range at 136-01+ to 134-19, with the overnight range being 135-24+ to 134-21. Support in TYM comes in at 134-29+, the aforementioned 134-19/20 zone, 134-12, 134-00, 133-26/25+, 133-17; resistance comes in at 135-30 (theoretical 1% cash 10s equivalent, but don’t think it holds at all if we trade there today), the aforementioned 136-01+, 136-12+, and then you pick from there today….
All right, enough. Good luck out there and be safe,
mjc