Markets shrug off horrible US jobless numbers
A record-shattering 3.3 million Americans filed for unemployment benefits last week, more than quadrupling the previous record and providing the clearest indication to date that the US is headed for a deep recession – if it isn’t in one already. Strikingly though, that wasn’t enough to extinguish optimism in the markets, with the S&P 500 rallying more than 6% in the aftermath.
So what gives? There are multiple potential explanations, including that some pockets in the market expected an even worse number, or that some dip-buyers were just waiting for this risk to get out of the way. Or quite the opposite, that in fact the number was so bad that Congress is virtually certain to add more stimulus to combat this downturn.
Rebalancing to blame? If so, this is a bear market bounce
None of these seems convincing though. Instead, a more credible explanation might lie with rebalancing flows. With stocks having recorded such staggering losses overall this quarter while bonds outperformed, major funds that have to maintain a stock/bond ratio might be rebalancing as Q1 draws to an end, dumping bonds and buying equities.
In other words, while part of this rebound may come down to some ‘value buyers’, the bigger driver might be quarter-end rebalancing flows after such a frantic quarter.
From that lens, this still looks like a recovery in a broader bear market, not the beginning of a healthy and sustainable uptrend. Indeed, Wall Street futures are pointing to a lower open today, which may reflect some caution among investors about keeping too much risk over the weekend, frightened of the headlines that might await on Monday.
In the big picture, while it’s encouraging that governments and central banks have gone all-out to counter this shock, most of that stimulus is now priced in and if rebalancing flows dry up soon as well, it’s difficult to see what will push this market higher. There’s little prospect for more good news in the coming days, but a high risk of more worrisome headlines, especially with the US overtaking China yesterday as the nation with the most confirmed virus cases.
Dollar extends retreat, but yen tells a different story
The improved mood in stock markets was also reflected in the FX realm, where the dollar extended its retreat as the funding stress that pushed it higher in recent weeks continued to abate, while the beaten-down commodity currencies inched higher. It seems the Fed’s forceful actions did the trick in relieving financial risks and quenching the market’s thirst for dollars, leaving the heavily sold British pound as the main beneficiary.
Yet, the Japanese yen tells a different story. The defensive currency shined yesterday and is extending its gains today, even against the recovery in stocks. While some of that may be owed to Japanese firms repatriating funds ahead of the fiscal year-end on March 31, it could also be a sign that investors aren’t as ‘bullish’ as the gains in equities would suggest.
Finally, euro/dollar continued to climb, partly as the dollar retreated and partly due to the euro getting its feet under it after the ECB announced the details of its latest QE package, which helped calm nerves in the Italian and Greek bond markets. Yet, it’s debatable how much further this upswing can go.
With the Fed having cut to zero, the monetary policy channel is now less relevant for the pair and focus might soon turn to differences in growth dynamics. While both Europe and America are surely headed for a recession, the US is starting from a much stronger point and has enacted much more powerful stimulus that could help mitigate the blow.
Origin: XM
