Morning Commentary: Markets Unmoored and Unanchored

Foreign Exchange - Morning Commentary
Markets Unmoored and Unanchored
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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
As we come in this morning, the markets are once again without direction with everything swirling around these days.  Clearly, the COVID 19 virus outbreak is the primary catalyst, but that fear seems to have spread into a lot of related areas of concern. 

While the outbreak is now more concerning outside of China, the economic damage is clear when China released its latest manufacturing PMI, which fell to 35.7 – an absolutely abysmal level.  Non-manufacturing PMI was even worse at 29.6, with the composite number at 28.9.  These are among the worst numbers ever seen with these indices and is particularly striking in an otherwise powerhouse economy like China’s.

Among the many notable developments overnight, I think the most eye popping to me was a note out by Goldman Sachs that says they expect a 50 basis point (bp) cut at, or even before, the Fed’s March 18 meeting, and another 50 bps of cuts before the end of the year.  Action in the Fed Funds futures markets Friday was almost unheard of in previous market downturns.  We went from a more than 50% chance of a 25 bps rate cut to a fully baked in rate cut plus another 50% chance towards a total of 50 bps in just 16 days. 

The Bank of Canada has the first chance at action this week when it meets on Wednesday.  A 25 bps rate cut is expected, which was not even fully priced in Friday; there was less than a 50% chance on Thursday.  Such is the pace of market expectations these days. 

In US Treasury bond trading, the 2-year yield fell as many as 21 bps and the 10-year got as low as 1.028% in Asian trading before coming back up to nearly 1.09% currently. Yes, that is not a typo; the 10-year is flirting with breaking below the 1.00% level which is something none of us ever expected to see in our lifetimes.

As far as currencies are concerned, the USD is somewhat directionless as are many other markets.  It is up against many emerging market currencies, but only by about 1%, and off by that same amount against many of the other major currencies.

The trading day in the US will be spent trying to sort all these things out.  And let’s not forget we are one day away from the Super Tuesday primaries, which would otherwise be the main focus for markets.  They are certainly not forgotten but just have to be somehow fit into the limited space of attention for markets.
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