Fed Plunges Back to Zero

Even as the Fed plunges back to zero interest rates, stocks fall by another 10%. This is officially not only a recession, but potentially depression. The Federal Reserve fired its policy bazooka on a Sunday night  in an attempt to counteract what increasingly looks like a massive economic shock. The US dollar initially sank on the headlines, but the initial bounce in sentiment faded and US stock futures hit the -5% limit. The Fed cut rates to a range of 0%-0.25% in the second emergency move this month, while pledging $700B in QE. They promised to keep rates at this level until the economy has "weathered recent events" and is on track to meet inflation and employment goals. CFTC positioning data confirmed a huge euro-short covering rally. A new Premium trade was issued, backed by 3 charts. 2 trades are currently open.

In truly what was a 'kitchen sink' move, Powell ruled out negative rates at the press conference.They also unveiled swap lines on signs of dollar-funding strain that contributed to the USD bid on Friday. Other moves included opening the discount window for 90 days and cut reserve requirements.

Separately, the RBNZ lowered rates by 75 bps to 0.25% and pledged to leave it there for at least 12 months. The bank also said QE is on the table if needed. Let's not forget that the Bank of Canada cut rates again by 50 bps on Friday.

The early returns on the central bank action weren't positive. WTI crude fell below $30 in a 5% decline and yen crosses sank, led by a 3% drop in NZD/JPY.

The economic shock that's unfolding is cataclysmic. France, Spain, Austria, South Africa, Dubai are among the new countries that have halted retail commerce and closed schools. We're at the point of pricing in similar actions virtually everywhere. The UK has so far resisted and the FX market is punishing the pound in part because London is a nightmarish place to try and stop a pandemic. The leverage of the economy to the service sector, tourism and banking makes it doubly vulnerable.

The next question is how long the activity halts last. We note that even with China's ultra-tight quarantines, activity is still at a standstill seven-weeks later. The wave of unemployment claims is going to be staggering and the cost of bailouts is barely fathomable.

As for strategy, anything leveraged towards global growth remains extremely vulnerable and that includes the commodity currencies. The loonie was the second-best G10 performer last week and that's nonsense in this environment.

Market participants are liquidating risk and carry trades at the moment. Retail equity holders have had no chance to hedge and will soon panic. The CFTC positioning data underscores a theme we've highlighted for the past two months around the unwind of euro carry trades. Once positioning is flat (and that may be now) a decline could resume, but there may be more straightforward trades elsewhere.

Above all, manage risk.

CFTC Commitments of Traders

EUR -13K vs -87K prior GBP +26K vs +35K prior JPY +8K vs -42K prior CHF flat vs -3K prior CAD -2K vs +11K prior AUD -54K vs -52K prior NZD -15K vs -17K prior