We are to close out what has been an incredibly dramatic quarter, and as we do, we see ever more stimulus hitting global economies. Yesterday, the PBoC come to the party with a 20bp cut to its 7-day reverse repo, while injecting RMB50b of liquidity into the system – adding to other monetary measures recently seen and giving extra spice to the sizeable fiscal package due to be rolled out soon.

The Australian government has its critics, like any political party, but they have delivered a fiscal stimulus yesterday that clearly resonated with investors. The $130b wage subsidy should provide a floor in the growth contraction and limit the fall-out in layoffs and when added to the other stimulus measures recently announced, it should see government debt increase to some $1.5t (80% of GDP) by next year. The reaction in the equity market was emphatic, with the ASX 200 closing +7%, with the intra-day chart looking as bullish as you’ll ever see. Breadth was fine, with 87% of stocks higher and turnover ok at $8.5b. We see Aussie SPI futures sitting +1.3%, so follow-through should see seen on open, although, I’d be calling an open closer to 0.9%.

We close out the quarter today with the ASX200 -22.5%, which looks even less compelling when priced in USD (-31.8%) or EURs (-30.8%). The 13% decline in the NASDAQ stands out as the place to have been invested, especially for an Aussie investor, where if you marked your USD exposure to market (i.e the index is currency unhedged) you’d be down just -1.6%.

We saw a strong performance yesterday from Aussie govt bonds, with 10s -14bp to 78bp, which seems like an odd reaction given the level of new issuance that the Morrison govt will have to get away in the market. That said, when the RBA has detailed there is “no limit on what we can buy”, it’s not hard to see why yields are contained. Despite the move lower in yield, the AUD has fared well across G10 and major currencies. Granted, we see AUDUSD trading unchanged on the session and mid-range of 0.6193 to 0.6112, but it has rallied against all other currencies, notably MXN, ZAR and BRL. EURAUD has dropped 0.7% and is pushing down on the 50% fibo of the Feb- March rally at 1.7944. A break here could be worth exploring for 1.7505.

Equities more broadly are closing out Q1 in bullish fashion. I certainly would have liked more from the Italian MIB (+0.3%), especially when they reported the lowest number of new cases in two weeks. The German DAX closed +1.9%, with the FTSE100 +1%, while in the US we are seeing the S&P500 closing +3.4%. Do you chase the market into Q2? I sit in the more modest conservative camp, which believes the prospect of a revisit to the 23 March low (2191) is certainly diminishing, but once we turn the page into Q2 the bears should get a better say again and two-way volatility is expected. The fact we’re seeing falling volume into this rally makes me less enthusiastic to chase.
I can look at the VIX and see it has fallen 8.5 vols to 57.08% – implying a 3.6% daily move (higher or lower), but 1-month put volatility is still at a 21 premium to calls.

That said, a break of 2637 (Thursday high) would suggest this rally has legs, with the index holding above its 5- and 10-day EMA and until price can close below this average, I will hold a modest bullish trading bias. Happy to react when price compels.

(Daily chart of the S&P500)

(Source: Bloomberg)

We have seen WTI crude trading into $19.27 (an 18-year low), although there has been some reasonable defence of the 20-handle. A close through $20 would obviously open up a further run lower, but there would be some longer-term players looking at $20 and saying, “if I take a 12-18-month view….”. I would stand back for now, as the fundamentals and technical set-up are horrible, and we need to see the market really show its determination in defending $20. But either way, crude looks to rounding out its worst-ever quarter and tomorrow maybe another day.

Back to FX markets, and we roll into the final session before we close out Q1 with the USD index pushing up 0.7% on the day, despite USD funding markets working against USD appreciation. USDJPY has moved sideways, and I am happy to cover the short idea and look elsewhere now. What a quarter it’s been in FX markets though. For the early part, I, like most were berating at the lack of volatility, yet on 19 March we saw AUDJPY 1-week implied vol hitting an incredible 57% – it has come back to 26%, which is still well above the 14% multi-year range highs, but you can see that volatility has come alive in all markets.

But some of the quarterly moves, as we can see have been huge, especially in the higher beta BRL, ZAR and MXN.

So an interesting session ahead as we round out the month and quarter and one many will never forget.

Published by Chris Weston, Head of Research, Pepperstone