This morning, when I woke up and switched on my mobile to check on the financial markets, as always, I had a big surprise: US futures were almost flat. It has been weeks since I lost the habit to see a modest+0.08% on NDQ or a -0.18% on DJ30.
This is a sign that something is changing – at least for the short term- after the massive intervention of the last three weeks by central banks and governments around the world. Maybe for now is better to say that something is just pausing.
All indices around the world have locked big gains during last days: DAX is up 19.5% since 19/03, Nikkei the same (funny, 19.6%) and DJ has rallied a more modest 16.5% since its lows 3 days ago.
Nasdaq easily reached the upper bound of the trading range we were talking about -7650- before retracing to 7457 now.
As for USD, it’s keeping losing its steam, DXY is now trading at 100.75 – far from its high a few days at 103.90- and EURUSD has now reached 1.09. THIS DOES NOT MEAN THAT THE PRESSURE ON US CREDIT MARKET HAS DIMINISHED.
Indicators like FRA-OIS are still very high and well above 100 bps while the TED has closed at 58.55 yesterday (it was trading almost flat a few weeks ago).
Some big companies have managed to finance themselves by issuing some debt: EXXON, the oil giant, raised two billion $, but at a +250 bps spread over the government debt while not long time ago it used to pay around 70 extra bps. A clear sign of how tensions are persisting in debt markets.
Yesterday, I was reading an interesting article by a Spanish-American famous economist I had the honour to work with in the past, and he was putting together the big USD demand of these last days with the fact that -even with huge injections of liquidity- the Greenback was maintaining its value. The point was about the rise of USD denominated bonds (so-called Eurobonds) for financing purposes by many emerging countries during this cycle.
Only during the next three years, EuroBonds for the value of almost 20 Trillion USD are due to be repaid while foreign currency reserves are generally small (China – together with Russia the best-stocked country – has $ reserves for 60% of its due repayments).
So, this is the well-presented thesis of Mr Lacalle, the demand generated offshore would prevent the destruction of the monetary base and a devaluation of the USD, as a huge money printing activity should lead to.
Anyway, these last two paragraphs are just to give you a taste that -despite the efforts from CB- it is still too early to think that they will be immediately successful and that the worst is behind us.
By: Marco Turatti