Weekly outlook: Bow down to the king
What happened last week?
It was a pure battle between central banks and market turmoil last week as we saw the first signs of financial dislocation surface amid the economic fallout caused by the coronavirus outbreak across the globe.
More and more countries are opting to go into isolation as the virus situation continues to take a toll on businesses and households everywhere.
The market did not like the developments and that saw equities get hammered once again with the S&P 500 index falling by nearly 15% on the week - taking it under the 2008 low.
In the currencies space, we saw wild swings and fluctuations as a toxic combo of rising bond yields and falling equities saw forced deleveraging across the market and that sent the sterling and aussie tumbling by over 4% in a single day.
The former hit its lowest levels since 1985 while the latter is tracking levels last seen back in 2002-03 as the rush for cash and the dollar continued amid funding and liquidity pressures.
On the week, the dollar crushed every other major currency with emerging markets also even more badly hit amid the outflows in risky assets and the rush to the dollar.
The aussie was the weakest performer, falling by nearly 7% against the greenback while even the likes of the yen and franc sizable losses as well, with USD/JPY racing towards the 111.00 level towards the end of the week.
Central bank action - particularly the Fed and ECB - helped to alleviate pressure off the market as we saw the likes of the BOE and RBA even dive into expansive QE.
The Fed introduced fresh swap lines and enhanced existing ones to help with dollar liquidity and that helped to stem the tide a little but should we see more financial dislocations happen again, the market will feel compelled to rush to the dollar as it has been the only trade that has been working over the past two weeks.
Meanwhile, the ECB bazooka has helped to turn the tide in the bond market and narrow spreads among European bond yields - but we'll have to see how long that can keep up.
In the Treasuries space, 10-year yields are back under 1% after a dramatic fall on Friday, also helped by risk-off moves as the trade in bonds starts to work again - for now at least.
What to expect next week?
Although economic data remains secondary, Tuesday brings a fresh perspective of the virus outbreak and the impact it is having all around the globe.
March PMI data for the euro area and the UK will be the ones to watch, with the former particularly notable since the virus outbreak has started to see a significant portion of Europe go into lockdown mode over the past few weeks.
UK data should be lightly affected as the country has not really shut off most parts of its economy but let's watch for any major surprises. The BOE meeting will also be one to watch to see what else the central bank may do.
Besides that, it is all about virus, central bank and government headlines. Monetary and fiscal measures are going to be much needed during the week once again to try and stem the bleeding in the market as the virus outbreak continues to become more widespread.
With more countries across the globe in lockdown, it will only put more pressure on businesses and households and the financial dislocations that may cause could be self-reinforcing and cause a bit of a feedback loop if not carefully addressed.
That also applies to the dollar trade and that is one reason to expect the greenback to still outperform. The market may seem room for some heavy correction after the dollar's strong run over the past two weeks but as long as the panic and fear continues to spread everywhere in the market, best be ready to bow down to the king.
On a side note, watch out for the latest US weekly jobless claims on Thursday. The number there is going to be a real shocker and that could be the real tipping point in the market in the week ahead.
The number hit 281,000 last week, but expect the latest release to be a blowout number - possibly between 1 to 2 million - way beyond the levels seen in the 2008-09 crisis.