Markets stabilise on hopes for vaccine, SNB defending the franc

Beware the Ides of March. There is a lot of relief out there that March as well as the first quarter is almost over. A fresh month can offer some fresh perspective, and perhaps a more constructive one.

President Donald Trump extending social distancing guidelines until the end of April was seen as the right call by stock markets. Oil markets saw it as a source of more demand destruction. Trump is resisting a nationwide stay home order in the US, calling it unlikely.

US shares gained more ground on Monday led by the healthcare sector. Johnson & Johnson shares popped after announcing progress on a coronavirus vaccine. The vaccine wouldn’t be available for use by the public until early 2021 by which time the pandemic could have brought the global economy to its knees. But an approved vaccine would be more confirmation there is an endpoint to this crisis.

European markets look set for small gains at the open. Investors are watching the coronavirus ‘curve’ bending lower in Italy and Spain. They are grim stats to follow but offer a glimmer of hope that lockdown policies work.

Stats showing China’s manufacturing industry actually expanded in March stretch the bounds of belief. Official manufacturing PMIs show an expansion of 52.0 when 44.8 was expected.

Market sentiment can continue to stabilise as long as there is an end in sight to the shutdown of the economy. The biggest risk is that lockdowns extend into May and then the summer. That’s when large scale insolvencies in the travel and leisure sector could start to hit.

Oil prices plunged to a fresh 18-year low on Monday. The big national oil producers are playing down any prospect of a pact and that’s keeping the downward pressure on the black gold. Ultimately they will do what’s in their best financial interest, and that is limiting output to push prices higher. We think either US shale producers agree to cut production, or the US reduces sanctions on Russia to get them to the table. Either of which we think would put an end to the current regime of falling oil prices.

The greenback gained ground on Monday. Last week was the worst in a decade for the dollar so a snapback seemed likely in the new week. A bullish call from Goldman added to the upside. The Canadian dollar (USD/CAD) was the hardest hit versus the buck due to the sub-$20 per barrel print in WTI crude oil.

Risk sentiment will sour again at some point in the coming days; it’s at that point that we can judge the dollar’s status as a haven after all the latest Fed easing policies.

That ‘technical’ trade talks will happen this week by phone helped the British pound continue is strong rebound into the new week. It shows good commitment from both sides that talks can still continue, even with the top officials incapacitated with coronavirus symptoms.

For the week ending March 27the Swiss National Bank increased sight deposits to CHF 620.455 billion from CHF 608.826 billion the week prior. That is a huge jump in one week; in fact it’s the biggest since the franc was un-pegged from the euro. The Swiss central bank is getting increasingly bold in its FX interventions. If Fed polices have made the dollar less preferable as a haven then naturally the franc would be more appealing. In such a scenario, the SNB will have a tough job battling market forces and another big capitulation moment could happen.

 

Opening calls

FTSE set to open 6 points higher at 5569

DAX set to open 58 points higher at 9873

S&P 500 to open 8 points lower at 2618