Month End, Beginning of the End?

Markets brushed off a massive number of US unemployment claims in a sign that much of the bad news is priced in; or maybe it's a sign of month and quarter-end flows. Sterling was the top performer while the US dollar lagged. Weekend risk looms. Wednesday's Premium trade is +200 pips in the green.

US initial jobless claims soared to a record 3.283 million compared to 281K the week before and sashing the 1982 record of 695K. It was a harrowing number but risk trades climbed on the headlines. We warned yesterday that even a number in the 2-3m range might be seen as good news because there were whispers and worries of worse. Evidently a number even slightly higher than that was enough to satisfy bargain hunters in the market.

In terms of the coronavirus, the US is now the epicenter of the outbreak with the total number of cases surpassing China; or at least the official numbers. That also didn't derail the risk trade and the DJIA gained 6.4% in its largest 3-day rally since 1933.

Part of the moves are clearly a sign of relief that the government and central banks have averted a cascading financial crisis. Markets were on the brink of a freeze-up and meltdown earlier in the month and it took unprecedented pledges to buy nearly everything to save them; but it appears to have worked.

That's some reason for celebration. We also highlighted month and quarter-end rebalancing earlier in the week. Given the drop in stocks and rally in bonds, balanced funds need to adjust their allocations of each and that means stock buying and bond selling. Estimates were for $240B in flows but talk of it was widespread and at some point the story itself attracts far more buyers in a massive front run.

Another clear sign that liquidity conditions have improved is the fall in the dollar. It sank across the board Thursday and the beaten-down pound was particularly perky in a climb to 1.2175.

The calendar is the main obstacle in the day ahead. We've seen epic selloffs and squeezes into recent weekends. Markets shouldn't be under any illusions that cases will continue to climb over the weekend but we remain in a highly volatile situation and the mood can change quickly.