Multilateralism has been Fractured: G7 may act in Concert, but Little Scope for Coordination

Overview: The Fed rate cut that many had expected before the US equity markets opened yesterday failed to materialize, but the focus shifted to a possible coordinated G7 action as early as today. A conference call with the G7 finance ministers and central bankers, led by this year's G7 head, US Treasury Secretary Mnuchin, is slated to begin, according to a Reuters report at 7:00 am ET today. France's Finance minister Le Maire told Reuters that there will be coordinated action, The S&P 500 gained 4.6% to close at a three-day high. Asia-Pacific and European equities have followed suit. Japanese stocks were an exception as the Nikkei failed to hold opening gains. Given the magnitude of the US rally, the rise in the Asia Pacific region was modest. Europe's Dow Jones Stoxx 600 is up almost 3% in late morning turnover, with broad gains distributed across industries. If gains are sustained, it would be the first back-to-back advance since February 11-12. US shares are consolidating, apparently waiting for the G7 meeting outcome. Peripheral European bonds have rallied (yields off 4-8 basis points) while core bonds are mostly lower (yields up 3-4 bp). The benchmark 10-year US Treasury yield is a little lower, hovering around 1.15%. The dollar is mixed. Of note, the Australian dollar is higher following the Reserve Bank of Australia's 25 bp rate cut. Emerging market currencies are mostly lower, including the Malaysian ringgit after its central bank delivered a 25 bp rate cut as well. After falling $59 an ounce at the end of last week, gold edged higher yesterday and is firmer today, but struggling to re-establish a foothold above $1600. Oil is extending yesterday's nearly 4.5% advance. It is up about 3% to push above $48 amid speculation that OPEC+ will agree to cut output by as much as 750k barrels a day later this week.  

Asia Pacific

The Bank of Japan tried the same operation as it did yesterday, offering cash for JPY500 bln JGBs in an unscheduled repo, While yesterday's measure was successfully taken up, today's was well undersubscribed. Only 30% of the cash was taken, suggesting that the lack of liquidity is not the pressing issue. The BOJ also appears to have bought a record amount of ETFs yesterday. Its policy framework lends it to scaling up (or down) as needed/desired. Some link Japan's underperformance today to a press report suggesting that Hokkaido may be experiencing 10x more infections that have been acknowledged. The island declared a national emergency last week (until March 19). Separately, Japan reported auto sales fell 10.3% last month year-over-year. Prime Minister Abe has indicated the second set of policies to support the economy will be unveiled on March 10.  

The Reserve Bank of Australia delivered a 25 bp rate cut and indicated it was prepared if necessary to cut rates again. The target rate is now at 50 bp. The derivatives market is pricing in about a 70% chance of another cut at the April 7 meeting. 

South Korea revised Q4 GDP to show a 1.3% quarter-over-quarter instead of 1.2%, but the more important news was the weakness in February CPI. It was flat on the month, which brought the year-over-year rate to 1.1%, down from 1.5% in January. The core rate fell to 0.6% from 0.9%.  Last week, it unexpectedly left its seven-day repo rate at 1.25%. 

The dollar bounced yesterday from about JPY107 to almost JPY108.60. It has failed to extend the recovery today. On the contrary, the greenback surrendered a good part of yesterday's gains (61.8%) to test the JPY107.60 area. There may be some support around JPY107.40, but it is not particularly strong. There is an expiring option for about $450 mln at JPY108 and another for $430 mln at JPY108.20. The Australian dollar spent yesterday within last Friday's trading range. It is firm today and poised to re-challenge that pre-weekend high near $0.6585. Last week's high was near $0.6630, and a move above there would lift the technical tone. The dollar rose against the Chinese yuan for the first time in four sessions. We have suggested that it may be in a new range of CNY6.95 to CNY7.05.  

Europe

EMU reported February CPI rose by 0.2% for a 1.1% year-over-year pace, slightly slower than the 1.4% pace seen in January. The core rate edged up to 1.2% from 1.1%. Separately, January producer prices rose by 0.4% on the month but are still off 0.5% year-over-year (-0.6% in December). It also reported that January unemployment was unchanged at 7.4%. The data is neither here nor there in terms of policy implications as it does not capture the economic disruptions spurred by the virus. 

The UK economy appears to be continuing to recover from the soft patch seen late last year. Today's news was a rise in the construction PMI to 52.6 from 48.4, and well above expectations. Recall that yesterday, it was announced that the manufacturing PMI rose to 51.7 in February from 50 in January and is the highest level since last April. 

The euro reached $1.1185 yesterday and is consolidating today. It has held above $1.1100 (the 200-day moving average is just below there). The Commitment of Traders in the futures market showed that in the first week of the euro's rally (to almost $1.09 on February 25 after bottoming near $1.0780 on February 18) speculators (non-commercials) liquidated 13k long contracts (each one is for 100k euros) while the bears added 9.5 short contracts to stand at 271.6k. This indicates a large gross short position that may have been squeezed as the euro continued to rally. Commercials added to their longs and reduce their shorts (likely hedges). Sterling is trying to snap a four-day decline and is knocking on $1.28 in late morning turnover. There is an option struck there for GBP415 mln that expires later today. It has forged a base in the $1.2725-$1.2740 area. A move above $1.2850, where another option for about GBP235 mln has been placed that also expires today, would aid the technical outlook.  

America

The S&P 500's 4.6% gain was the largest since December 2018. In one fell swoop, it moved above its 200-day moving average (~3048.4) and overshot the minimal retracement (38.2%) of the drop since the February 19 high (~3393.5) that came in around 3061.25. The (50%) next retracement is seen by 3124.7, which is a bit above the gap created by last Thursday's sharply lower opening. That gap is found between about 3097 to 3109. 

A key question is whether the G7 has to propose coordinated action or jawboning about how they are prepared to act should conditions warrant, like the major central banks be sufficient to allow the equity recovery to continue. The BOJ did provide extra liquidity to its banks via a JPY500 bln in JGB repos ~($6.6 bln), but the other major central banks have only offered to do something if needed. Lagarde mentioned targeted action, and some understood the word cue as a new TLTRO or tweaking the old one, though we suggest it means a rate cut now is not very likely. That said, banks are to submit bids for the third tranche of TLTRO III on March 18. The ECB meets on March 12. Some suggest March 12 is too late to adjust the terms.  

It is somewhat ironic that the US has eschewed various forms of multilateralism, but now as the G7 president, is trying to coordinate something. That said, a Reuters report indicated that the draft statement that will be issued by the G7 after the call did not include rate cuts. There is a difference between acting in concert and coordination.The former seems more likely than the latter.Each country/central bank is responding within its own policy framework. Talk of a high-level coordinated rate cut or fiscal stimulus seems misplaced.  

April WTI reversed higher yesterday. It initially gapped lower to new multiyear lows and then rallied and, although it rose above the previous session's high, it failed to close there. The rally met the (38.2%) initial retracement objective of the last leg down (from about $51.65 on February 20) seen at roughly $46.90. The next retracement objective (50%) is found $48, and then the following retracement (61.8%) is a little above $49. OPEC+ meets on Thursday and Friday, and Russia has shown some reluctant willingness to talk about cooperating (with more cuts). There is speculation that OPEC+ could agree to reduce output for the next few months at least by 750k barrels a day. Many observers are warning that this could be the fourth time in 40 years that oil consumption does not grow. 

The Canadian dollar staged a strong recovery yesterday. Before the weekend, the US dollar had reached CAD1.3465, its highest level since last May. It fell to about CAD1.315 yesterday, a four-day low. The greenback is firmer today and has met the (38.2%) retracement of the pullback around CAD1.3370. A move back above CAD1.34 would warn of a retest of the recent high. The Bank of Canada meets tomorrow, and a 25 bp cut is now fully discounted. The US dollar posted a key downside reversal against the Mexican peso yesterday by first making new highs for the move (~MXN20.0025) and then selling off and closing below the previous session low. After settling a little below MXN19.40, there was initially follow-through selling toward MXN19.35 early today, but a consolidative tone is emerging. An initial cap may be seen near MXN19.60.   

Disclaimer