Episode 16: Hong Kong and Coronavirus

This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be covering the signals to look out for in the event of a dollar break and BTFD - of which more of later!  In the After section, we'll be reporting on Lowe's results. 

Everyone in Macro has an opinion on the dollar, but they usually are imposing 'their' scenario on the currency rather than identifying what conditions and triggers could lead to the dollar moving. For our purposes as trend followers, we say it could take off. And here's why. The first point of interest is the Bank of Japan coming back with liquidity to offset sales tax slowdown, although it has rebounded to some extent. The BOJ has been in pumping mode for some time, so it's difficult to assign how much Yen driven liquidity leads to Dollar strength, but it does fit with the rest of the picture. The second point of interest is that the Coronavirus supply chain effects continue to hit Germany keeping the Euro soft. And thirdly, the emerging market risk off is sparked by a continued run out of the Korean Won. As the investment world can't get enough gold in this risk off environment, emerging markets can't have enough dollars, and that alone should support a bid. 

As the grim news has come out of Korea about their number of Coronavirus cases, we've seen the Won weaken and USD/KRW rip 5% this year, with multi-year highs right around the corner. So whether it's the Euro or emerging market currencies selling off, either can create a panic in the DXY. FX is always a relative game.... So we've seen the dollar strengthen in 2019 on the back of emerging market weakness, but we began 2020 with dollar rallying on Euro fragility. Perhaps the crisis will cost both Euro and emerging market weakness simultaneously. We have also seen oil and copper stress taking out key support levels, which could also create a dollar squeeze. There's no doubt that we're dealing with an A-typical Macro environment these days. 

But as WTI crude plunged through 50 earlier this week, we look at a longer-term key level of 42.5 as the next support. The collapse of oil could also just be the spark to ignite the DXY. 

Everyone now is suddenly a pandemic expert, and almost everyone can rattle off some scary exponential growth formula that you should be aware of. And then there is a group of people that just apply a flat strategy to all scenarios/market conditions/news events -  the 'Buy The Dip Crowd'. 

Somewhere between the doomsday preppers and those walking around waiting for a 2% correction to buy more, exists a measured approach. We all know that in what has been an extremely long and resilient market, there have been many moments of doubt and panic, all of which were, in hindsight, great opportunities to Buy The Dip! But what is it that we're looking at with a Coronavirus? Is this perhaps the black swan event that pulls apart at the seams of an already shaky global economy? These are the key questions investors should be asking themselves right now. So let's examine the scary unknowns of Coronavirus, potential government efforts and long term ramifications. First, we need to understand why 1.7 trillion dollars of market cap went to money heaven on Monday. What had changed? Well, to be blunt, what triggered the Western markets to finally react was that people started to die from Coronavirus outside of China. So that brings us to our first sign that you're getting closer to 'Buy The Dip'. Sign One:  The fatality rate in the West dips sub 2%. If the treatments are more effective and some of the sheer horror aspects of the virus are lessened, that would be a good start. Sign two: The outbreak in Europe is contained and doesn't spread like wildfire from Italy. The worst-case would be a cluster of countries in every continent spreading. Over the weekend there was a breakout near Milan. As of the production of this show, in Italy, the epicenter of Europe's outbreak, the death toll rose to 12 amid more than 300 confirmed infections. Austria, Croatia, Greece and Switzerland reported their first cases, most of which health authorities linked to Italy. Sign three: we'd like to see the Fed come out and hint at a near term cut. The treasuries market has been bid on hope that the FED would cut rates with likelihood rising to 72% of a cut by April's meeting. And perhaps more importantly, will the Federal Reserve keep its repo liquidity spigots fully open? Not only that, the markets have to deal with the global spread of the virus this week. But the worst declines came after Chairman Powell suggested that the FED would now start dialing back its accommodation. For the last three months the weekly performance of the S&P 500 has ebbed and flowed with the rise and fall of the Fed's balance sheet. In markets like these, things turn on a dime, and the FED could be forced into action sooner rather than later. But either way, it would feel a lot safer to BTFD with the full force of the United States Federal Reserve providing cover.... The market has a way of throwing tantrums to influence policy, and in this crucial election year, they might not be the only ones throwing a fit if the selling gets too severe. 

Even a hot housing market couldn't rescue Lowe's sales last quarter. Revenue came in at sixteen billion versus a sixteen point two billion expected. One key retail metric that Lowe's missed on was same store sales, which came in at 2.5% versus a 3.7% projection. Rival Home Depot reported earnings the previous day, and had same store sales growth of 5.2%. So perhaps this is an execution problem rather than one directly tied to housing. This is not the environment to miss earnings, and Lowe's was punished down over 5% in the following session. And over 11% of the highs it made just last week. We'll see if the recent collapse of mortgage rates softens the blow of this earnings mess as a home-owners refinance and move to capitalize on cheap money. 

There it is. The dollar and BTFD in the Before and Lowe's results in the After. Refinitiv data throughout. This has been the Friday episode of Before & After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

Have a great weekend and we'll see you next week.