PRE ASIA OPEN: WHEN MOVING AT WARP SPEED

First, I think there are opportunities here as stocks appear to be pricing in lending stress, but otherwise, falling rates tend to auger well for stocks over the long run. And if economic growth remains healthy, a big if, mind you, stocks could eventually flourish. From a trading perspective, am I buying out of the gates tomorrow? No, it was a Friday singe fest on my reversion strategies, as recent rate volatility has been more challenging on both algorithmic and manual strategies.

MARKETS 

What a difference a week makes. The FOMC enters this Wednesday's meeting amidst historically high volatility in the front end of the rates curve, which is moving at warp speed. At the time of writing, the OIS curve was pricing roughly 15bps for this Wednesday's meeting. 

The biggest problem is to believe "it's different this time" indeed, history suggests any banking crisis requires monitoring not only day by day but minute by minute as any lapse in judgment could result in a costly trading error, especially with the dash for cash headlines flashing prominently. 

And even with "bailouts and booby traps" top of mind, many a veteran trader got snared Friday by fading bank turmoil through rates and or going long KRE. So far, rates markets and the banking sector have borne the brunt of market volatility.

That said, it is exceptionally ambiguous whether the rush to raise cash through various venues, the Fed Window( lender of last resort) sparking the most excessive investor jitters on Friday, reflects a system-wide shortage or an uneven liquidity distribution. Still, it can be lethal if you are on the wrong side of that ambiguity.

Heightened uncertainty has fueled large swings in yields across the curve as the market exhibits the hallmarks of a dovish Fed shock. Short-end yields have collapsed, the Dollar is weaker, and gold is doing a moonshot as peak funds rate pricing has declined by about 100bp since Chair Powell's testimony to Congress.

Last week's theme may best be described as evolving uncertainty amidst volatility in US Regional Banks and one European Outlier.

Hence, the current market stress as a function of uncertainty will likely continue to weigh on broader markets in the near term. Still, even if stock markets rebound from current levels, high uncertainty and deteriorating confidence will likely mean choppy and volatile conditions where collapsing liquidity in the most critical asset, US treasuries, suggests numerous vol events could be ahead. 

Depleting "depth-of-market" due to risk management stress and increased volatility, especially in rate markets, go hand in hand, and that is something to remember if "I-told-you-so" hits the tape this week.

And suppose the combination of Main Street Banks' lending curtailment and rapidly falling consumer confidence causes the economy to slow sharply and justifies current rate market pricing. In that case, traders may dump stocks, especially high-margin companies, on recession signals before the rates rebalance yet again lower, attracting folks back into stocks. So the story goes.

We now witness the unavoidable consequence of a previous "mistake": letting inflation run too hot. In the current context, it is hard not to argue that the policy mistake was to ignore that disproportionate coordinated monetary (AIT) and fiscal policies (covid stimulus) are the textbook way of generating inflation and then to compound this mistake with counterproductive forward guidance.

FOREX

G-10

Outside of one European outlier, liquidity stresses are mostly being viewed at this stage as US Bank-centric; hence the Dollar has struggled so far. But it is unlikely the currency's safe-haven status is under threat. Instead, the Dollar's slide can primarily be explained by the fact that, at least initially, the market has treated this bank saga as a dovish Fed shock. But traders will be dialling for dollars if bank stress broadens into other jurisdictions or economic sectors, as we see in commodities. 

The Shunto wage negotiations came in at 3.8% headline and 2.3% base, which was well above consensus expectations. JPY moves are dominated by broad market sentiment, but the JPY rally could get further fuelled by domestic wage inflation. 

ASIA FX

While Credit spreads were initially a problem last week as traders were forced to hedge global financial contagion risk, as the dust settles, Asia traders believe the current bank crisis to be more of a US-centric hence dovish Fed shock event. 

A decline in real yields bodes typically well for EM currencies, with Asia FX historically being the largest beneficiary. It also appears that real yields' influence on Asia FX has grown even more prominent over the last two years, given there are a more significant number of lower-yielding currencies in Asia. So falling real yields remain a strong tailwind for EM currencies, especially for Asia FX.

But importantly, a lower US rate environment should allow investors to focus better on Asia's improving fundamentals as China's recovery is underway.

Significantly boosting regional sentiment, home prices in China are rising again in both the new and secondary markets. And home sales improved in February, vs. January, with property investment contracting slower, painting a relatively optimistic view of the property sector.

As expected, traders continued to buy THB through this risk event since it is one of the currencies that should have a high beta to China's domestic consumption recovery, and the US yield beta tends to dominate the equity beta.

Traders remain conflicted on CNH; while the economic recovery and mobility trends look fantastic, stock market sentiment remains sour, perhaps a negative legacy from the NPC and soaring unemployment among the younger ranks.

BNM might resume rate hikes if they see a solid reason to revise their growth forecasts. And this was hinted at in their latest monetary policy statement, which stated that "the implementation of projects from the recently re-tabled Budget 2023 would provide upside risks to the domestic growth outlook". Moreover, MYR depreciation in February at 4.99% was the most significant monthly decline since 2016. It could increase the rate hike prospects, undoubtedly boosting MYR appeal amid a dovish Fed shock. It is a balancing act call, however. 

Of course, if bank contagion risk starts shoring in Asia jurisdictions, it could signal the need to "dial for Dollars "

GOLD MARKETS

Hightended recession risks, questions about the viability of the US dollar as a reserve currency, and the dovish Fed shock are an exceptionally bullish brew for gold markets. 

OIL MARKETS

Last week Brent prices plummeted from $83/b to $71, due to global economic concerns, particularly in the OECD, resilient Russian oil supply, and inventory builds. Not even a dovish Fed shock, a weaker US dollar or another decline in the number of active oil rigs in the United States helped the oil complex climb into the green as the market continues to track around 1 mn bbl net long this quarter.