The contrast between a sharply contracting US labor market (-20.5 mn jobs) and rallying US equities (S&P 500: +15.3%) in April is blunt. But the US dollar has been confined to a slightly tight range.
However, in a sign of increasing confidence and lower implied volatility, EM carry currencies are starting to light up. In Asia, IDR is the apple of the market’s eye relegating INR to the back burner in the high-carry space. Part of the reason is the market’s ongoing selective bias to short the USD as the most unobstructed path right now is via the carry.
Market expectations for US monetary policy, with the US 2y yield falling below 16bp and turning negative in the short end of the Fed funds curve, are encouraging carry trade inflows.
As for the rest of the basket, hints for more exceptional monetary policy support and more widespread economic recovery in China are supporting China rates and equities for now, plus providing excellent optics for ASEAN market risk.
One of the biggest problems facing this recovery is consumer confidence about about health concerns and their jobs. The April 9-22 China housing survey showed a significant weakening of market sentiment and home purchase intention. Respondents' purchase intention in the next two years declined sharply to 21% from 35% a year ago, while a record number of respondents said they had no plan to buy a property. The Covid-19 outbreak and related lockdowns hit not only property transactions but also respondents' income outlook and confidence in the property market. Consequently, almost 80% of respondents who originally had home purchase plans for the next two years decided to delay or cancel their plans.
Oil prices eased a touch after initially punching higher as concerns linger about western countries attempting to reopen their economies, which has triggered some profit-taking in early Asia.
Still, with evidence the bottom is in, oil bulls will feel more comfortable buying dip as oil fundamentals are showings signs of improvement by the week. This is likely accelerated by the recent historic collapse in prices which is causing a massive reduction in US oil production. The number of US rigs drilling for oil fell to a level not seen since before the shale-oil revolution kicked off at the beginning of the last decade.
However, this week’s inventory data could be vital to extending the recent rally.
The majority of traders’ top-line view is that inventories will increase at a slower pace but will still build, capping oil prices in the medium term. Also that sentiment will remain sensitive to news flow about coronavirus and any signs that major economies around the world are recovering more slowly than hoped. The latter is weighing on sentiment this morning after Boris Johnson’s un-lockdown plan left the UK divided.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies