US equities were weaker Tuesday, with the S&P down 0.8%. US10Y yields fell 7bps to 1.62%, and oil prices fell back 6.2% due to a sudden and hugely unexpected pullback on growth optimism because, after what was thought to be well in the rear-view mirror, Covid-19 and lockdown fears reared their ugly head again.
For the oil markets, the sum of Q1 and reopening fears have been realized this week due to the resurgence of Covid as worries of new virus variants start to wreak havoc with investors’ psyche.
With little new news from the Congressional Thunderdome, where neither Powell or Yellen's joint congressional testimony overnight might have acted as a positive catalyst, investors were left scrambling for life jackets as it seems we are back navigating the stormy sea of the coronavirus pandemic again, sending them to seek safe harbour under the umbrella of US bonds and the "safe-haven" Greenback.
As sentiment plummets to rock bottom, some good news – or at least a few days of no negative news – is needed for a lift in sentiment.
Germany extended lockdown measures through April 18, a resurgence in Covid-19 in India and health care alerts in the US have dealt a cruel blow to oil markets.
And when it rains, it pours as oil investors go salt rubbed in their eyes with prices continuing to slide after the API reported a most untimely US crude inventory build, which came in much larger to consensus.
Brent is still holding on by a thread above the psychological $60 per barrel at Asia open, with investors on the fence deciding whether this is the dip to buy or not after getting no joy stepping in front of the oil slide throughout the NY session.
The past pattern, in general, has been for the markets to pare back on initial lockdown announcements but then to recover. However, there are more worries at the moment about a lagged rise in US Covid-19 cases to follow in Europe's footsteps due to Spring Break festive proclivities. So, there’s still a chance of more pain to come.
The thought of the US shuffling back into the Covid lockdown abyss, even a soft shuffle, is having a seismic effect through oil markets overnight. Similarly, India could be paying the Covid piper as a vast gathering of devotees for a Hindu festival have likely caused the spike there.
And while the stronger US dollar and higher US interest rates are not helping matters, the drop in oil is mainly a function of concern that a third Covid-19 wave will extend lockdowns and delay the return to normal demand levels necessary to stabilize at a reasonable level. Indeed, this is one reason why so many oil traders haven’t bought into the 'super cycle' argument – at least in the near/medium-term – because underlying demand, though improving, remains well below the level that would typically support oil in the USD60s and bullish sentiment has been dealt a ferocious reality check.
Oil Weakness & Bearing On OPEC Meeting
It’s perhaps too early to start speculating about the outcome of next week's OPEC meeting. Still, the weakness in oil this week seems to have validated the cautious view expressed by Saudi Arabia at the last meeting. It increases the probability of yet another rollover of current production levels.
The USD is stronger this morning despite lower US yields as the Greenback’s safe-haven appeal endures, perhaps taking its cue from weaker equities.
The narrative about Europe's outlook is grim: the vaccine roll-out is failing, lockdowns are tightened amid a third wave, and policy is descending into chaos, ranging from last week's panic over vaccine safety to this week's threat over vaccine exports.
Again, the EUR fell under selling pressure given Covid-19 headlines and the contrast in the US's fiscal trajectory. Germany's Chancellor Merkel announced a 5-day "hard lockdown" over Easter to try and short-circuit the renewed spread of the virus.
Most "risk-on" currencies are weaker overnight, but the NZD has been particularly hard hit by new government policies to temper the local housing market.
Despite the Bank of Canada announcing a taper that caused a knee jerk strengthening of the Loonie, the CAD is back and looking at 1.2600 in the near-term viewfinder.
The Malaysian Ringgit
The ringgit dived into the plunge pool along with oil prices overnight. With Covid -19 rearing its ugly head at various hot spots worldwide, investors ran for the cover of US bonds and the US dollar for a safe harbour to ride this third wave Covid storm out.
Gold weakened as the USD rallied amidst positive comments from Jerome Powell and Janet Yellen; however, lower yields may support and even firm bullion over the short term once the US dollar safe-haven appeal ebbs.
Gold took a knock as US trading got underway as it was unable to ward off a rallying USD. Gold fell as the USD DXY tipped above yesterday's highs. Both speakers to Congress had previously released their prepared remarks, which supported the long US dollar view.
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USD regains ground on April inflation figures to outperform low-yielding currencies; EUR/USD meets strong resistance; Gold looks increasingly attractive