Pre Asia-Market Open
Stock Markets: A dramatic rebound in US equities has left many investors scratching their heads due to the temporal mismatch between financial markets and the real economy which has been in the full effect of late.
Oil Markets: Price discovery is complicated, more so than usual, by the soon-to-expire WTI NYMEX front-month contract for May 2020.
G-10 FX: "Risk on" Friday meant very little to G10 currencies as the correlation between risk and the dollar has disappeared.
Asia FX: China isn't shaping up to be a quick rebound, either.
Gold Markets: Gold lost some support due to the release of the US plan for exiting lockdown measures, combined with news of progress in finding a treatment for Covid-19.
This week's data docket is relatively sparse and, once again, Thursday's jobless claims (5.000 million forecasts vs. 5.245 million previously) remain the most important metric to follow.
Stock markets ended last week higher following new guidelines for gradually reopening the US economy on a state-by-state basis, as well as some optimism on treatment therapies. All the while, over the weekend, New York reported the fewest new coronavirus deaths in almost two weeks, Italy announced the least in nearly a week and France had the smallest increase in five days. Health-related news on the three key steps (containment, alleviation and immunity) will remain critical.
In addition, market participants will be on the lookout for secondary spreaders like in Singapore and Harbin, a city in northeastern China that’s forced authorities to impose new lockdowns, ending a period starting in mid-March during which China was able to report near-zero domestic transmissions.
We saw an aggressive short squeeze in cyclical stocks on Friday as the market took heart from apparent progress in Covid-19 therapies and a path to a partial reopening of the US economy. But then, in typical Friday fashion, air started to leak out of the party balloons into the New York session only to rebound into the close.
Shorting stocks has been an exercise in frustration as the SPDR S&P 500 Trust, the biggest exchange-traded fund, has been active and increased holdings to $68.1 billion last week – the highest level in data going back to January 2016. The dramatic rebound has left many investors scratching their heads due to the temporal mismatch between financial markets and the real economy, which has been in the full effect of late. But there are believers out there evincing the unprecedented actions by the Federal Reserve and Congress, as well as the propensity for markets to price in negative expectations.
A quick return to normalcy is little more than the removal of a single recessionary input (the virus) via a vaccine, or more effective treatment can pave the way for fast recovery in output. I thought humanity was condemned to forever get nervous on Friday, read scary news articles all weekend, panic sell on Monday, then regret it on Tuesday?
Well, let's see how things play out this week as it’s another Monday open and, as usual, we’re dealing with some of the typical unsettling weekend headlines. And to add more to the confusion to the mix, Goldman is now predicting the S&P 500 to plunge to 1500 based on earnings after predicting last week that the US Index bottomed and will rise to 3000. But there’s way too much going on to fit into one market note.
So here we are: in two short weeks, equity markets went from pricing the depth of a global depression to being increasingly focused on pricing a short duration recession again.
Price discovery is being complicated by the soon-to-expire WTI NYMEX front-month contract for May 2020 – even more so as the near-term prices are trading massively discounted due to storage premiums getting packed in the far dates, creating very squeezy conditions on the expiring contract as final day settlement (FDS) looms.
Calendar spreads are complicated at the best of times, but with market makers packing on huge premiums to cover risk amid sparse liquidity, it’s a challenging time to dance to the contango into the FDS. And there's probably still some housekeeping to be done.
The WTI rolls have been chaotic to execute at times and, as a result, the WTI spread to Brent went a bit helter-skelter during Friday's sessions, the current poor liquidity conditions notwithstanding.
Brent cargoes are also trading at huge discounts as no one wants to take delivery, given the price of storage could effectively be more expensive than oil prices when dealt with end-users.
There could be more support for oil this week as, after the post-OPEC+ price collapse, the Energy Ministers of Russia and Saudi Arabia have released a joint statement hinting at further production cuts to come.
The pressure is also building outside the OPEC+ group. Chevron announced a 225kb/d oil production cutback, and it wouldn't be too much of a stretch to expect similar announcements from peers even if no formal plan by the Texas Railroad Commission and other state regulators in the US gets tabled.
Production in the US market is slowly curtailing as US drillers cut 66 oil rigs in the week to April 17, bringing the total count down to 438, the lowest since October 2016, energy services firm Baker Hughes Co said in its closely followed report on Friday. RIG-OL-USA-BHI
That's all meant very little to G10 currencies as the correlation between risk and the dollar has disappeared; I guess there's a limit to how much US dollar selling you can do when there’s no carry on the other side of the stick. Currency performance has been mixed but relatively tightly grouped around nil.
The Canadian Dollar
Even USDCAD, which I thought was ripe for a much more massive rally given the OPEC disappointment and subsequent new lows in crude, hasn't moved at all. This suggests oil seems like less of a driver of market psychology as people get used to $20 NYMEX.
The Euro remains mired in a political malaise after the EU finance ministers' meeting last week provided little news. But this is a new week and hope springs eternal that EU leaders continue to push for mutualization, with France's Macron leading the way. With the Eurozone likely the most economically impacted region by this virus, this meeting should take on heightened significance for the currency.
Trading USDJPY is as frustrating as playing Gin Rummy if you don't know the rules. Shorts were frustrated by gold and US fixed income on Friday, while longs are perplexed. It didn't light up on Friday as risk turned positive; I’m not sure what will change this see-saw but eventually, with the Fed playing for a weaker USD, it's bound to move lower.
With the weekend to think about the China data and how quickly economies might be expected to 'exit' the crisis, it was encouraging to see manufacturing and fixed investments suggesting the economy was coming back online. However, employment normalization remains suspect, and with export flopping in the wind this isn't shaping up to be a quick rebound. Still, there will be a lot of policy hand-holding until a new fiscal supercharger gets fitted to China’s consumption engines.
Despite RMB trading back above seven again, RMB weakness should remain capped as China is not considering using RMB as part of its policy toolkit to boost growth. This was evident from past but also recent comments from the PBoC that it will maintain RMB stability.
The market remains moderately bearish on the Ringgit, likely until oil prices rise and China's consumption and export engines start to fire on more than just a few cylinders.
Gold lost some support by the release of the US plan for exiting lockdown measures combined with news of progress in finding a treatment for Covid-19. The lack of fresh buying, in turn, encouraged profit-taking and gold was on the defensive for the rest of Friday.
As we indicated in Friday’s Asia Morning Note, institutional gold bids are pulling back to the $1650-75 oz levels on a more optimistic near-term economic outlook taking hold after President Trump introduced a workable roadmap to recovery. And while there was some intermittent support once stops at $1700 were triggered, gold fell to $1680 level – just above those chunky strategic gold buyer bids.
The prospect of an end to the lockdowns in the US is impressing risk markets and triggering a modest liquidation on gold. Equity traders are sprinting to their "America First" playbook. The MSCI USA index is trading near a record two-decade high versus the rest of the world.
If US equity markets continue to push higher, and the SPX500 puts in some headroom above 2900, gold may tumble below $1650 as hefty positions built above $1675 could head for the exits.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support