With volatility in the stock market ebbing somewhat – or at least going in a more comfortable direction – and despite global growth estimates continuing to plunge amid an overhang of uncertainty around Q1 earnings, investors still found the muster to buy the stock market dip overnight. Financial markets have started to take a more open and reassuring view with the cumulative fatalities outlook peaking around the globe, and as hospitalizations in hard-hit New York City have fallen sharply.
Still, a return to business as we know it will be impossible until we have a vaccine, although the increase in trace and testing protocols should allow a good chunk of the economy to restart with social distancing guidelines in place.
When it comes to the virus economy, I don't think it’s our job to predict the future. Our job is merely to interpret the present – a vital task that isn't nearly as easy as it sounds without crucial data inputs. This is why global economy watchers are honing in on April 17, when China releases Q1 GDP as well as March retail sales and industrial production. Not only will this data provide an excellent benchmark, but a more positive rebound in China could give hope to investors that there’s light at the end of the very long and dark tunnel when economies emerge from hibernation.
To be sure, we’re currently in the worst type of investment climate and it isn't likely to change any time soon. The economy is certainly in a recession already, but its depth and length is impossible to gauge. At some point, though, growth will accelerate, or the Dollar will fall, and a new trend will start.
While risk lights are flickering, the most imminent challenge for policymakers is how to usher people back to work safely.
Precious Metals: Gold and Palladium
Gold prices eased in Asian trading and into the early portion of US action as profit-taking set in after last week's strong performance, but the market soon reversed its losses and pushed above USD1,700/oz to new year-to-date highs. Interestingly, the FX market played little part in the price action as the US dollar was relatively stable. But gold shot higher on underlying concerns about the global economy and ahead of a data deluge this week that will likely more fully reflect the economic devastation from the onset of COVID-19 and the associated containment measures.
There’s a lot to like about this gold rally, especially as the central banks are delivering a "whatever it takes" policy to support equity markets, which is driving Yields on debt instruments to virtually zero and increases physical demand for gold and silver as opportunity costs evaporate.
The USD will eventually get watered down, and this could push gold prices considerably higher.
Palladium bounced in volatile trading. While volume was thin – in part due to much of Europe being shut – concerns remained high over available supply despite weaker demand for the auto demand sector. China, where the COVID-19 pandemic has been receding, is currently producing vehicles and is providing a slightly more positive tone. Gold gains in thin action also buoyed platinum.
Oil prices are trading moderately lower after a muted reaction to the OPEC++ deal, which was mainly a marginally watered-down version of last Thursday's announcements, so there was a bit of disappointment in the markets.
Prices have since stabilized as the supply side of the equation clears, but attention will now turn to demand and the collapse as a result of the coronavirus outbreak. That has yet to be quantified and means there are still downside risks to oil despite a big chunk of the extreme supply risk premium priced out of the equation.
There’s certainly not much breathing room for energy bulls who are suffering from an intoxicatingly bearish headline overload, all courtesy of Wall Street's biggest energy house analysts who are unwilling to move off house views yet.
The immediate focus will shift to US crude inventories and these builds are likely to test the limits of storage capacity, potentially forcing prices much lower again. In the US, storage at Cushing (the WTI pricing point) could well reach its maximum next month. That's when logistical constraints and refinery run cuts could push North American prices much lower still and force widespread supply shut-ins in the coming months.
The Australian Dollar put on a scintillating performance overnight, apparently leaving many scratching their heads. Still, the A$‘s strong correlation to all things gold may have carried the day.
The Australian Dollar has several things in its favor at present, being far too weak versus its G-10 peers notwithstanding. Statistically, the virus is much less of a problem in Australia as infections per capita are well below half of the US and most of Europe. And it's not like Australia is merely playing catch-up - virus growth has already moderated plenty and is amongst the lowest in the world (2% in recent days). A result of excellent medical management and the combination of early containment and a quality health care system put Australia head and shoulders above many – not to mention the excellent fortune of being an island and able to control inbound people flows more effectively. One risk to watch: Australia soon approaches winter.
The iron ore price is resilient and there are tentative signs of a relatively quick return to activity in China, which could bode well for Australia. Last Tuesday, Bloomberg reported that Rio Tinto Group's iron ore business is seeing pretty normal demand levels. Iron ore unit chief executive officer Chris Salisbury told 6PR radio that Rio Tinto is "pleased China has come back so fast" – the mining giant sells more than 70% of its iron products to China. Meanwhile, there’s an evident recovery in copper prices, which also supports AUD.
Portfolio outflows may abate given Australia's more restrained QE; the bond yield is relatively high in the wake of the collapse of North American returns. And since the struggling AUD has exaggerated the fall in local equities, we may even see the repatriation of foreign investment funds if the Australian Dollar continues to strengthen, adding to the domestic equity market allure.
But here’s the big kicker of near-term flows: The Australian Dollar has been the best performing G10 currency over the past two weeks, gaining over 4% versus the US Dollar. For the most part, AUD/USD has closely tracked the S&P 500, or broad risk sentiment, in line with its typical historical beta. Still, many analysts will be quick to point out the Aussie move could be short-lived and head back towards mid-March levels if equities turn lower. But the S&P 500 fell overnight and the Aussie dollar still pushed through 64, suggesting that it's attracting some attention and, at a minimum, could cause bearish hedge fund bets that are dominating IMM positioning to second-guessing.
But the latest round of fiscal stimulus allows eligible people to access A$10,000 from their pension funds with no penalty between mid-April and fiscal-year-end, as well as in the next fiscal year (after June 30). In preparation for these withdrawals, domestic funds need to sell overseas equities and convert the returns to local currency, which should result in more upward pressure on AUD.
The Malaysian Ringgit
The Ringgit struggled for traction after the watered-down OPEC+ deal provided little immediate solace. However, traders will likely sit tight waiting for China to release Q1 GDP as well as March retail sales and industrial production.
While the market is moderately bearish, with EM local currency flows stabilizing and investors looking for opportunities to redeploy capital, Malaysia remains a viable decision for bond inflows as real rates are high. Also, the market is far from pricing the 100bps of easing that I’m thinking will happen with the extended MCO, which should also trigger more MGS demand.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies