Investors took an untimely ride on the COVID-19 roller coaster
The S&P gave up nearly 100 points on the day as the two-day stock market rally petered out. US equities came off pretty hard in the US afternoon session despite substantial gains in Europe and Asia. US stocks had been higher for most of the course on good volumes with a notable increase in Hedge Fund participation, heavily skewed to the buy-side, covering shorts in banks, industrial and airlines. But markets came under pressure in late afternoon trading, coinciding with a sharp slide in oil prices, which ended the US session almost 10% lower.
Sure, the oil market slide got the bus rolling downhill but, with investors focused on COVID-19 curves, when New York – the epicenter of the US outbreak – announced 731 deaths overnight, its greatest single-day count, and suggested there could be a "lag" in reporting, the equity market rally bus hit a brick wall, leaving investors to execute their much-practiced version of a position cut and run. All of which left investors scratching their heads again, trying to balance out the government's positive fiscal response in light of what the economic damage will be to a possible extended lockdown scenario.
Trying to factor in the mix of epidemiology, psychology and politics is troubling. And while we know economic data is missing or poor quality, if the COVID-19 data proves to be unreliable then we’ll be in a world of hurt, afloat in a sea of red on a rudderless ship – especially with investors trading on sentiment rather than the economics for now. So, with questions of reliability getting priced into the equation, this could gnawingly remain front in center on investors' minds over the short term, so it's likely to be a wobbly open in Asia today.
But assuming the reporting lag was a one-off event, the buy-in yesterday suggests there are some big funds looking to put money to work as arguably there’s a ton of cash on the sidelines. And with thoughts that we're probably closer to peak COVID-19 than not, the bids will probably come back, provided the NY state data proves reliable from here on out. The plunge could be limited.
Most COVID-19 curve watchers thought the forecast as far back as mid-March was that cases in NY were set to peak in mid to end April. So investors were taken by surprise this week as the earlier than expected leveling of the case count data is being consumed more readily than a hard-to-evaluate economic forecast.
But there's still a series of good news stories around the world, suggesting staying at home is the one practice that flattens the curve faster than people understand. In Europe, Austria and Denmark announced timelines for ending their lockdowns. Spain and Italy, which represent well over half the fatalities on the continent, have reported signs of improvement.
Oil prices plummeted overnight after the US Energy Information Administration lowered its 2020 forecast for West Texas Intermediate and Brent crude prices, sending oil traders into a frantic selling tizzy. The stark reality is setting in that the proposed production cut deal is unlikely to be anywhere big enough to offset the unparalleled demand devastation.
The current figures being discussed – OPEC+ at 10Mbd plus 5Mbd from other producers where the US position appears to be that shale production is already falling, and that’s how it will contribute with possibly offering up adding storage space – is probably not enough to save 2Q over-supply.
So now the challenge remains the extent to which producers are willing to cut, or even logistically how fast they can cap the wells, as 2Q looks over-supplied by 30mb/d on an 18mb/d demand decline, suggest filling storage in 2Q remains likely unless producer can pull off a much deeper cut.
This view was echoed by Fatih Birol, head of the IEA: "Even if there was 10m b/d of cuts, in our view we could still see a building of stocks of 15m b/d," Mr. Birol said. "I see that there is a growing consensus that this [the G20] is the forum to address this problem."
At this stage of the drama, all eyes and ears remain trained on both the actual US response and the outcome of the OPEC+ virtual meeting. Fingers remain crossed over a plethora of cross-asset markets that the producers can formulate a response that puts a floor under oil price, as the recent prices in the $20s reflect the dual demand and supply shock and is not sustainable for any of the primary producers.
With millions of jobs and the stability of the global economy at risk, someone needs to compromise, or it will leave the industry in tatters.
It's been another secure day buying of gold, although we are about $25 off the overnight highs. But one has to believe market makers who were asked to reduce their short position trading risks as the volatility on EFP mushroomed again and has some play in a gold surge at yesterday’s Asia open when EFP peaked at 65.
With Swiss refineries reopening this week, the production rate is low compared to actual physical demand due to manpower issues on the ground. While this will gradually decrease as more return to work, supply chains/logistics are always challenging. The commercial airlines being grounded suggests that market makers will continue to hide in the pipes, only entertaining client demand at a premium and undoubtedly little interest contributing to the ECN market unless it suits.
What’s a bit troubling for price action this morning is that gold has been non-reactive to the slide in US equity markets – even more so given the fact the DXY remains below 100.
The dollar suffered a sharp correction on Tuesday, starting at the European Open in a seemingly delayed reaction to Monday's substantial US equity gains. Both DM and EM currencies have risen as risk-on sentiment has squeezed safe-haven dollar positioning. But some of these gains were pared as the US equity market turned tentatively sour.
But what’s critical, and suggests the USD liquidity strain is greately abating, is that traders will find it reassuring that expected correlations seem to work, i.e. the dollar strengthening during risk-off times but then weakening during recovery phases. This will give them much more confidence to sell the dollar when risk turns on. In the meantime, we should expect the USD to turtle anytime soon as the greenback is effectively the ultimate safe haven and continues to trade as such at the moment.
The Ringgit remained held hostage and tethered to the oil price yo-yo as all ears and eyes remain trained on this week's OPEC+ meeting. But the outlook remains slightly positive, nudged along by the government's stimulus efforts and signs that the COVID-19 crisis is abating in some hot spots around the world.
But more important in this view is that China is coming back to life, so there should be a decent export market awaiting the Malaysian industry when the people emerge from the MCO.
Rich countries that competed over commodities and shipping lines will now fight for control of cloud computing and data processing.
China, South Korea and Japan are on the cusp of transition, making their capital market high ports of entry. And as the supply chains geographically concentrate, the more populated markets in Asia are where “the too big to fail” trades continue to resonate. Admittedly I'm way too early on this trade, but in my view proximity becomes the next competitive advantage.
But to take this proximity view a step further, and in light of the extreme USD dollar funding pressure of late, with China now the largest trading partner for most Asian economies, RMB becomes the natural choice when thinking about alternatives for businesses that have struggled to source dollars as this crisis unfolded.
China's policy thrust on RMB internationalization has been in play since the big push on Belt and Road initiatives. But with globalization giving way to internalization, there could be a more significant role for the RMB in settling corporate invoicing in Asia. This would be a welcome respite, leaving corporates free from dealing with the arduous and unpredictable task of hedging USD risk. Even more so as proximity trading partners will be the key input to tide the local economies over as they initially see the virus pass.
Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot