US equities were weaker Tuesday, with the S&P 500 falling 0.5%; European equities did better, Asia was mixed and US 10Y treasury yields fell 5bps to 0.61%. And the front contract WTI oil was down 3.4% in another volatile session amid the concerns of storage capacity.
A positive start to the week supported by the reopening of economies around the globe and central banks pledging to monetize all debt fizzled out in a ticker-tape of red. Stock market leadership – including the technology darlings Facebook, Amazon and Netflix – scrunched as a combination of earnings letdowns and a gnarly drop in US consumer confidence, provided the "bitter pill."
The news flow elsewhere has been generally limited. But amid concerns about supply-chain disruptions hampering food supply chains, President Trump may invoke the Defense Production Act to compel meat-processing plants to remain open. The French and Spanish governments provided a detailed plan to ease lockdown restrictions, with a range of businesses allowed to reopen in France on May 11 and Spain detailing a four-stage process over the next two months.
The whole idea of returning to work has aroused the fancy of many an investor. And while no one expects the global economy to immediately time shift back to January 2020, market reopenings are positive. But roads less traveled these days are bound to be fraught with numerous potholes, none more so when economic reality checks set in entering the month-end portfolio rebalancing period ahead of the most prominent policy setting central banks, the FED and ECB, set to deliver what will likely be a sombre but hopefully sobering outlook.
Over the next few weeks, markets are going to struggle for direction while the debate over easing lockdown restrictions continues. Fundamentally, investors are caught in the same pickle as governments who have to balance the economic risks with the chances of the second round of infections. Until there’s some way to ease lockdown restrictions without the specific risk of a secondary spreader, expect the market to remain stuck in the current range or even possibly a more extensive downside range until the full course of exit strategies plays out.
Honestly – and I’m a buyer – I was utterly perplexed by yesterday's inexplicable move through the SP500 2900 level.
Before I turned the machine off last night (I’m tuning out of the market now at 5pm religiously and focusing on family life 100%) I’d resigned myself to the fact that we’re in for an unprecedented level of uncertainty going forward as economies reopen to the reality of gloomy hard data suggesting markets will struggle for a steer more times than not.
Last night’s shift in the market darling's sentiment suggests the never-ending debate will ebb on whether a handful of mega-cap stocks supporting the market will catch down to their laggard peers or if the inverse plays out.
Many of the recent outperformers were market darlings before the corona crisis. Still, one worrying concern is investor crowding as the tech giants' recent gains have led to a surge in already-elevated market accumulations.
While this week’s SP500 bounce through 2900 provided excellent optics, under the hood activity remains super thin, with most sector’s trading volumes down 35% versus average with the buying splurge dominated by perma bids in the macro community.
It was hardly a resounding vote of confidence with the stocks rallying on the narrow market breadth and weak participation. Which, on the surface, suggests if you’re buying and holding shares at the current levels, you’ll probably need to have the patience of Jobe to see this one through.
As expected, it was another rough week in the oil pits.
Although the Brent June contract expires on Thursday (July trading at >$23/bbl), it was the front-month WTI that set the tone once again. That dramatic move in June US oil appeared to be mainly because of a change in the exposure in the USO ETF, reducing its prompt exposure and shifting money further along the curve.
This additional noise around the USO, however, adds to the fundamentals which are that we’re probably at base demand as several large economies are now considering 'exit strategies' or a 'new normal' and lifting restrictions. All the while, OPEC+ quotas are due to kick in on Friday and May 1 will probably take weeks to show up in the physical market. Hence we’re still stuck with the inventories issues that will continue to curb any semblance of bullish appetite over the near term.
As far as July pushing higher, there’s extraordinarily little substantive news, so I’m surmising fast money is moving in on weakness. OPEC+ cuts start soon and should provide some semblance of support, but the inventory gluts which could continue to build will likely make purposeful upside little more than a grand illusion at this stage.
Gold gains reversed on profit-taking as risk-on sentiment increases and equities firm, although finished weaker into the close of business in the US markets.
The USD weakened yesterday and this initially supported gold which rallied in European trading; London macro has been right buyers of bullion of late. However, gold couldn’t hold gains in the US. Perhaps one important reason is the ongoing discussion in the media concerning the exit from the lockdown.
Since failing to retest USD1,746/oz set in mid-month, gold has eased. Profit-taking exacerbated by the prospect of a loosening in lockdown measures provided good cause to trim long positions.
But, in a world of gnarly economic and real-life news flows, gold declines are likely to be limited given the favorable opportunity cost to warehouse yellow metal with interest rates at zero across the board.
And as the dust settles on the first shockwave from the virus and with a massive rise in government debt and ballooning deficits pointing to either a debt trap or hyperinflation. It all suggests that in Q3, as the US dollar most likely falls, you may look back at bullion at $1700 with nostalgic longing.
The US Dollar
The USD is aching to sell-off. Funding is normalized, volatility is dumping, US equities are flat to the rest of the world since mid-April, and the month-end rebalance signaling a multi-branched USD sell signal.
If you like the USD sell-off theory, though, the issue becomes the choice of the numerator, hence the reason why advocating selling the dollar in small doses in a selective manner is the distinction of choice. I’m sticking to what I know rather than what I don’t .
Although the current EURUSD relief rally extended overnight on a perplexing risk rally in Europe, the EU stimulus plan looks far too slipshod and infighting continues. While Italian spreads have tightened, it’s not 100% clear how the North vs. Club Med divide can narrow. Plus, there’s hardly a crumb of economic recovery to digest.
The Australian dollar
If you read my blog, you know I’ve been active and bullish on the AUDUSD since 55. But tremendous resistance 0.6600/0.6700 lies in wait and, since we just came from 0.5500, on the surface today long A$ does not look like great risk-reward value for new money. Also, May has typically been a lousy month for AUD over the years for reasons I really cannot explain. On the other hand, if everything is getting better and vol is collapsing, maybe AUD goes to 0.7000? It’s not an unreasonable proposition.
Gold and Silver
Yes, I trade them like currencies – they always make sense to own.
The Malaysian Ringgit
The Ringgit's oil price sensitivity continues to steer the MYR tanker, although petrol linked currencies are ignoring the plight of the front-month US oil and focusing on July Brent. With economies emerging from lockdowns and OPEC production cuts set to take effect this week, suggesting demand has troughed. Supply has more than peaked which, from a fundamental perspective, should provide some semblance of comfort for the Ringgit, which for the time being remains in ball and chains to the MCO order – not unlike many of its regional peers.
But for Asia FX risk, not unlike G-10 risk, you want to gingerly sell the dollar selectively as the divergence between North Asia FX and Southeast Asia FX becomes more notable via the difference in governments reopening strategies.
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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