Global markets trembled on Wednesday as a disquieting rise in coronavirus infections shattered investors' dreams and now pose a clear and present danger to a nestling economic recovery. France is quickly turning back the clocks to spring while taking a frightful step back into Covid's economic abyss.
The Covid blade only cut one way overnight, with few willing to catch the falling knife. It's been an exceptionally rough day for the oil sector – and broader markets in general – as the lockdown lambaste wholly flipped the reflationary narrative.
A lack of buying, compared to outright selling, was notable and even the wall of money appeared unwilling to add risk ahead of next week’s US election. Still, it does feel like equities are at a point of maximum pain with other asset classes (i.e. industrial metals) behaving relatively well.
While the market is clearly in the process of resetting Q4 expectations, the potentially favorable tailwinds of a vaccine, a Brexit deal and cleaner positioning cannot be overlooked.
History tells us mobility restriction sell-offs can be harsh even if the economy's incremental negative impact is mitigated through targeted lockdowns. But what always tends to come through like a chocolate cake with a cherry on top – especially when the markets are in their deepest despair – is that stimulus always seems to save the day.
With the world facing a second wave of infections compounded by an unknown level of disruptions and costs – framed with that gnawing fear that governments and central banks alike are so deep into their tool kits that some policymakers remain hesitant to unleash bazookas – it’s all the more critical that the showcased responses to the indeciduous flu bug are seen to be overdelivering.
European policymakers have a chance to make one of the biggest transformative policy splashes in the history of the Eurozone. And if there was ever a time to make a clear, unambiguous and unified statement and bear the burden of the crisis debts, it's now.
It’s time to do away with the inane debate over the "rule of law" conditionality that threatens to delay implementation beyond the Fund's touted 1 January 2021 start date. And for those member states willing to spend grants but not draw down on the Fund's loan facility, it’s also time to indicate that they’ll use the RRF as policy markets will need to use every option in the EU Recovery Fund’s arsenal to buttress the economic free fall from this second wave.
Oil price action is looking mighty ugly. The proximate cause of the overnight meltdown was the DoE numbers, which showed a massive build in crude oil stocks of 4.3m barrel, well ahead of the 1.1m build expectations.
As lockdowns begin to bite on demand concerns across Europe, the near-term outlook for crude starts to deteriorate. With that in mind, it's worth mentioning the spread between Brent and WTI has narrowed in recent sessions and is at $1.66 per barrel now compared with $2.25 a couple of weeks ago. That makes sense with the European nature of the lockdowns so far. Still, the fundamental issues of delivery and storage in the WTI space haven't gone away, and if we stay on this demand trajectory don't be surprised to see some sharp losses in the coming weeks.
Crude stocks increased 4.3mb on the week due to the return of shuttered crude production and still-weak refinery throughputs. At the same time, oil stocks at Cushing (where NYMEX WTI settles) fell for the first time in six weeks. But that explanation merely sugar coats the ugly looking forward narrative. However, it might provide a sufficient impulse for some buying interest in Asia, whether profit taking or opening up new longs; WTI 36.45-95 has proven to be a decent "buy zone" back to the beginning of September. But if that zone gives, it could be bottoms up for the oil bulls for a while.
Oil markets are such an emotional roller coaster and the worrying aspect for me is the overall level of market angst. The return of the "Sudden Stop" economic nightmare will play a considerable role in the oil market's mindscapes over the next few weeks, and it’s this fear that keeps traders awake at night.
Overall, traders worry when US oil stocks are still 42mb (9%) above their 5-year average. It's also hard to get bullish when expectant demand could fall off the cliff as more lawmakers increasingly feel pressured to impose more stringent mobility restrictions.
Unfortunately, policymakers find themselves in the most unenviable place of choosing between saving the economy or healthcare concerns. And the policy lines get struck around the most sensitive commodity of them all: human lives.
Fortunately, oil has OPEC+ to lean on and OPEC + decision branches are relatively straight forward. From here, if there’s unequivocal proof that global demand is contracting due the lockdown, OPEC might be tempted to make deeper cuts. But with the Covid beat-downs and Libyan ramp-up, I think it would be a safe bet that OPEC+ would choose to delay the two mbd tapering decision well into 2021.
Oil is not going anywhere until we get a vaccine, and even then the bottom line for oil is relatively straightforward. It’s hard to imagine any scenario in the near-term where air travel gets back to pre-pandemic levels; after all, who wants to get stuck in a country halfway around the world in another national lockdown waiting for the next government repatriation flight to return home?
United States Dollar
The US dollar is trading a bit firmer today as European and US equities fall on concerns over rising Covid-19 cases on both sides of the "Pond." But it's the laundry list of worries, be it pre-election caution, US Congress’s failure to launch (stimulus) or France and Germany lockdown concerns, risk aversion demand for the greenback is nothing new. Under these conditions, the US dollar tends to shine bright as the cleanest shirt in that dirty laundry. But the Euro is holding up ahead of what should be EU government signaling that fiscal support is likely to be held for the duration and the month-end buy Euro rebalancing signal.
As such, the JPY is holding the safe-haven bid with USD and EUR appearing more vulnerable to the latest Covid onslaught.
Aussie is trading at a nine-day low on a combination of a beaten-down US stock market after risk sentiment went in the tank overnight and the omnipresent "Trump Shy Voter Syndrome."
The US election outcome is more important for AUDUSD, with expectations for fiscal stimulus (most significant under a Democratic 'blue wave') a potentially crucial offsetting factor to domestic monetary policy. However, a Trump status quo (harmful for China-sensitive assets like the AUD) or a Biden presidency with a split Congress could lead to commodity price-sensitive currencies like AUD underperforming on more limited fiscal expectations spending.
Offshore yuan extended its three-day slump as long yuan speculators trimmed risk after the third PBoC currency pushback. The sell-off was marginally offset by month-end exporter USD selling after the PBoC suspended the counter-cyclical factor (CCF) in the USD-CNY fixing mechanism on 27 October. That followed an earlier announcement to remove the 20% reserve charge for long USD forward transactions with effect from 12 October. The market firmly believes these recent actions suggest that FX policy is now neutral, rather than implicitly tolerant of RMB appreciation as before.
For now, CNH becomes USD dollar trade following G-10 risk vagaries. And the CFETS will likely be held in rigid band ~4% range (92/96) since 2016 despite tariffs, Covid and various other markets "risk-off" CNH implosions.
Gold started on the defensive and racked up further losses. Initially, the USD was slightly firmer in response to Europe's falling equities on concerns over rising Covid-19 cases on both sides of the Atlantic. That seemed to provide a level of anxiety for gold investors.
The bullion market is likely to be volatile until the elections; ultimately, the falls will be limited by easy global monetary policies. But any further equity-related margin selling has to be squeezed out of the gold market first, which will only occur when the equity markets stabilize and start to reverse higher, which is similar to the March 2020 playbook mentioned in yesterday's market opening analysis.
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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