Asia Open: Bad news equals good news for markets

Market Analysis / 8 Min Read
Stephen Innes / 15 Apr 2020
City skyline in the backdrop covered by a neon chart

Stock Markets: Flattening infection curves and thoughts of more stimulus lifted all boats; it feels like 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations.
 
Oil Markets Even with a new OPEC+ agreement, oil is likely to remain under pressure as the OPEC ++ deal in its current format sorely disappointed relative to market expectations, even if executed to the letter
 
Gold Markets:  Gold has been putting in a sustained rally in active trading and bulls won betting the trifecta into key US earnings. They were quick to take profit, but debasement resonates.

G-10 FX: The improved risk tone has lifted all currency boats, even more as cross-asset volatility is declining.
 
Asia FX: Yuan hampered by this week's data deluge and rate cut banter while the Ringgit frets over oil’s gnarly predicament

A peek into the crystal ball: Behind the headlines the most gnarly and thunderous storm clouds are building, suggesting there is still much to be worried about

Stock Markets

At first glance this morning, with the S&P 500 soaring overnight, one would think that a V-shape recovery in markets is underway. However, appearances can be deceiving as behind the headlines the most gnarly storm clouds are building, suggesting there’s still much to be worried about.
 
But flattening infection curves and the thoughts of more stimulus lifted all boats. And regardless of whether I think we’re in la-la land, it is what it is. 
 
In the US, there’s been a noticeable leveling off in coronavirus cases in several states. Most encouraging, perhaps, is Louisiana, where social and comorbidity issues threatened to create a large number of deaths. In terms of the broader impact on the economy, infection rates appear to be under control in most of the heavily-populated states. Likely encouraged by this hard data, President Trump is set to make an important announcement in the coming days regarding state guidelines on reopening the economy. Suggestions are that he's going to throw the White House's weight behind reviving the US economy, which was received well by investors and added to the bullish momentum. 
 
The US data was terrible but the markets are in a time warp; it feels like 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations.
 
Oil Markets 
 
Even with a new OPEC+ agreement, oil is likely to remain under pressure. While the deal is a vital acknowledgment, a free market for oil is troubling in a Covid-19 world and the return of supply-side management is an essential step towards recovery in oil prices.

But the deal in its current format sorely disappointed, relative to market expectations, even if executed to the letter. But even more worrisome is that it failed to address the immediate structural oversupply, leaving oil prices vulnerable – especially with even the most bullish oil traders worried about backing the wrong horse at current levels. Markets believe the deal won't come close to offsetting demand devastation and isn't even large enough to eat into what's in storage.
 
OPEC has a deal, but you'd never know it from the price as WTI threatened to move below $20 overnight only to recover slightly on the news that President Trump will make an important announcement in the coming days regarding state guidelines on reopening the US economy. But, frankly, I don't even know if that’s good news or not; with medical experts chiming in it might be unrealistically optimistic for many areas of the country.
 
The market, meanwhile, remains in an extreme contango. Half of the curve's steepness has happened in just four months. Such is the extent of oil in storage, if OPEC (and other producers) want to get a handle on the market again, they need to flatten the curve, not hyper invert it. The bulk of the cost of oil isn't the cost of crude oil – it's the cost to store it. The curve is showing that even with an assumed economic recovery in just over a month or so, that oversupply will again be a significant concern – especially as most estimates suggest there's only a month or so before storage fills up and Dated Brent starts to head back towards zero.
 
And, unmercifully drilling home this oversupply concern, this morning’s API inventory data revealed a massive weekly build of over 13 million barrels in US crude supplies. If the EIA data confirms a hefty build oil, markets will likely show the oil bulls all the mercy of a Greek tragedy.  
 
Gold markets 
 
Outside of some profit-taking venture, gold has been putting in a sustained rally in active trading. Overnight bulls won betting the trifecta into key US earnings as the bulk of the overnight gains came from front running into the US open as gold at one point hit all the high notes. But traders were quick to book profits. 
  
Massive profit-taking ensued and even shorts are building as the stock market surged with evident signs the Covid-19 outbreak is leveling off. But positions started to melt more aggressively with President Trump expected to herald in the opening of some parts of the US economy. So now we're trading back towards yesterday’s Asia market highs where some tentative support is filling out the stack. 
 
The Trifecta 
 
1) Bleak economic outlook 
2) US$ printing presses working on overdrive (debasement)
3) Weaker US dollar
 
The real economy is grim, suggesting the Feds will keep the printing presses working on overdrive, which should eventually weaken the dollar, all of which indicate gold could rally beyond current levels. And even more so considering the extent of policy easing as opportunity costs evaporate and massive deficits lie in waiting.
 
Debasement
 
Today, fiat currencies are not based on gold so it only requires that the government print more money – or in the Fed’s case, since money exists only in digital accounts, they can simply create more electronically by adding a few more zeros to their digital bank book ledger. 
 
As such, within the next two years traders expect the world will face the most massive wave of asset price inflation/fiat currency debasement in recorded history. Once the economy returns to pre-pandemic all-systems-go mode, the incomprehensibly large global stimulus will find its way into every nook and cranny imaginable. All of which should support gold.

Currency markets
 
The US dollar weakened as positive risk sentiment return to the market. The improved risk tone has lifted all currency boats, even more as cross-asset volatility is declining.
 
The Euro
 
The Euro is higher as European bond yields help float the Euro with virus worries in the region ebbing and providing good measure.
 
The Australian dollar 
 
The Aussie continues to revel in the positive risk sentiment as industrial metals got a lift from yesterday's China trade data. There was some profit-taking ahead of the US session, given the uncertainty around Q1 earning, but it was clear sailing after risk lights turned green with US equities climbing the ladder. 
 
6450 is a formidable level that needs to be cleared before the March gap lower gets filled. However, when we move above 65 the big stops get triggered. 
 
The Yuan 
 
The Yuan is getting held back to a degree by the bid economic data day on Friday and rate cut banter. But the latter should be playing out more positively as interest rates cuts should drive more equity inflow.
 
The Ringgit 
 
While the pandemic curves are stabilizing and supporting risk sentiment, unfortunately for the Ringgit oil prices are not and the prospects of further oil price declines could continue to hamper the Ringgit recovery. 
 
A peek into the crystal ball
 
The VIX has fallen, but the shape and level of the volatility curve remain elevated. Governments aren't freely talking about exit strategies; they’re only commenting because the media is hounding them. Some governments are extending lockdowns. 
 
Tremendous efforts have been made by the official sector to stabilize economies and markets – higher and faster than in 2008/09 and, in some cases, such as the Fed's credit purchases, beyond what was thought possible – but it would be wrong to suggest that blue skies are ahead.
 
Equities have gained but participation is low and nerves are frayed. The positioning has increased over the last couple of weeks but remains as low now as it has been at any point in the previous 12 years; the S&P's 20% gain has been achieved without real involvement from a broad array of investors. There's a concentrated bid from a select group – corona rebound short-covering group, the omnipresent technology group that loves cheap money, and the thriving "stay at home group."
 
The latest fund manager survey from Bank of America Merrill Lynch (BAML) showed cash levels among investors edged higher in April, going from 5.1% to 5.9%, the most since 2001, Bloomberg reported. The survey also showed client equity allocations at their lowest since March 2009, per Bloomberg. Discussions about cash on the sidelines will arguably ramp up.
 
In terms of risk, the survey identified a recurrence of the virus as the most prominent tail, with 30% of respondents still fearing a systemic credit event despite central bank action, Bloomberg said.

Those believing in a V-shaped recovery are in the minority (15%), with 52% expecting a U-shaped recovery, Bloomberg said. The survey was conducted between April 1-7.

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