Outlook: If the Bank of Canada says, "The outlook is too uncertain at this point to provide a complete forecast," who are we to argue?
Stock markets: Several weathered traders and keen students of the market were quick to point out last night's price action echoed the false starts seen in the 2008 recovery.
Oil markets: The market is gradually leaning towards a combination of deeper OPEC+ cuts and a more assured response from the G-20 producers to avoid a further collapse in oil.
Gold markets: Investors continue taking refuge from the storm under gold’s umbrella, but demand was getting crowded out a bit by a firmer US dollar and demand for US treasuries.
G-10 FX: A dreary night for the commodity riskies as sentiment was clobbered not only by the fall in oil prices but compounded by a series of horrific US economic data prints.
Asia FX: A triple whammy of negatively hit the Ringgit as oil demand collapses.
The Bank of Canada Governor Stephen S. Poloz and deputy Carolyn A. Wilkins are arguably two of the best economic forecasters in the world. So if the Bank of Canada says, "The outlook is too uncertain at this point to provide a complete forecast," who are we to argue?
We shouldn’t try to predict the future, just interpret the present. So, try to survive the short term with some capital to be in a position to ponder the future.
US equities were weaker Wednesday, S&P down 2.2% with slightly larger falls through Europe and following weakness in Asia as well. US 10Y treasury yields saw the most prominent daily change since 27 March, falling 12bps to 0.63%. Oil fell a further 1.2%, recovering a bit later in the session after falling to a fresh 18-year intraday low. US data likely added to the negative tone; retail sales fell 8.7%mom and industrial production fell 5.4%mom, both for March and both weaker than expected. The NY Fed manufacturing survey plummeted 56.7pts in April.
Several weathered traders and keen students of the market were quick to point out that last night's price action echoed the false starts seen in the 2008 recovery due to worsening economic data even after the VIX peaked. These memories suggest sentiment may only shift more favorably again when we have a sustained ex-China exodus from lockdown.
With most of the market participants still looking for bear, tumbling oil prices mixing with the dreary US data provided the toxic elixir to send markets toppling. But retail sales weren't that bad if you look at the underlying numbers, while the Empire number – though technically worse than expectations – largely confirms what we already know.
Still, equities have been under continuous pressure, with e-minis ominously matching 24 hour lows at the Asia open. Not only does this suggest policy has stopped papering over the economic cracks, but with central banks tapped out we could be back to bad news is bad news once again.
The EIA reported the most significant weekly crude US inventory build ever - at 19.25mb - showing why the OPEC+ deal won't be enough to stabilize oil prices.
Global inventories near capacity and filling fast will require additional cuts (from OPEC+ or elsewhere) to avoid another step down for oi prices. However, the massive storage build – as counterintuitive as it sounds – did provide some price support as the build also foreshadows that more wellhead closures are just around the corner, which effectively trims US supply.
It was a pretty gloomy picture painted by the both the EIA inventory data and the IEA's monthly oil market report. The EAI expect 2020 oil demand to be down 9mb/d (UBS estimate 7.5mb/d), with April expected to be the worst month this year.
Despite the OPEC+ deal, the IEA expects global inventories to rise by a large 12mb/d in 1H20, potentially saturating not just storage capacity but overwhelming shipping and pipeline infrastructure. Use of strategic petroleum reserves in China, India, South Korea and the US could add about 200mb of temporary storage, but this only buys a few months of wiggle room.
With prices holding and not dropping further, implied in this sentiment is not only a more rapid pace of shut-in within the US shale industry but the market is gradually leaning towards a combination of deeper OPEC+ cuts and a more assured response from the G-20 producers to avoid a further collapse in oil.
Investors continue taking refuge from the storm under a gold umbrella. Still, demand was getting crowded out a bit overnight by a firmer US dollar and demand for US treasuries. However, gold remains supported by Covid-19 driven safe-haven demand, which remains bolstered by the unprecedented fiscal and monetary stimuli around the globe.
The US Dollar
A dreary night for the commodity riskies as sentiment was clobbered not only by the fall in oil prices but compounded by a series of horrific economic data prints from the US which confirmed yesterday's IMF report and left little to interpretation after inking perhaps the most profound doom and gloom scenario yet.
Indeed, it raises more than a few questions if risk sentiment did jump the gun. And with the S&P 500 gapping lower in rapid succession, risk-off emotion has triggered another wave of haven demand for the US dollar as the market's infatuation with the Greenback (USD) endures.
Commodity currencies weakened dramatically as oil prices started to shake the trees late in yesterday's Asia session. WTI dropped below $20/bbl to the lowest since 2002 and sent commodity block currencies tumbling; the Kiwi (NZD) cratered 1.8 standard deviations, the Aussie (AUD) folded 1.6 stdev and the Loonie (CAD) toppled 1.6 stdev.
But the commodity bloc of currencies was struggling for traction as industrial metal prices failed to launch after yesterday's surprise PBoC rate cut yesterday. It’s pretty much a foreshadowing of nastiness to come and London FX traders predictably showed the dollar bears all the mercy of a Greek tragedy.
The Ringgit’s oil price sensitivities have taken center stage this week as oil prices collapsed. However, the 180-degree pivot in risk sentient, which triggered a steep decline in global equity markets, has sent investors back under the umbrella of the US dollar to wait out the storm. In this risk-off environment, traders will continue to shun risky assets like the MYR, preferring the safety of the US dollar and US bonds.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll