London Open: Risk sentiment remains key amidst economic strain

Market Analysis / 5 Min Read
Stephen Innes / 16 Apr 2020

London Open 

Caution ahead
 
Any recovery in risk sentiment depends on how quickly economies can reopen without risking overloading their healthcare systems and, most of all, not risking any chance of a secondary spread. The risk of escalating economic damage is putting enormous stress on governments already under immense pressure to relax social-distancing measures sooner rather than later.
 
Milestones, but fewer tombstones
 
We just hit another grim milestone of 2 million virus cases around the world. But, fortunately for risk sentiment, it hasn’t translated into a proportional rise in tombstones.
 
PBoC: More cuts to come
 
Vice Premier Liu He on Wednesday chaired a State Council Financial Stability and Development Committee meeting where China's top policymakers acknowledged the growing headwinds facing the economy. They pledged to target both supply and demand in implementing various measures to support the real economy, the report said. After the People's Bank of China cut the 1y MLF rate by 20bp on Wednesday, the market is expecting the 1y LPR fixing and TMLF rate to fall in tandem later this month.
 
Currency markets 
 
Much to my chagrin the USDCNH continues to weaken off on more rate cut expectations, throwing a spanner into the China reflation trade narrative. But when it comes to trading currencies, it's less about where they've been and much ado about where they're going. 
 
But the potential for supply chains moving away from China, with Japan moving the first internalization, is starting to become more of a reality. In its emergency economic package outlined on April 7, Japan's government pledged about $2.2 bn to assist domestic companies either move production home or into their production bases in South East Asia. It's throwing a number of Asia currency strategies helter-skelter.
 
Australian employment data was better than expected for March, but these notoriously volatile data should be taken with a pinch of salt. Employment rose 5.9k in March (cons. -30.0k), driven by a rise in part-time work (+6.4k). The Aussie was nonreactive to the better print, correctly choosing to focus on risk sentiment today. We could see several false starts on a bullish A$ trade as we may not see a recovery in base metals until there’s a sustained ex-China demand recovery. So I think it will be a battle of the betas; AUD is very sensitive to global risk sentiment using the S&P 500 as a proxy beta vs. expectations of a recovery in SE Asia – and when those both eventually align, the Australian dollar marches higher. 
 
As for the economic data, any sage economist will tell you that the range of economic forecasts is absurdly wide by historical standards and suggestsg the median is moot. Economics is never precise, but there are two enormous challenges at the moment; economic data is either not timely, or is timely but wildly unreliable. Ultimately, using dodgy data in economic models produced dodgy results so I can't see the market getting overly flummoxed by scary US employment data.
 
Gold 
 
It was a quiet day in Asia on gold, and the longer it stays quiet the more chance there is for a sell-off as positioning remains stretched. Still, the market bias is to buy XAUUSD on dips to $1,680/1,700. A break of $1,750 is needed to open things up for a move to $1,800.
 
Musings 
 
I was reading a new research report from Goldman Sachs; China: Infrastructure – a new prospect, a year of acceleration:

"In the coming years, we see infrastructure in China as no longer just about roads and bridges, but also about new technologies including artificial intelligence, 5G, industrial IoT, EV charging stations, etc. In the next two years, we look for an acceleration of investment in both traditional and new segments, with total infrastructure spending growth to reach 12.1% in 2020E (from 6.2% in 2019), followed by 5.6% in 2021E." 
 
I don't think it’s early to start to think about what the new world order will look like, maybe even as soon as Q4. 
 
The New World Order ( republished from April 3 AxiWeekender)
 
Things will eventually recover but possibly not in our parent's lifetime. The world was already questioning globalization before the virus, so many projects that were previously considered domestically unviable will now be reconsidered. But this will take years to install the necessary multi-product robotics that can manufacture multiple product types, energy production, and storage, high-speed data transfer, nanotechnology.
 
Export-led economies in Asia that previously had a labor market cost advantage will find they become net importers of improved technology from abroad; a short term role reversal will occur. Still, it will be necessary for local governments to spend more on high technology education to ensure they can improve and build on technologies. 
 
The oil war and the Covid-19 economic fallout suggests that rich countries that competed over commodities and shipping lines will now fight for 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, proximi

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