US Open: The quarter-end rebalancing rolls on

Market Analysis /
Stephen Innes / 31 Mar 2020

Oil markets 
 
Oil industry press reports that most of OPEC are clamoring for an emergency technical meeting to discuss the state of oil markets. Still, Saudi Arabia and the United Arab Emirates are opposed. Another signal that Saudi Arabia is digging in?? Indeed, the risk remains skewed to the downside for oil until this hard-line changes, or COVID-19 news flow turns positive.
 
However, Trump does hold more sway over Saudi Arabia (than Russia), and Riyadh could be more susceptible to change, given the extent to which it relies on the US for military support in the middle east. So, the market is sitting tight, holding onto the oil price bounce in Asia waiting for further news flows from OPEC or The US DoE. 
  
Currency Markets 
 
The USD is still in demand despite pressure easing on risky assets. The weakness in the euro could partially be blamed on European borders being shut. But with liquidity yet far from average, the main thing to watch today should be month-end and quarter-end rebalancing.
 
USD assets have outperformed European assets across equities and fixed income. Overall, from an FX trader perspective, I wouldn't be surprised to see faders entering at extreme levels later today. (after the London 4 PM fix)
 
However, eFX volumes continue to run light, and trading volumes are reported to be at the lows not seen dating back to the beginning of February. Confirming my thoughts that most prop traders are hiding in the pipes and not bothering to get caught up in month-end flows while letting the machines handle the bulk of the order book.

Of course, this makes things incredibly messy on the street, especially in low liquidity conditions, with most algorithms likely set on the pass-through, basically toggled to price, and dump on auto hedge mode. 
 
FX volatility has taken another leg lower in London, as has the surface of things, with all eyes on month-end spot moves. Client activity has been fragile on the ground in the European space - but it looks more like positions cut out rather than anything else will unfold ahead of the 4 PM London Fix where all hell is expected to break out for a brief minute or two.
 
 Equity Market 
 
US equity markets closed yesterday's session on firm footing and held on to the gains through trading today in Asia and continued to do so through the London session. It remains to be seen how much month-end flow there is left as markets have been busy throughout today. But if the markets continue to push higher, it further cements the view the worst is behind, and we could see a more broad-based buy-in. Not to mention we could see another stimulus bounce as the US politicians are so enamored with the results of the three prior stimulus packages, they're already lining up number four. 
 
No longer is the speed of the equity markets declines that stand out, but instead, its the rate of the recovery. Especially amid the plenitudes of dreary growth revisions with some market economists are now expecting annualized falls of + 34in the US (over three times worse than the previous most significant quarterly decline in 1958), and over 40% in Europe – similar to the scale of the falls that China experienced in Q1.( Goldman Sachs) 
 
It speaks volumes about the positive way investors view the massive monetary and fiscal stimulus. This global policy flash flood is providing investors ample wiggle room to buy in with fingers crossed for a health care solution or assume this Covid19 economic shutdown will be the worst but shortest recession in modern-day financial history. While China is providing a roadmap to recovery which is basically shut people in and then throw a gazillion dollars at the right-hand side for the V
 
 
Data debate 
 
The big US data monthly data releases such as non-farm payrolls, retail sales, and even the ISM PMIs are likely to be either suspended or extremely inaccurate because the primary surveys that underlie such data won't be completed. For now, US companies are suspending their guidance pending further information. So, it's likely that information gleaned from how companies come to view themselves will take over from the usual macro data.
 
 
The 17% nearly straight-line gain in US equity markets reflect an optimism that the worst of the virus has been priced. The idea here is that a V shape recovery will ensue as a consumer make a mad dash to the malls with a big-ticket item shopping list in tow, suggesting there's a chunk of pent up spending to be done. But it remains debatable if consumers will feel confident breaking social distancing rule by packing shopping centers any time soon. While the potential for regional on-off-on lockdowns as the virus surges in some places and less in others means the eventual reopen will be slow anyway. So, retailer guidance will take on a much more significant role and will tell us much.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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