Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Officer
Summary: Risk appetite surged overnight with little supporting narrative save for hopes that the Covid19 outbreak peak in the US may be near and lower than originally feared and on the strong rebound in crude oil prices after an approximate 10 percent gap lower opening price caused by a weekend of bickering between Saudi Arabia and Russia. The week ahead looks critical for EM countries caught in a negative spiral as well as the usual focus on the broader equity market and oil
What is our trading focus?
What is going on?
UK Prime Minister Boris Johnson hospitalized – the UK prime minister was admitted to the hospital for testing after persistent fever from Covid19. There is no formal precedent for who rules the country when the prime minister is incapacitated. Sterling traded about 0.5% lower versus the euro overnight.
Oil rebounds from a gap lower – bickering over the weekend between Saudi Arabia and Russia and a cancellation of today’s planned OPEC+ meeting saw major crude oil grades gap some ten percent lower overnight before recovering much of the sell-off by early this morning in Europe. Faced with a massive loss of demand and increased risk of running out of storage the current market action is based on hope more than fundamentals. OPEC+ is tentatively scheduled to hold a virtual meeting on Thursday. Its success will based on the ability to reach out to non-OPEC+ members such as the US, Canada and Norway.
What we are watching next?
April 7 Eurogroup meeting – this week could prove one of the most critical weeks in EU history after the disastrous summit meeting the week before last produced bitter disagreement on “coronabonds” (bonds issued on the EU level that all EMU members would be mutually liable for repaying) and southern EU countries refusing to sign the communique. A summit tomorrow on April 7 between EU finance ministers is the next crucial meeting for establishing whether we continue to risk an existential political EU crisis, even as the ECB has kept conditions in sovereign bond markets across the EU orderly.
EM stress – note the USDZAR trading focus above and South Africa focus, but we also focus on large economies like India, which has suffered a recent banking crisis and has a current account deficit before going into lockdown and Mexico, which announced a fiscal initiative deemed weak by the market, as well as a weaker EM like Turkey, where forward implied interest rates are pricing an aggressive devaluation of the currency.
Oil prices – oil remains a critical factor as low oil prices and reduced demand vastly reduce the dollar volume of global trade, meaning tighter USD funding conditions for global markets, and heighten the risk of corporate and even sovereign defaults, as well as straining the long term credibility of the USD pegs in major Middle East oil producers.
JPY – the yen has been the flipside of risk appetite – falling as risk appetite improves and vice versa, but with USDJPY at particularly pivotal levels and Japan suddenly faced with mounting Covid19 problems, both as a new financial year gets underway in Japan as of April 1, the JPY crosses are an interesting subplot to the general obsession with the direction of the USD.
The unfolding shape of the Covid19 crisis and perhaps more importantly, the shape of the recovery. This week is seen as the week in which the US heads toward peek impact from the virus outbreak. Elsewhere, we watch those countries who have seen the lowest impact, like Denmark, for how they plan to begin opening up after the Covid19 shutdowns, a process that Denmark claims it would like to start next week. Japan is in a different place as it is announcing more severe shutdowns after a large rise in cases in Tokyo.
Calendar today (times GMT)
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