Chief Economist & CIO
Summary: Markets went back into risk-off mode yesterday as the Trump administration's new forecast for the COVID-19 outbreak and extension of the US lockdown likely spooked investors as it means the economic pain will accelerate in the US. On the close the S&P 500 futures were 7% off the recent highs while the 2021 dividend futures on S&P 500 was down another 4.5% to the lowest levels this year. USD continues to strengthen but is weaker against JPY in a sign of safe-haven behavior coming back into currency markets. In bond markets the US 10-year yield trades back below 0.6%, not far from the 9 March low point. Crude oil, led by Brent, has jumped 12% on news that China will speed up buying for its strategic reserves.
What is our trading focus?
What is going on?
US macro data was less bad then expected as the ADP employment change for March was only down 27K compared to minus 150K expected. ISM Manufacturing for March came out at 49.1 vs 44.5 expected. These macro series are old news when they are released and their timing has most likely not captured the full effects from the US lockdown which is why the initial jobless claims is the preferred indicator at this time.
What we are watching next?
Dividends the next frontier - Regulatory pressure is mounting for banks to suspend dividends in favour of maintaining strong capital positions in the face of mounting bad debts. Following restrictions on dividends implemented in the past week by the ECB and BOE, the RBNZ are the latest to stop dividends for lenders under its jurisdiction. Australia’s banks fell in trade today as the mounting scrutiny presents increased uncertainty for the industry. Although widely expected to slash dividends a suspension would be a blow to investors who thrive of the high yield.
NATGASMAY20 trades $1.61/MMBtu, not far from the multi-year low at $1.51/MMBtu reached on March 23. Despite having traded weak for weeks, speculators have cut bearish bets by almost 90% from a record in February. EIA’s weekly stock data due at 14:30 GMT.
EURJPY – this is an interesting pair to watch as it combines the status of the Japanese yen safe haven trade as Japan pulls its investments home in the event we see further deleveraging, and the EU existential concerns. EURJPY sold off heavily yesterday and is not far from its cycle low around 116.25.
XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – US president Trump will be meeting with US oil executives on Friday to discuss how the US government can help the industry. This could be the beginning of indirect nationalization of the US oil industry which would keep oil production higher than otherwise and thus extend the pain for all oil producers. A potential import tariff on oil from Saudi Arabia is on the table.
Carmakers – the large carmakers in the US have seen a collapse in showroom traffic in March and Fiat Chrysler reported a 10% sales decline in Q1 and GM 7% decline. Ford is expected to report Q1 sales numbers today. The car industry could be the next industry to go full into crisis mode.
Initial jobless claims – probably the most timely macro indicator right now on the US economy and how COVID-19 is impacting the labour market. Consensus is looking for another high number around 3.76mn new jobless claims filed with a whisper number of 5mn. The continuing claims are expected to jump to 4.94mn the highest level since January 2010 killing 10 years of labour market gains in two weeks.
Lockdown extensions – this remains the medium term key as its impact the economy’s ability to make a V-shaped recovery.
The Chinese Yuan is slipping against the USD. The onshore yuan (CNY) fell more than 200 pips to hit 7.1280/USD at one point today, the weakest level since October last year. Whilst the PBOC want nothing less than a disorderly devaluation of the currency, they have been very clear they wish to detach from the importance of the “7 level”. A weaker currency would be desirable at present in order to boost exports and support the manufacturing sector, which is hit from the collapse in global demand. The weaker oil price allows for a weaker currency without raising the price of China’s import bill at present also. However, one to watch on the risk radar. This as a disorderly move would serve a second punch to weakened risk asset markets and no doubt spark another heavy risk off wave, particularly in the current fragile environment. A markedly weaker CNY would also add to the near term deflationary pressures and commodity collapse as global demand has fallen off a cliff via COVID-19 containment measures.
Calendar today (times GMT)
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