Reality checks defy relief rally Reality checks defy relief rally Reality checks defy relief rally

Reality checks defy relief rally

Summary:  After a negative cash trade on Wall Street following a deluge of weak data, continued slide in oil prices and weak earnings from major banks, Asian stocks are souring. The wheels of the rapid bounce back/sharp bear market rally appear to be falling off in slow motion as risk rolls over.

US futures remain in the red throughout the Asia trading session, and Asia trades heavy Nikkei -1.49%, KOSPI -0.11%, Hang Seng -0.49%, ASX200 -1.49% at the time of writing. The ASX200 dropping off early afternoon highs as Prime Minister Scott Morrison extended current social distancing measures for another 4 weeks. The extension cementing the uncertainty that is still ongoing globally with respect to the return to normalcy and re-opening the global economy. This will off course differ country to country, but it is likely the restart in many places falls short of optimistic expectations floated most prevalently in the US

  • Reality checks all round as dismal US data and soaring loan loss provisions for US banks illustrates the real impact of COVID-19 shutdowns
  • As reality bites, hope fades - equities have moved too far, too fast
  • King dollar marches higher to trample on risk sentiment

US retail sales and factory output staged historic declines in March, with retail sales coming in worse than expected posting the largest mom decline since 1992. The data dump was a reality check for investors betting on a rapid rebound and points to more pain ahead for both the real economy and equity indices. Highlighting once again the dichotomy between the recent rally and the real economy, main street employment realities and earnings outlooks.

As we said earlier this week, the ongoing sharp contraction in both the real economy and corporate earnings leaves little margin for error at current above average valuations, which are based on what are likely overstated earnings estimates. We are only in the early innings of earnings season in the US, but so far analyst estimates have proven already to be too optimistic. Uncertainty remains high and there is a wider than usual range of outcomes, this poor visibility is not accounted for in the consensus outlook. Many companies have withdrawn guidance and the effective information vacuum has encouraged the relief rally. As the weeks roll on and visibility improves, this will become more difficult. As we move into the next phase of this crisis and COVID-19 case counts are put aside in favour of the true impact the resilience of the recent bounce back is about to be tested, regardless of the unbounded stimulus/Fed bailouts. The realities unfolding across developed world labour markets, extended lockdowns and the process of “opening up” being just that, a process leaves the risk of disappointment at current levels very high even if containment progress continues.

In Australia, the focus today was on the March jobs report. Headline unemployment came in at 5.2%, versus 5.4% expected and 5,900 jobs were added surprising to the upside of the 30,000 decline expected. Despite the beat on the headline read, underemployment and underutilisation picked up in March indicating that labour market slack was on the rise prior to the worst of the COVID-19 hit.

However, before reading too much into this data we have to remember that the survey was performed in the first half of March before the heightened measures to control the spread of COVID-19 were implemented so incorporates little of the true impact. We know that the near total shutdown in economic activity has been sharp, and the labour market deterioration will have been equally sudden so the true state of the labour market has been vastly understated by the data released by the ABS today.

In addition, as we highlighted earlier this week the JobKeeper subsidy and a potentially lower participation rate will mask the true dislocations in the labour market and keep the headline unemployment rate lower than would have otherwise been. The real gauge of the dislocations will be most evident in the hours worked and underutilisation data.

Aside from consumer confidence, key for Australia will be the dislocations in the labour market. Not least because consumption accounts for almost 2/3rds of economic growth but also a key area of vulnerability is the excessive levels of household debt across Australia. Household debt to income ratios across the nation are well above OECD averages, at approximately 2x household income. This debt is serviceable whilst unemployment is low. However, as Australia’s unprecedented streak of economic growth fizzles out, a rise in unemployment or even underemployment will be just one catalyst for reversing the nascent recovery in the housing market. Having the potential to set in motion a more drawn out lag on economic activity and consumption. Both via forced or voluntary deleveraging and a negative wealth effect as house prices decline.

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article
  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article
  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992