Risk Consolidates, PMIs in focus

Eleanor Creagh

Australian Market Strategist, Saxo

Summary:  Overnight risk assets recuperate as oil steadies, US equities posting gains across the board off the back of stronger oil prices.


Risk began on a solid footing in the Asia trade but has since faltered as attention turns to weaker PMIs in Australia and Japan and the raft of PMIs to be released later today as well as the high stakes EUCO meeting. Aussie stocks again lagging Asian counterparts, at the time of writing Nikkei +1.36%, KOSPI +0.83%, Hang Seng +0.39%, ASX200 -0.46%.

Weakness presenting in higher beta Aussie stocks that have bounced back strongly, ahead of reporting season. The price action in oil markets this week, a market with true price discovery that has not been altered by the “unlimited” liquidity from Central Banks, warning the rapid rebound in risk assets has perhaps run its course against the real economy backdrop. 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 likely overstated earnings estimates. As it becomes more apparent that the road to recovery and widespread testing/vaccination is long and winding, the pipedream of a mean reverting snapback in activity in the 2H becomes more distant. This calls into question the sustainability of the bounce and continues to cap sentiment. The Aussie banks continue to weigh on the index, another headwind holding back the ASX200. As we wrote earlier this week, as the outlook for the banks and their traditionally juicy dividend payments becomes cloudier, the opportunity cost of these holdings grows. Headwinds include rising consumer credit defaults and bad debts across residential mortgage books and higher impairment charges denting profits. The share prices have already corrected significantly, but there is capacity for ongoing pressure particularly as we expect dividends will likely be deferred to 0 for the first half of 2020. The panic deleveraging of Q1 may be past, but dividend cuts remain a prompt for retail selling, particularly for pensioners reliant on dividends for income. Until this uncertainty is resolved when the big four (CBA, WBC, ANZ, NAB) update the market in May, it will be hard for Aussie stocks to push much higher from these levels.

The Australia Services PMI collapsed, as the lockdown has shuttered many businesses and jobs have been lost with a frightening speed, contributing to the large drop. Flash PMIs will later be released in the US, EZ, Germany, France and the UK. Likely delivering the same cliff drop in activity as lockdowns have largely become more severe throughout April, with services leading the decline. The forward outlook subindices will be useful in gauging how quickly businesses expect activity to rebound, a useful read on the effectiveness of stimulus measures to date and the optimistic assumptions of a V-shaped recovery underpinning risk assets. 
Source: Bloomberg

WTI leapt almost 25% overnight after the June contract traded down towards $10 at one stage, helping to keep risk buoyed in the US session. Gaining after the heavy sell off and President Trump resorting to other methods to pump the oil price ordering the US Navy to destroy any Iranian gunboats that hassle US ships. However, without some resolution of the ongoing storage issues and vast over supply, we are far from out of the woods. The issue is supply and demand, oil keeps being produced and not used, and the storage problem will be in effect post the shutdown ending whilst the global economy runs below potential. Meaning we may yet relive the horrors of the May contract roll when the June contract rolls, unless those fundamental issues are resolved. The only cure will be a restart of the global economy.

Overnight the ECB eased collateral rules, now accepting sub-investment grade debt in its financing operations which has also soothed nerves into the all-important, or “make or break” as our Christopher Dembik puts it, EUCO meeting tonight. This permits the ECB to continue to finance Italian banks if Italy lost its investment-grade status, relieving some pressure in BTPs.

Keep an eye on

  • Beijing has shut down gyms once more fearing 2nd wave of infections. The risks of lockdowns easing too early, without widespread testing. We have seen the same 2nd wave in Singapore, a clear risk for some US states which are easing lockdowns and reopening very quickly whilst their daily new cases remain high. I am no epidemiologist, but anecdotally the balance of probabilities lie with opening up economies becoming a phased transition and the return to normality being slow. In that instance, it is far from likely the employment recovery will be V-shaped. This in itself creates another headwind as the negative externalities and second order implications then have the ability to cascade, presenting an additional lag on economic activity.
  • Dollar Index – DXY looks poised for a move higher, one that could dent enthusiasm for risk assets
  • Jobless claims – may decline from previous weeks although remaining at unprecedented levels
Disclaimer

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 is not intended to and does not change or expand on this. 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 (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.