Market Quick Take - April 6, 2020
Chief Economist & CIO
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?
- US100.I (NASDAQ 100 Index) and US500.I (US S&P500 Index) – these have bounced strongly overnight and are not far from the recent key resistance in both indices, around 2641 in the S&P 500 and the 8000 level in the Nasdaq 100 after the key 61.8% retracement in the latter was taken out overnight.
- OILUKJUN20 (Brent crude) and OILUSMAY20 (WTI crude) – The market focus remains squarely on the world’s biggest producers and their ability to strike a deal to curb production. The big questions remain who will participate, how much will they cut and from when. All these questions matter as the world otherwise could run out of storage within the next couple of months, something that could send oil back below $20/b. An agreement faces immense hurdles and a meeting on Thursday remains only tentatively scheduled.
- XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – With the current high level of uncertainty and volatility in crude oil markets investor with a long-term view on the energy market could instead consider strong energy companies or ETF’s tracking a basket of oil and gas related stocks.
- USDJPY and AUDJPY – with the overnight bounce in risk sentiment, USDJPY is on the rise and the JPY is even weaker elsewhere. Japan’s Prime Minister Abe is set to declare a state of emergency over the coronavirus outbreak, where cases in Tokyo have spiked suddenly. The JPY will rise and fall in negative correlation with risk appetite and pressure on bond yields. Potentially, an increasing focus on “yield curve control” by central banks and implications for negative real rates if a bounce-back in inflation is seen could weaken both USD and JPY aggressively. Alternatively, if the concerns remain centered on asset price deflation, both USD and JPY will likely trade stronger.
- USDZAR – notably absent in the strong rally in risk appetite overnight is the participation from some EM currencies, particularly the South African rand (ZAR), which is weaker still overnight by over 1% versus the US dollar on top of losing some 8% or more over the prior week. The rand has been caught in a negative spiral, in part accelerated by ratings agency Moody’s finally joining the other ratings agencies in downgrading the country’s sovereign debt to junk. A credit event in a major EM is a risk in this cycle that could spark contagion.
- LUV:xnys (Southwest Airlines) and DAL:xnys (Delta Airlines) – Friday, it emerged that investment legend Warren Buffett voted with his feet by selling major stakes in the two airlines. Is this to avoid the bad PR of bailouts or a long term decision based on the perceived prospects for the industry?. Southwest Airlines closed Friday near its lows for the cycle while Delta closed Friday some 10% above its worst daily close.
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)
- 0830 – UK Mar. Construction PMI
- 2230 – Australia AiG Performance of Services Index – helps benchmark the scale of Australia shutdowns relative to what has been seen in the US and Europe.
- 0430 – Australia RBA meeting – not expecting much here, but updates on the scale of QE and other measures could be worth noting. The RBA is largely done for the cycle as government measures carry more weight.
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