Market Quick Take - March 31, 2020
Chief Economist & CIO
Summary: Markets put in a positive session yesterday and managed some stability overnight, though the major US average is still below a key pivot. Today marks the end of month and quarter, an interesting test of how much this recent bounce in equity markets is down to large portfolio rebalancing flows.
We are going into quarter-end today and still watching the key pivot levels for risk appetite as noted below for overall direction.
What is our trading focus?
- US500.I (S&P 500 index) – overnight we saw the S&P500 index poking toward that crucial 38.2% retracement level from the lows at 2,641 which still remains the main blockage for further gains. Rebalancing flows are likely adding tailwind to the S&P 500 while the VIX level and term structure suggest downside risks still exist.
- AUDUSD – as noted yesterday, AUDUSD is a high beta FX pair to global risk sentiment and one to watch as a coincident indicator for swing in risk appetite – also sentiment toward China. The pair is close to a key retracement, th1 61.8% retracement of the large recent sell-off wave that comes in just ahead of 0.6250.
- USDJPY – we will watch the Japanese yen in coming sessions as we roll into a new financial year in Japan and whether global safe haven bond yields continue to drop. Already, the huge compression in US-Japan yield spread argues for much lower USDJPY.
- USDHUF – rule by decree for PM Orban (see below) and credit spreads have blown wider for Hungary’s foreign currency denominated debt – EURHUF closed at a record high yesterday. HUF is perhaps the weakest link in the EU along existential lines.
- DBA.arcx (Invesco DB Agriculture Fund) – several countries, including Russia, are beginning to or proposing to put export bans on some agricultural goods which increases the risk of rising food prices and down the road higher breakeven rates and inflation (longer term stagflation).
- XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – Brent crude has stabilised overnight and energy stocks were the best performing sector in Asia. The market is extremely overstretched so any technical bounce could be sizeable.
- VOPA:xams (Vopak), EURN:xbru (Euronav) and FRO:xosl (Frontline) - oil tank firm Vopak and ship owners such as Euronav and Frontline could benefit from the storage space crisis in the oil industry.
- OILUKMAY20, OILUSMAY20: Crude oil rising from an 18-year low but the short-term outlook remains troubled by a massive overhang of supply. Aramco is expected later this week to maintain discounted OSP’s for May.
- CORNMAY20, SOYBEANSMAY20, WHEATMAY20: US farmers planting intentions for the 2020-21 season will published by the US Department of Agriculture at 17:00 GMT. It is one of the most closely watched reports by the market. It is expected that farmers will increase the corn and soybeans acreage while cutting wheat to a record low.
What is going on?
China reported official PMIs for March, with the Manufacturing PMI at 52.0 vs. 35.7 in Feb. and Non-manufacturing at 52.3 vs. 29.6 in Feb..
US Dallas Fed Manufacturing survey fell to -70 in March¸ far and away its lowest reading ever and below the global financial crisis worst reading of -59.9.
Covid19 – Italy reported its lowest growth in case numbers in almost two weeks, Denmark announced the intent to begin path to normalization after Easter, WHO says EU outbreak may be topping, US outbreak still in growth phase as New York City epicenter has now seen 1,000 deaths. several Asian countries seen on top of their respective outbreaks are showing a rise in new cases.
Crude oil rise from an 18-year low but is still down by 65% on the quarter, its worst ever. Supported by signs of a recovery in the Chinese economy, Putin and Trump announcing they are in a dialogue together with US shale oil companies calling on regulators to discuss production cuts.
The outlook remains dire with Goldman Sachs seeing demand down by one quarter while Rystad Energy an oil consultancy, suggest that as much as 36 million barrels of oil production per day could be at risk from Covid19 related demand destruction.
Hungary’s parliament granted Prime Minister Orban the right to rule by decree indefinitely – an unprecedented move for any EU member. EURHUF closed at cycle highs as the HUF is down some 6% against the euro this month.
What we are watching next?
The quarter-end and 2641 area in US S&P500 – as we discuss above, the 2641 level is the local bull/bear line in the S&P 500, the most prominent global risk barometer. The next Fibonacci retracement levels of note are the 50% at 2785, and perhaps the most important, the 61.8% at 2930.
US Consumer Confidence reading today for March – was 130 in Feb and expected to move a near record 20 points lower to 110 – but for perspective, back in 2009, this indicator bottomed out at 25.
Japan stimulus package – said to be large and comes after the disappointment of needing to delay the Olympic games for a year – this could offer JPY support on a particularly strong stimulus push.
Path to the other side of Covid19 – this remains the medium term key.
Calendar today (times GMT)
- 0900 – Euro Zone Mar. CPI estimate - not really an investor concern, but worth noting in the background
- 1345 – US Mar. Chicago PMI – the last of the US regional manufacturing surveys ahead of tomorrow’s ISM Manufacturing survey – expected to post a level around 40, which would be lowest since the financial crisis.
- 1400 – US Mar. Consumer Confidence – a huge drop expected and worth tracking as a coincident indicator for employment numbers.
- 2350 – Japan Q1 Tankan survey – traditionally an influential survey, but not a market mover.
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