The air above the world’s financial markets smelled of cordite and rang loud with the sound of artillery rounds, as fiscal and monetary bazookas kept up their barrage overnight. The Federal Reserve announced more US Dollar swap agreements with other central banks to alleviate the greenback shortage around the world. The US Senate is working on a follow-up one trillion-dollar stimulus plan and the Bank of England reiterated its do whatever it takes while trimming 15 basis points of its reference rate, dropping it to 0.10%.
That didn’t stop the US Dollars surge overnight, as the greenback crushed all before it under its tank tracks. The surge in US interest rates in the longer-tenors, and the ensuing rise in the Dollar, has sent shivers through emerging markets who have loaded up on Dollar-denominated debt in the past years. Falling currencies and an economic recession mean those payments will become increasingly hard to make in the months to come.
For now, though, the shoulder-launched artillery barrage from the worlds’ central banks and government treasuries seems to have stopped the rot sweeping the global economy for now. Markets enjoyed a relatively quiet, by recent standards, overnight session, with equities stabilising in particular. It should be noted though, we are only at the beginning, and not the end of the coronavirus recession, and the repricing of asset classes to the new reality, likely, still has a long way to run.
Most concerning to me currently is that the US Federal Government still has a headless chicken look about it with regards to its on-the-ground coronavirus response. That job seems to have been sub-contracted to state and local governments. President Trump appears to be devoting more energy to blaming China for the whole mess, instead of dealing with the problem in front of him in the hear and now.
Blaming China can wait until the election campaign. President Trump did spur a record 25% rise in oil prices overnight, after stating that at some stage, he might try to get Saudi Arabia and Russia back to the oil negotiating table. Thoughts of what an unholy Trinity around a table that would be aside, it is also essential to put the oil price jump overnight in context as well. Oil prices have collapsed, 25% of not a lot, is still not a lot.
Somewhat surprisingly, China has left its one and five-year Loan Prime Rates unchanged this morning at 4.05% and 4.75% respectively. It is unlikely to be overconfidence, rather an acceptance that direct fiscal stimulus measures will be more effective in China at this point. Companies don’t have a borrowing problem; they have a demand problem. Chinese authorities may also be aware that although new coronavirus cases in China have plunged, for now, they may want to keep some ammunition in reserve if a second wave occurs.
Overall, Asia looks like it will enjoy the respite granted by Wall Street overnight, easing into the weekend. We should all enjoy it while we can.
Equities
The actions by the US Federal Reserve and Federal Government finally had their desired effect overnight, easing the liquidation pressure on asset markets, if only temporarily. Wall Street made tentative gains with the S&P 500 rising 0.47%, the Nasdaq increasing 2.30%, and the Dow Jones gaining 0.95%.
Asia has had an uneven start to trading. Although most of Asia is in the green, the Nikkei 225 has fallen 1.05%, with the increasing possibility of the Olympics being cancelled, hanging over markets there. The US after hour equity futures have also eased, with the S&P e-mins falling 0.60%. Still, the NASDAQ futures have gained 0.50%, as the street continues backing big tech as a future winner in the coronavirus recession.
For the rest of Asia, though, the news is all good. The Australian All Ord’s has jumped 4.15% and the ASX 200 by 4.60%. The Kospi is 4.80% higher with the Hang Seng 3.50% higher. The impressive moves though, more than likely reflect a lack of two-way liquidity, as opposed to a new dawn.
Singapore’s Straits Times has climbed 2.0%, and Kuala Lumpur has risen 2.15%, with even Manilla tracing out a 1.20% gain. On the Mainland, the Shanghai Composite and CSI 300 are 1.15% higher.
Although the first positive day in what seems like forever is a welcome end to a tumultuous week, sentiment remains fragile. We have seen plenty f examples in recent times of rallies turning into routs in double-quick time.
Currencies
The scramble for Dollars continued at pace overnight, with the greenback crushing all before it and the dollar index rising a mammoth 1.60% to 102.80. Part of the Dollar’s strength is reflected by the desperation for Dollar funding internationally. Much of it though, reflects its status as a liquid haven, as evidenced by the 4-week, and 8-week bill auctions overnight, where yields plunged to 0.03%. Investors are clearly still moving into cash and parking it in the very short end of the US yield curve. That is unlikely to change anytime soon.
The EUR/USD fell 2.0% overnight to 1.0690, an astonishing fall from grace, given that is was testing 1.1500 11 days ago. EUR/USD has traced out a double bottom at 1.0650 which offers initial support. Such has been the velocity of the fall though, that a decent short squeeze is not out of the question from here. EUR/USD is already up over 50 points this morning.
The same can be said for the GBP/USD, which touched 1.1400 overnight, a post-Brexit low. The squeeze is already in full swing today in Asia as equities enjoy a respite, GBP/USD has risen by 1.45% to 1.1645, and it would not surprise me in the least, if we saw it trade back to 1.1800, such was the rapidity of its collapse.
Having traded to multi-year lows yesterday, both Antipodeans commenced their comeback yesterday after the RBA came out with its own “whatever it takes” and said intervention wasn’t off the table. AUD/USD is 2.0% higher this morning, rising to 0.5860 today, having traded as low as 0.5500 yesterday. Again, it would be of no surprise if the AUD/USD made its way back to 0.6000 before the week’s end. The NZD/USD has risen 1.40% to 0.5750 today, having traced a low of 0.5460 only 24 hours ago. The squeeze still has the potential to carry the flightless bird back to the 0.5900 regions, after the panic sell-off yesterday.
USD/JPY climbed from 108.00 to a high of 111.35 in the last 24 hours, before easing all the way back to 110.15 this morning. A Nikkei 225 stubbornly in the red this morning is likely to limit further moves lower in USD/JPY for now. It should find some support at 108.50, but Japanese Yen, more than most, looks vulnerable still to further losses against the greenback.
The strength of the US Dollar and Chinese Yuan in Singapore’s NEER basket, has seen the SGD remain weak, even as other major currencies stage strong short squeezes. USD/SGD remains near its highs, trading at 1.4500 this morning. With the PBOC controlling Yuan weakness, and the US Dollar the destination of choice for investors globally, any gains from here will be limited for the SGD. More than likely, a period of consolidation beckons around this region for USD/SGD.
Dollar strength is likely to reassert its dominance, once the correction of the panic selling has run its course. That applies equally to the major currencies, but most especially emerging markets; where the Dollar shortage will remain a serious issue in the months to come.
Oil
Apart from saying the chloroquine was a new Malaria medicine, and that it could also cure coronavirus – it absolutely is not, and his medical people denied the later in quick time – President Trump’s other significant contribution overnight, was that he would get involved in Saudi Arabia and Russia’s oil price-war at an appropriate time.
The irony of Trump as a peacemaker aside, his comments were enough to trigger a helter-skelter rally in oil prices. Brent crude rose 13.50% to $ 28.25 a barrel, and WTI made a one-day percentage record gain of 25.0% to $25.50 a barrel. Although the scale of the rallies has been lauded, but as I have stated previously, 25% of not much, is still not much.
That positive vibe is still prevalent in Asia this morning. Brent has risen around 3.05% to $29.20 a barrel. WTI meanwhile, has risen 4.50% to $26.65 a barrel. Oil is coat-tailing the easing of Dollar strength and rise in equity markets in Asia.
The outsized gains by WTI reflect the hope and not the reality of the US shale industry. Russia and Saudi Arabia have zero interest in helping US shale survive. Just the opposite, in fact. How the US could negotiate with Russia on anything these days, also escapes me. Once this reality finally sets in, I expect the rally in oil to disappear as quickly as it began.
Gold
Gold remained unloved overnight, as Dollar strength, firm US Treasury yields, and a rally in commodities and equities, saw the recent correlation break, and gold falling 1.0% to $1470.00 an ounce. Asia has had other ideas though, gold regaining all its overnight losses to climb back to $1482.50 an ounce.
Asian markets appear to be loading up on gold ahead of the weekend as an event-risk hedge, an entirely sensible strategy. From a technical point of view, the $1450.00 support zone remains intact and at the risk of catching a falling knife, presents an excellent value zone. Interim resistance is at $1500.00 an ounce. Given the recent correlations with the stock market though, substantial gains above that level look unlikely in the short-term.
