After the strong earthquakes that shook financial markets yesterday, Asia appears to be emerging from the rubble and dust clouds. U.S. equity indices futures, oil and Asian stock markets have all moved sharply higher in the last hour.
The reason for the sharp moves higher appears to be the press conference in Washington DC, held by President Trump and Vice President Pence that recently concluded. Perhaps it reflects the strange times, we live in. Both gentlemen outlined potential fiscal stimulus measures, including payroll tax relief they hope to clear through Congress. Offsetting it is supposed, the coronavirus/oil price shock that has roiled markets.
Additionally, VP Pence gave the impression that the U.S. is finally getting its act together on the coronavirus containment front. In times of turmoil, nothing is more important in restoring confidence than the government appearing calm and in control of the situation, however tenuous that control may be. Both gentlemen seem to have pulled off that feat of this morning.
That does not mean that the world is out of the woods after just one day. Far from it. A coordinated response will be required from monetary and fiscal authorities around the world to achieve that. It is also important to realize that any moves made will not be a magical panacea to the ills sweeping the globe. They can only mitigate the situation, not make it go away.
With interest rates at records lows around the world, central banks are running dangerously low on monetary ammunition. That does not mean though we are low on fiscal ammunition. Those same low rates make it a perfect time for governments to undo the purse strings, with debt never cheaper, to fund than it is now. The major roadblock to this approach is off course the austerity mindset prevalent in certain quarters of the world’s ivory towers. (Yes, I’m talking about you Germany.) Those politicians and bureaucrats would be well advised to understand the value of work to the average person on the street, before sticking stubbornly to their ideological guns.
Issuing a trillion dollars or euros of 30-year debt at near-zero per cent interest rates into a deflationary environment would be the deal of the century. If interest rates rise once the world recovers, the opportunity presents to repurchase it at a much lower price than at which it was sold. To paraphrase President Trump, “it would be a wonderful trade, wonderful.”
For now though, readers should be a little cautious about getting caught up in the hype of a relief rally. If we are indeed entering structural bear markets across the world, we will see plenty of these false dawns along the way. Payroll tax relief in the U.S. will not single-handedly save the economy from a recession. I also note that coronavirus is still well and truly with us. Italy is effectively trying to lock down the entire country overnight to combat its spread there. Copy that playbook to other major economies around the world, and throw in a deflationary shock from oil’s collapse, and we can see that the world is nowhere near being out of the woods yet.
I was asked by many reporters repeatedly yesterday, how long can this oil price war go on. And how long can this coronavirus emergency last? If the world’s containment measures are effective over the next two months, and if after a month of chest-thumping, Saudi Arabia and Russia get back to the negotiating table, then the world will move on rather quickly. That’s a huge “if” though isn’t it?
The honest answer is that nobody really knows yet how this will all play out, we just don’t have that data available to us, no matter how learned. The best answer, I believe, is to plan for the worst and hope for the best.
Equities
Some equity markets are bouncing quite strongly this morning after the Trump/Pence press conference, with others reducing their early losses. U.S. indices futures have made an impressive turnaround after finishing the day down around 7.0% yesterday. We can all thank the exchanges for once, for bringing in circuit breakers to stop algorithmic trading-derived flash crashes. Yesterday they did their job.
S&P e-mini and Dow Jones futures are higher by over 2.0% this morning. That fed through to Asian stock markets. The Nikkei 225 is down just under 1.0% after falling by nearly 4.0% on the open. The ASX 200 has rallied by 2.25%, with Singapore’s Straits Times is higher by 1.0%. The Hang Seng and KOSPI are flat as are China’s Shanghai Composite and CSI 300 indices. Malaysia and Jakarta are also outperforming, up 0.60% and 1.70% respectively.
The mixed performance, to some extent, reflects the differential performance of local markets yesterday. Chinese mainland exchanges, for example, emerged relatively unscathed from yesterday’s sell-off, but are underperforming today. Others, such as Sydney, Jakarta and Singapore, were on the frontlines of the sell-off yesterday, and have rallied the most this morning.
I note though that Japan’s Nikkei 225 has been unable to return to positive territory this morning, it has reduced its initial losses. That should probably be a warning sign against complacency or that after one day and one press conference, global markets are out of the woods. Today’s recovery has the look of a bear market bounce at best, and equity markets will stampede for the exit door in a disorderly rush, at the first signs of trouble.
Currencies
It is hard to know where to start with currency markets at the moment. With U.S. yields plumbing record lows across the curve, and even 30-year bonds under 1.0%, currency markets exploded into life. In a nutshell, the U.S. dollar was pounded into the ground against other developed nations' currencies, but rallied very strongly against petro-currencies such as the ruble and Mexican peso, and benefited from a mass exodus from emerging markets.
The Australian dollar had a flash crash yesterday, falling nearly 300 points to just above 0.6300, and back up in 15 minutes. Apart from highlighting how wonderful robots are in regular markets, what a liability they can be in not-so-regular ones. The AUD still finished down 0.90% at 0.6580 on the day. Both it and its antipodean brother, the NZD, will struggle to make any sort of gains while commodities remain in the naughty corner. Both currencies are pricing in further easing from their respective central banks.
USD/JPY plunged 400 points yesterday in a yen repatriation panic, to just shy of 101.00 before recovering to finish a still massive, 2.85% lower at 102.35. USD/JPY has made a nascent recovery to 103.25 today as stock markets showed signs of life after yesterday’s crash. That recovery looks tentative though, with resistance at 104.50. Japanese authorities, in the present climate, would need U.S. sign-off to intervene in the currency if USD/JPY was to fall below 100.00 in a disorderly manner. It is hard to see that permission being granted.
The onshore and offshore Chinese yuan continue to be a mysterious bastion of stability in a world of turmoil. Both remain almost unchanged at 6.9450, roughly where they have been for most of the last week. A falling rate of coronavirus infections is, no doubt, adding some support. But one suspects that the tentacles of the PBOC are on both sides of the market, ensuring that the turmoil internationally does not infect it. I fully expect that situation to continue.
The ECB holds its policy meeting on Thursday, with global markets demanding that the ECB do something on the easing front. Carving ten basis points off the policy rate, that is already at -0.50%, probably won’t cut it. Markets will be looking for an upping of the QE game and possibly more LTRO’s. Being Europe, the potential for disappointment is high. A failure by the ECB to get their act together could see another spike higher in EUR/USD from its already elevated 1.1405 today, possibly even as high as 1.1800.
Oil
Prices on Brent crude and WTI finished the overnight session down around 24%. An impressive achievement in anybody’s books. Both contracts have gaps of about $10 dollars from their closing prices on Friday on their charts. Given the reasons for the drop though, an all-out price war between Saudi Arabia and Russia, those gaps are unlikely to be filled anytime soon. Only a real conflict of some description or a sudden return by both parties to the negotiating table would do the trick. Neither is likely anytime soon.
Oil has rallied strongly this morning though, lifted by the bounce in after-hours U.S. stock futures. Brent crude is 7.0% at $36.70 a barrel, and WTI is up 6.0% at $32.95 a barrel. But put in context, that is a jump of only around $2.0 a barrel for each contract. One U.S. press conference does not a recovery make.
The moves higher most certainly look like bear market bounces and are built on foundations of sand that could easily give way. An extended Saudi/Russia price war is a body blow for the already highly indebted U.S. shale sector. Expect those with deeper pockets to be picking up some bargains in that sector in the months ahead.
Suffice to say; it is reasonable to expect that Brent crude and will settle into a $30.00 to $40.00 barrel a day range with WTI roughly the same. We can expect a lot of fast money, tail-chasing, price action in the days to come, but oil’s longer-term picture looks structurally grim.
Gold
Gold traded in a near 50-dollar range between $1655.00 and $1705.00 an ounce overnight. The record will show that gold closed modestly higher from the day before, up 0.35% at $1680.00 an ounce, but that does not reflect the monumental intra-day volatility.
What is clear is that the margin-based selling of profitable gold positions to prop up the carnage elsewhere was back in force. Those flows are clearly acting as a brake on gold's surge, slowing its ascent. Thus, we can surmisethat further large drops in equity markets or energy markets will see the same sort of offers reappearing in gold.
That does not mean that the bullish case for gold is diminished, far from it. It likely means that buyers will be more highly rewarded by being patient and waiting for adverse action elsewhere to give themselves better gold entry levels.
Gold has fallen 0.75% to $1665.00 an ounce today as stocks have staged a modest rally after yesterday’s destruction. The case for gold remains constructive, though. Technical support should lie in the $1650.00 to $1655.00 an ounce region, with resistance around $1705.00 an ounce.