US markets retreated following overnight testimony by Dr. Anthony Fauci at a Senate committee hearing that reopening America’s states and cities risked serious consequences if done too quickly. Dr. Fauci himself is in self-quarantine after one of his staff tested positive for COVID-19. Refreshingly, he appears to be much more inclined to speak his mind when not sharing a podium with the US President, who has a mostly opposite view.
It is the timing of Dr. Fauci’s comments, rather than their content, that spooked markets though. He is, of course, stating the obvious in no uncertain terms. The comments came though, after an extended bull run in “risk-on” assets in which markets had unceremoniously been ignoring similar warnings for the past two weeks. It suggests that for now, most of the peak-virus global recovery trade, may be baked into financial markets and that we are entering a period of sideways consolidation. Investors should be wary of being whipsawed by the daily flip-flops in global sentiment over the remainder of the week.
An insight into the challenges that lie ahead may come from down under. New Zealand has been lauded for its efforts to contain COVID-19, its economy is due to almost fully reopen in the coming days. That, however, did not stop the Reserve Bank of New Zealand this morning announcing it was doubling the amount of monthly quantitative easing to NZD 60 billion per month. In addition to leaving interest rates unchanged at 0.25%. The global economy will remain on central-bank life support for quite some time to come, make no mistake.
Another reality check is the New York, Atlanta and St Louis Federal Reserve’s GDP Nowcasts. Depending on which one you look at, they are suggesting the US GDP for Q2 is on track to fall by 30 to 40% annualized! You have read this correctly. Admittedly, with partial reopenings commencing, those numbers should improve, but have a mountain to climb in the next six weeks. But if anyone needed an example of just how “forward-looking” markets have become on the peak-virus trade, the evidence is right there.
That is not to say that better days do not lie ahead in the near-term for equity markets. The street will become much more headline sensitive going forward though, leading to markets chasing their tail more.
Equities in Asia following Wall Street lower
The waning of upward momentum saw US investors lightening up recent long positions following headlines concerning the risks of reopening the economy too early. The timing and not the content of the headlines probably had a more significant effect, coming after a multi-week bull run. The S&P 500 fell 2.05%, the NASDAQ dropped 2.06%, and the Dow Jones fell by 1.73%.
Asia has duly followed Wall Street south after its own extended multi-day rally, complicated by concerns of secondary coronavirus outbreaks in South Korea and China. The Nikkei 225 has fallen 0.85% with the Shanghai Composite down 0.40%, the CSI 300 by 0.20%, with the KOSPI flat on the day. Regionally, the Hang Seng has fallen 0.15%, the Straits Times by 0.30% with Australia and New Zealand lower by 0.70%.
Overall, the reaction in Asia has been modest, suggesting the price action is corrective and not a wholesale change in sentiment. We expect trading ranges to be choppy for the remainder of the week as investors chase headlines in a broader consolidation phase.
Currency markets refuse to follow the noise from equities
The US dollar ignored the negative price action in equity and oil markets, with the greenback continuing to ease versus the major currencies. The Dollar Index fell 0.28% to 99.96 with the euro a notable gainer. Currency markets have not joined into the peak-virus hype seen elsewhere, and thus are less inclined to reverse the dollar’s gentle retreat sharply.
Most attention this morning has been on the New Zealand dollar which has fallen sharply this morning as the Reserve Bank puts out uber-dovish comments following its unchanged rate decision. The RBNZ doubled its quantitative easing target to NZD 60 billion a month with officials stating they are not looking for a v-shaped recover and telling banks to be prepared for negative rates by the end of the year. The New Zealand Government has also announced a national interest test to all foreign investment. I suspect New Zealand is the first developed economy out of the blocks on this front, and governments around the world will follow in the months ahead.
The NZD/USD has fallen 0.90% to 0.6015 this morning, just above support at 0.5995, a multiple daily low and the 50-day moving average. A break of this level opens up further losses to 0.5900 initially with daily resistance now distant, at 0.6160.
Elsewhere across Asia, major and regional currencies are trading almost unchanged for the day.
Oil eases in Asia
Oil also refused to buy into the profit-taking seen on US equities, with both Brent crude and WTI edging higher in the New York session, supported by extra Saudi Arabia production cuts. Subdued trading seeing both Brent and WTI around 1.50% higher at $29.90 and $26.00 a barrel respectively.
Both contracts have given ground this morning as equities moved lower in Asia, Brent crude has fallen 50 cents to $29.50 a barrel, and WTI has dropped 30 cents to $25.30 a barrel.
Like equity markets, a lot of good news has been baked into oil prices over recent weeks. The price action of yesterday and today has a distinctively consolidative look about it. Like equities, the danger is that investors get whipsawed chasing their tails on intra-day sentiment. If anything, though, with momentum waning, oil is perhaps more vulnerable to negative headlines now than it has been in recent weeks.
Gold remains marooned midrange
We may have to rename gold the castaway at this rate, as the precious metal continues to trade each side of its $1700.00 an ounce mid-range level quietly. Gold rose slightly overnight to $1702.00 an ounce and is unchanged in Asian trading today.
Gold has fallen of investors radars for now although its longer-term fundamentals point to much higher levels ahead. Gold will need to break out of its longer-term range of either $1650.00 or $1750.00 an ounce to stimulate investor interest again.