Asia Session: Peak-Virus Trade Goes Viral; Dollar Fades, Gold Falls

Asian asset markets are positive this morning as headlines continue to be dominated by Moderna’s trial vaccine headlines. I most certainly hope that Moderna (NASDAQ:MRNA) has managed to help the planet avoid a bullet.

The result of the news was entirely predictable, equities rose sharply, the US dollar faded, oil jumped and gold quite significantly fell and avoided an outside reversal day by the narrowest of margins. That story may yet contain heartbreak for bulls. Sectors I would characterize as “the little shop of horrors,” comprising big oil, airlines, leisure industries such as cruises, and consumer discretionary in general, all, unsurprisingly, outperformed.

As ever, in my role as the voice of reason, floating alone on a sea of non-thinking FOMO-ness that characterises the world’s financial markets in this day and age, I should point out a few things. Moderna’s trial is terrific news, but the sample size was eight. Not statistically significant. The experiment was to make sure that dosages didn’t make recipients fall over dead, or otherwise suffer serious side effects. It didn’t, which is pleasing. At least two more large scale trials will be required, and Moderna’s CEO himself said that he was hopeful of results by the end of the year. After that, even with fast approval, the vaccine would have to be manufactured on a previously unimaginable scale, and then the whole world will have to receive it.

Thus, in the best-case scenario, it will probably be another year before normal life will make a comeback, at best. That is a long time in this day and age, especially if you are unemployed or shortly to be; or a company that is running tight on cash flow in the next few months. The zombie apocalypse may well finally occur, in the shape of many corporations existing on paper as zombies only due to central bank and government life support. The amount of debt issued by governments globally, and will continue doing so, will compete for capital with private sector requirements for a generation. Let’s all hope for some decent inflation to make it inflate away, as markets price in return to normal life by July. Did I also mention we have a US Presidential election in November?

Climbing off my soapbox, alone in speakers’ corner, and back into the here and now, the peak-virus trade has been supercharged by last night’s news. That sentiment is unlikely to fade any time soon and has left some interesting set-ups, to my wizened eyes, in various markets—more on that below.

In other news, the euro outperformed overnight, as did the EuroSTOXX 600, as France and Germany agreed on a EUR 500 billion recovery package for the region. Although only members of a larger grouping, everyone is sure to fall into line behind the two biggest kids in the playground. The elegant solution allows the EU to borrow cash through an EU entity, which will then give it all to Italy, I mean those countries within the EU that need it to rebuild devastated economies. The solution elegantly circumvents EU countries jointly guaranteeing Italy’s I mean the broader groups national debts.

Attention today will be focused on Indonesia’s latest rate decision. The Indonesian rupiah has staged a spectacular, if quiet, comeback since the start of April, which gives the Bank of Indonesia (BOI) plenty of breathing room to cut rates again. We are expecting a 25-basis reduction to 4.25%, as the BOI will have one eye on the currency still. Fifty bps, though, is not out of the question.

UK unemployment and Germany’s ZEW survey are expected to print at nightmarishly poor levels later today. Luckily for both, the results will be largely ignored as both are already expected, and irrelevant in the context of the peak-virus sentiment sweeping financial markets. They should both be sending thank you notes to the Moderna CEO.

Equities march boldly forward on peak-virus sentiment

The Moderna news spurred the peak-virus trade to new heights overnight, with European markets and Wall Street enjoying an out-sized positive day. The S&P 500 leapt by 3.15%, the NASDAQ rose by 2.44%, and the Dow Jones, home to many previously unloved stocks, jumped an impressive 3.85%.

Asia has needed no second chance, and markets across the region are a sea of green today. The Nikkei 225 and the South Korean KOSPI are 1.80% higher, as are the Hang Seng, Straits Times Index and Jakarta Composite. China’s Shanghai Composite and CSI 300 are 1.0% higher. Australia’s ASX 200 and All Ordinaries have climbed 2.0%.

We expect the positive momentum to be maintained through the remainder of the Asian session. Europe had an excellent day yesterday, and with no data surprises on the horizon that haven’t already been priced in, that should continue today. The peak-virus trade continues to gather momentum after last night’s Moderna headlines, and there is no reason to doubt that will not continue.

US dollar retreats as haven positioning is reduced

The Moderna vaccine headlines accelerated the rotation out of defensive positioning in currency markets overnight. The US dollar fell across the board with the Dollar Index of developed currencies falling 0.78%. Both the GBP and EUR made notable advances, GBP/USD rising 0.77% to 1.2200, and the EUR/USD rising 0.95% to 1.0915. In the euro’s case, the potential EUR 500 bio EU support package also supported the single currency.

EUR/USD is notable, as it has been tracing out a symmetrical triangle pattern since the nadir of mid-March. Today, the top of the triangle lies at 1.0955, and a daily close above that level implies that the EUR/USD could rally strongly, targeting the 1.1400 region. GBP/USD must still overcome strong resistance at 1.2250 before the technical picture swings strongly positive. Brexit and data nerves may temper its gains.

Light at the end of the return-to-normal-life tunnel saw the trade-sensitive and China proxy Australian Dollar, strongly outperform overnight. AUD/USD rose 1.70% to 0.6525 in overnight trading. Although unchanged this morning, it looks set to test resistance nearby at 0.6570. A daily close above sets up the Antipodean for further advances.

Locally, the Indonesian rupiah has now recovered around 65% of its mid-March losses. It is trading at 14,800 this morning, having fallen to a low of 16,750 during the March asset market capitulation. That will allow the Bank of Indonesia to cut rates today, but may also, therefore, temper further gains to what has been a mighty rally.

Currency markets are, for the most part, sedate and unchanged in Asia today. More than likely, they are awaiting the arrival of London, from whence we expect to see the US dollar once again, pick up steam.

Vaccine hopes propel oil aggressively higher

Oil continues to bask in a combination of falling production from OPEC+, a return to regular consumption by China, a short squeeze in the WTI futures, the ending of lockdowns globally and, as of last night, hopes that a COVID-19 vaccine is on the horizon. It is no surprise, therefore, that Brent crude and WTI strongly outperformed overnight. Brent crude rose 9.0% to $35.40 a barrel, and WTI leapt 10.60% higher to $32.55 a barrel.

Both contracts have seen profit-taking in Asia tempering the overnight gains, with Brent and WTI easing by just over 1.0%. The dips are shallow, however, and appears technical. Brent crude will be eyeing resistance at $36.50 a barrel, and a daily close above there implies further gains to $40.00 a barrel. WTI has resistance at $33.00 and $36.00 a barrel, with $40 a barrel also the target if the later gives way.

Today, the June WTI deliverable futures expiry. Open interest fell once again overnight, from around 55,000 contracts to 34,000 contracts. That still leaves a significant position that needs to either be closed out, rolled, or delivered by today. Interestingly, open interest fell by 12,000 contracts in the July tenor, but rose by around the same in the September one, implying that being exposed to the front-month contract remains. The squeeze has definitely been on short positioning in the June contract, and thus, sharp spikes higher cannot be ruled out into the expiry today. That is in complete contrast to last month’s expiry.

Gold narrowly avoids outside reversal day, implying heartbreak for long positions

Gold avoided an outside reversal day by the narrowest of margins overnight. Having traced out new highs at $1765.00 an ounce, gold then plunged on the Moderna vaccine news to close at $1733.00 an ounce. That was a mere two dollars above the previous days open.

Although the reversal pattern has been narrowly avoided, investors should be alert to the possibility that gold could now suffer a sharp reversal as peak-virus sentiment reaches new levels. A failure of support around $1725.00 an ounce sets up further losses to the next support at $1700.00 an ounce. I also note that gold has tested, but failed, to close above $1750.00 an ounce for two days in a row.

Gold has risen slightly by 0.25% in Asia, mostly driven by profit-taking flows from short-term traders after the overnight drop. Caution should be exercised though; gold could potentially suffer an aggressive downward whipsaw price correction following the price action overnight.

Bitcoin has failed multiple times at the $10,000 mark

Bitcoin has tested and failed to close above $10,000 multiple times during May. With the Moderna vaccine hopes invigorating the rotation into recovery positioning and out of defensive plays, Bitcoin is vulnerable to a deeper downward technical correction. Bitcoin is trading at $9,542.00 this morning and a failure of the $9,500.00 region, sets up a potentially sizeable downward correction to $8,500.00, and possibly as far as $8,000.00.

Adding weight to this theory, a good friend of mine in Singapore, who has no experience with this market, asked me yesterday if it was a good time to invest in cryptos? Sell signals come in all sorts of forms. This is one of them.

The Bitcoin aficionados who believe 5G towers, or Bill Gates, are the original of COVID-19, should prepare to wrap an extra layer of tinfoil around their heads.

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