Peak virus seemed to be the overriding theme of the week, with the rate of new cases and deaths falling in Europe and the United States, the COVID-19 epicenters. Plans appear to be accelerating also for partial reopening’s around the world. New Zealand returns to work tomorrow, Australia plans a partial effort this week, New York has announced protocols for a mid-May reopening with some US states already tentatively opening. European hotspots such as Italy, Spain, Germany and the UK are also planning partial reopenings or will be doing so this week.
Off course, this doesn’t mean the shutters come down, and we can also go to the beach, attend a concert with 100,000 other people and start mingling in crowded bars and hipster restaurants. The return to partial normality means facemasks and social distancing and many other restrictions that will be the norm of peoples’ lives for a long time to come. Social workers around the world will breathe sighs of relief, though, as schools reopening reduce alcohol abuse by parents, and the chances of little darlings having lockdown home-schooling “accidents.” Air travel will continue to be a no-go as countries maintain border restrictions.
Although life is not about to return to normal anytime soon, the hope that peak virus is upon us has lifted financial markets modestly in Asia today. Whether COVID-19 returns in a second wave is a story for another day. The hopes that even a partial return to regular economic activity begins to draw a line under the economic carnage wrought by the pandemic, should see markets such as equities outperform this week.
Earnings season picks up pace this week, with an avalanche of corporate heavyweights reporting. Most closely watched will be tech titans Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) to see the level of de-faanging COVID-19 has caused. Looking at the NASDAQ, which has broken higher through its 100 and 50-day moving averages ten days ago, not a lot of bad news is priced in. Peak-virus sentiment should shield big tech from any serious mark-downs if their results are weaker than forecast.
China has done markets a favor this morning, reinforcing the peak-virus risk-on sentiment. Industrial Profits for March YoY fell by 36.70%, an improvement on the previous -38.3% number and much better than the forecast -48.7% fall. Less bad news is good news in a COVID-19 world, and today’s data should give hope that China has weathered the storm, and a return to business will lift the economies globally.
The Three Amigos of the Central Bank world, the Bank of Japan (BOJ), Federal Reserve (Fed), and the European Central Bank (ECB) all announce their latest rate decisions this week. Expect no changes in official interest rates with most attention being on whether extra monetary stimulus is forthcoming. The Fed is likely to hold off as it lets the latest $500 billion Congressional programme work its way through the system.
The BOJ may well announce a significant extension to its bond-buying program today to support the Government’s fiscal plan announced last week. The monetary policy meeting lasts typically for two days, but the BOJ appears set to bring forward its decisions to today. It may well also suspend yield curve control and move to allow unlimited purchases of JGB’s and corporate bonds. Markets are expecting an announcement early this afternoon in Singapore.
The ECB could well do something similar, but more conservative, as European Leaders grapple with the mechanics of the grouping’s pandemic recovery fund. Their vacillations have unsettled markets, and the ECB may well decide its needs to calm worries, particularly in peripheral Europe bond spreads. An extension of already galactic Quantitative Easing by the BOJ and ECB would be unlikely to be supportive for the Japanese yen and euro. However, if the peak-virus sentiment holds up, that should mollify any negative impact.
The reloading of monetary cannons by the world’s central banks, and the extra belts of ammunition bought up from the rear, is at odds with peak-virus sentiment making its way across the globe. It tells us that the global economy will be on government and central bank life support for quite a while yet. We may, in fact, never fully return to the share buyback, lunch is for wimps, neo-liberal model of capitalism/consumerism. The post-COVID-19 world may look more like the late ’70s and early ’80s. Flared trousers and hippies had passed by then; there was some great music and a lot of exciting change. I’ll take that and the possibility of peak-virus and start the week with a smile.
Wall Street and China lift Asian equities
Asian equities are higher this morning after a positive Wall Street session, peak-virus positivity and a much less-worse than expected Industrial Profits number from China.
With New Zealand on holiday and Australia partially so, the Nikkei 225 has led the charge higher, rising 2.25% this morning. China’s Shanghai Composite and CSI 300 have risen 1.0%, and the Hang Seng is 1.75% higher. Singapore has risen 1.35% with both Kuala Lumpur and Jakarta carving modest gains as trading gets underway.
With a quiet data calendar in Asia, it would take a very negative headline to unsettle the bullish tone of today’s markets in Asia. That sentiment is likely to flow over into Europe this afternoon.
Dollar eases against majors and regionals on risk-seeking sentiment
The US dollar saw profit-taking in New York on Friday as traders booked profits on longs. It sparked modest recoveries on the JPY, EUR, GBP and also petro-currencies as oil prices rallied slightly. Peak-virus and better than anticipated China data has maintained that modest momentum this morning.
EUR/USD has climbed 25 points to 1.0827, and GBP/USD has risen to 1.2390 as the Dollar Index falls 0.20% to 100.185. Both AUD and NZD have been significant beneficiaries of the China data and general sentiment, AUD/USD has risen 0.65% to 0.6435, and NZD/USD has climbed 0.50% to 0.6040. If sentiment globally continues to be positive, AUD/USD could test its 100-day moving average at 0.6600 this week. The NZD/USD has strong support at 0.5900 and appears to be girding itself for an attack on the 0.6100 regions.
The MYR rallied strongly towards the end of last week on global recovery hopes. USD/MYR finished at 4.3550 on Friday and MYR looks poised to strengthen again today. A continuation of the peak-virus sentiment this week sets the MYR up for further gains towards 4.3000 versus the Dollar, coincidentally, also its 50-day moving average. A similar tone should life most of Asia’s regional currencies as the week begins with USD/THB set to test support at 32.20.
A game of two halves in oil markets today
Brent and WTI have diverged sharply this morning in Asia with Brent easing by 20-cents to $21.60 a barrel from its Friday closed. WTI, by contrast, has fallen by nearly 10% to $15.60 a barrel, from its New York close at $17.30 a barrel.
There appear to be no news headlines driving the 10% fall in WTI. Local markets are awash with news though, of Chinese retail investors losing billions of dollars on savings products linked to WTI after prices went negative at the May futures expiry last week. The price action today leads me to believe that WTI may be falling as Chinese banks unwind more of these products tied to futures prices on WTI in the forward months.
With a positive risk environment and the BOJ appearing likely to resume unlimited bond-buying shortly, oil should be moderately supported. One suspects that the WTI sell-off is due to one-off capitulation flows as described above. Therefore, once they have been absorbed, WTI could potentially rebound strongly into early Europe.
As ever, oil’s recovery is tempered by its vulnerability to negative headlines, as well as the goliath supply/demand overhang in global energy markets, Now is not the time to start calling the bottom of global energy markets.
Gold eases as Asia goes peak-virus and the BOJ set to ease further
Gold eased slightly on Wall Street Friday, falling 0.15% to $1727.50 an ounce. It has dropped another 0.30% in Asia this morning, falling to $1722.00 an ounce.
Much of the fall is likely to be weekend risk hedges being taken off the table by Asian investors this morning. The positive risk sentiment sweeping Asian equities and currencies has also added gentle downward pressure to gold.
Gold now has resistance at $1750.00 and a double top at $1740.00 an ounce, substantial obstacles to further advances, especially in a peak-virus environment. Support ay $1707.00 an ounce is probably the weaker side as the new week begins.
Taking a step back, though, I will repeat my gold outlook from last week once again. Ignoring the intra-day noise, gold is trading in a wide—but real—$100 range between $1640.00 and $1740.00 an ounce; such is the world we live in. Trade intra-day if you wish but separate the noise from the bigger picture.