Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Central Banks Take The Stage, Gold Heads Higher And USO ETF's Policy Shift

By Stephen InnesMarket OverviewApr 26, 2020 08:40AM ET
www.investing.com/analysis/the-central-banks-take-the-stage-the-uso-gets-a-shoulder-tap-from-the-cme-libor-200522636
Central Banks Take The Stage, Gold Heads Higher And USO ETF's Policy Shift
By Stephen Innes   |  Apr 26, 2020 08:40AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Week Ahead

As we head towards May, next week's focus will turn to central banks again, with the Fed, ECB, and BoJ all announcing their latest decisions on rates.

Earnings season will also be closely monitored over the week ahead, with 173 of the S&P 500 companies reporting, including several big names.

And on the data side, the first peek at Q1 GDP for the US and the Euro Area will provide investors the dreaded reality check to the extent of the initial drops in output, while PMI releases and the weekly US jobless claims will be carefully analyzed for more recent developments as the data becomes more time accurate.

The Federal Reserve

The event is expected to be little more than a status report while providing an update on the Fed's actions to date and the committee's evolving views about the economic outlook.

The European Central Bank

The ECB has turned on the taps, similar to the Fed, albeit with a more lukewarm reception to its €750bn Pandemic Emergency Purchase Programme, but there have also been temporary collateral easing measures and moves to mitigate the impact of rating downgrades on collateral availability. However, the landscape remains extremely thorny, as evidenced by last week's dispiriting EU composite PMI for April falling to a record low of 13.5, while sovereign bond spreads have continued to widen. So, there could still be a surprise or two from the ECB.

The Bank of Japan

The BoJ meeting could be the most interesting one of them all. It is highly likely the bank will consider additional easing measures next week, with the most bandied around idea is for them to increase its purchasing of commercial paper and corporate bonds.

The Dueling GDP's

The first look at Q1 GDP readings will be closely watched, with the US reporting on Wednesday and the Euro Area, then following on Thursday. Economists are widely expecting contractions, though given the lockdowns only came into force from March, with the early part of the quarter unaffected, they will not display the full extent of the damage until the next quarter's releases.

The PMI's

The flash PMIs for April was worse than the March numbers, and even more dreary than expected with composite PMIs falling to record lows across several countries. However, on Thursday we'll get the composite, manufacturing and nonmanufacturing PMIs from China, which will give us an indication of how their economy has recovered as lockdown measures have been eased, and what that could mean for the rest of the world as social restrictions measures are eased.

Earnings Season

We move into second gear with 173 companies in the S&P 500 reporting, along with a further 95 in the STOXX 600. Of the 120 S&P 500 companies that have reported so far, 67% have to say a positive surprise on earnings, and 65% have reported a positive surprise on sales.

Oil Market

There has been a massive drop in open interest in the June 20 NYMEX. This is very much a result of the USO ETF (NYSE:USO) being told by the CME to reduce the front-month delivery risk. This policy shift is to avoid another technical break down. And it makes sense as June contract might be un-deliverable with Cushing storage probably full.

If you are looking to express a medium-term bullish view on oil this week, the proxies would be a better bet like CAD, NOK, or even the AUD. Although the Aussie is not typically described as a Petrol currency, it exhibits a powerful beta to oil risk.

We are entering a point of infection as June contract settlement looms. And it could devolve into the silly season as market sets to test global storage capacity in the next 3-4 weeks. This will likely create substantial volatility and possibly more spikes to the downside until supply finally equals demand, as with nowhere to store the oil, supply has no other option but to be shut-ins

I would caution on being overly bearish as risk management protocols suggest more rolls out of June into July could happen next week, meaning less settlement risk in June contract.

With that in mind, within around 4-8 weeks, there could be a significant change in the situation as the OPEC+ cuts plus a combination of additional voluntary, forced, and compensated shut-ins gradually brings the market back to a state of normalcy.

Brent has recovered from lows but remains about 23% below last Friday's close after a week that showed just how bad things could get for oil.

Deeper cuts are needed to support oil prices, not because they fix the oversupply expected in 2Q but because they quicken the rebalancing expected in 3Q. This could provide a buffer as border lockdowns, and travel restrictions would like to be the last to reopen after governments are convinced the curve has flattened, and the risk of secondary spread has receded.

It will be an uncertain time for the oil market with data pointing toward accelerating inventory builds and storage moving closer to capacity.

Gold Markets

A couple of critical technical supports were breached last week $1603 XAU/EUR and $1725 XAU/USD, as the current leg higher came on the back of the gloomy EU and US data, which is bound to get worse. And the bounce was exacerbated by the situation in Europe. The talk of potential further government spending under an EU budget seems to be driving XAU/EUR back to the all-time highs around 1600

As far as the primary benchmark XAU/USD, all the bullish reasons to stay long gold in the medium term still apply - notably, the considerable amount of money being printed by central banks and fiscal spending by governments to offset the economic impact of the coronavirus outbreak. Temporary deflationary concerns like the one triggered by the selloff in oil are one of the few things to worry about apart from the massive positioning as the market to merrily along the way to $1800 on a path paved with gold bricks.

LIBOR is falling; signaling USD funding pressure is dropping, so is it time for the dollar to finally give way?

Currency Markets

The Australian Dollar

The Aussie will catch wings.

Aussie currency has been on something of a tear recently, coming at the top end of the G-10 spectrum.

There are a few things at work here. With evidence that China is bottoming out, it would be reasonable to expect AUD to be one of the biggest beneficiaries.

The meek level of iron ore inventories at Chinese ports has raised some hope that China might soon start re-stocking.

Meanwhile, in Australia, recent changes to government rules allow workers to take funds out of their pension pots. There might, therefore, soon be something of repatriation of overseas cash into AUD.

The Euro

There is a good case for the euro to pop higher

Events are mostly out of the way, they were not euro-supportive, and yet EUR/USD is holding in very well, suggesting the EU outcome was in the price.

Friday LIBOR fixing might have flown under the radar for some was 0.88 from 0.99 the day before and 1.02 the day before that. The peak in LIBOR in 2008 was a signal that panic USD buying was done, and a few weeks later, the USD fell precipitously. A good chunk of the USD buying since March has been of the global USD shortage variety and tumbling.

LIBOR is yet another signal that the shortage is dissipating.

Central Banks Take The Stage, Gold Heads Higher And USO ETF's Policy Shift
 

Related Articles

Craig Erlam
Week Ahead – Rate Hikes Keep Coming By Craig Erlam - Aug 12, 2022

Barring The Obvious Exception We may have entered into a typically slower time of year for financial markets but as last week showed, there really is no such thing in 2022 and I...

Central Banks Take The Stage, Gold Heads Higher And USO ETF's Policy Shift

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Strela Fxxx
Strela Fxxx Apr 26, 2020 6:11PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Deflation in Europe is coming!
Robert Kolonajan
Robert Kolonajan Apr 26, 2020 10:22AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
meeting could be the most interesting one of them all?
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email