Asia Morning: Coordinated Hopes Lift Markets

Equity markets posted outsized gains overnight, on what was a very volatile day, as the tail-chasing fast money trading strategy reached biblical proportions. US equities indices climbed over four per cent, driven by renewed hopes of coordinated central bank stimulus efforts to offset the coronavirus slowdown.

The noises coming from Europe, Japan, Europe and this morning, Australia, would indicate something is brewing. Indeed, later today, US Treasury Secretary Steve Mnuchin, and Federal Reserve Chairman Jerome Powell, will lead a conference call comprising the G-7’s finance ministers and central bank governors. Most pleasing is that representatives of both monetary and fiscal levers will be in attendance. Ham-fisted rate cuts will not be a magic panacea to a coronavirus slowdown if SME’s cannot get paid or cannot access working capital.

A good dollop of optimism was, therefore, well earned by the markets after a torrid last week. Off course, what one minister can give, another can take away. Given the levels of volatility sweeping financial markets at the moment, last nights outsized gains on stocks and commodities could just as quickly swept away if a coordinated response fails to appear or disappoints in its scope and execution.

Australia has started the ball rolling. The Reserve Bank of Australia announcing a 0.25% cut in rates to a new record low of 0.50%. Australian Prime Minister Scott Morrison this morning, also indicated that targeted fiscal stimulus was on the way, following the approach of several Asian countries so far.

Asia will almost certainly get its second rate cut of the day at 1500SGT, with Malaysia’s Bank Negara set to ease by 25 basis points to 2.50%. Their hand has probably been forced by the ongoing political turmoil in Malaysia, as well as the effects of coronavirus.

Over in the US, attention will mostly be focused on the Democratic “Super Tuesday” voting for the Democratic Presidential candidate nomination. Fifteen states will choose their candidate, with some 34% of total delegates up for grabs. Today marks the first appearance of Michael Bloomberg into the Democratic race, seeking to shake up the increasingly two-horse race between Bernie Sanders and Joe Biden. Should Mr Bloomberg’s millions have failed to scoop voters, by the day’s end, the competition will likely be between just Mr Sanders and Mr Biden. The effects on markets though, will be modest unless Mr Sanders records a landslide win, which remains unlikely at this point.

Equities

Wall Street endured a volatile day, seesawing between red and green before the lure of coordinated central bank easing’s, propelled Wall Street’s three leading indices to impressive gains in the last hour of the session. The S&P 500 leapt 4.61%, the Nasdaq by 4.49% and the Dow Jones by 4.16%.

Asia has refused to buy into the tail-chasing, fast money, FOMO-on-steroids trading strategy of Wall Street. Nevertheless, in a much more calm and controlled manner, regional stock markets have all recorded gains today. US stock index futures have fallen around 0.45% in Asia as profit-taking from yesterday’s rally has set in. That has no doubt helped mollify any irrational exuberance in Asia. Another factor being that although China’s rate of new infections is falling, South Korea’s is rising, and Indonesia yesterday, finally came in from the cold, reporting its first official coronavirus cases.

Asia has made steady rather than spectacular gains, the Straits Times rising 1.10% and the Hang Seng by 0.55%. The Nikkei 225 has risen 1.10% with the Mainland Shanghai Composite increasing 1.40% and the CSI 300 by 1.30%. Today’s outperformers are rather surprisingly, Jakarta and Bangkok, rising 2.95% and 2.20% respectively. Perhaps reflecting the outsized underperformance by both last week, and less pressure on the Rupiah and the Baht.

Asia’s performance sets up Europe for another positive, if unspectacular, start to their session. One feels though that the newly found optimism sweeping the markets has a fragile foundation. We have not seen the end of “peak gyration” in markets yet.

Currencies

With US bond yields still anchored at near-record lows, the US Dollar struggled overnight. Adding to its woes was the bounce in risk assets, as the street aggressively priced in coordinated easings from the world’s major central banks.

The Euro was the big winner on the day, EUR/USD rising 1.0% to 1.1135, having touched 1.1185 earlier in the session. EUR/USD also rallied through its 100 and 200-day moving averages for the first time since early January. The story though, is more one of shrinking rate differentials rather than a miraculous comeback by Europe, with so much bad news priced into the continent. Further gains above 1.1300 will likely require another strong move lower by US yields, however.

The Chinese Yuan continued its comeback as the rate of new coronavirus infections continued to fall, along with the US dollar. The onshore CNY rallied 300 points yesterday, USD/CNY falling to 6.9590. Another strong fixing at 6.9516 points towards further gains, although USD/CNY, has risen slightly this morning as US stock futures have edged lower.

The market was clearly short Australian Dollars into the RBA decision, with AUD/USD climbing gently to 0.6550 today. That followed a healthy 0.50% gain overnight on stimulus hopes. The AUD remains in a well-defined downtrend though, with a move higher through 0.6600 needed to remove it from the naughty corner.

Oil

Stimulus noise and hopes of OPEC+ production cuts produced a flammable mixture overnight, with Brent crude and WTI exploding higher. Brent crude jumped 5.30% to $52.75 a barrel and WTI jumped 5.0% to $47.50 a barrel.

Even with Russia still downplaying the scale of further cuts, both contracts continued rallying gently in Asia. Brent crude rising 20 cents to $57.95 a barrel, and WTI rising 30 cents to $47.80 a barrel.

Assuming the central banks come to the party this week, a substantial production cut by OPEC+ would set oil up to regain all the losses of the past week. Probably very quickly. Inaction by either, or both, should see oil retesting its recent lows by the week’s end. Which way this resolves I know not as yet, but we can expect more extreme tail-chasing volatility this week.

Gold

Gold continues to puzzle, with a weaker dollar and low US yields inspiring only a modest rally of 0.20% to $1589.50 an ounce by the end of the session. That perhaps does not tell the full story though, with gold testing and failing at $1610.10 earlier in the session.

These conditions should be ripe for gains in gold, especially if we start to see coordinated easings in some form by the world’s major central banks over the next week. It may well be that the margin call induced selling of last week has removed much open interest in gold, with investors attentions more focused on equities for now.

Unless the coronavirus magically disappears, US yields rise aggressively, and we have a rapid rally in equities globally to recoup all their losses of last week, it is hard to make a bearish case for gold. The $1550.00 an ounce region, along with the 100-day moving average at $1525.00 an ounce defines the longer-term support zone. If that remains intact, gold remains constructive on a technical basis. We may all just need a little patience.

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