Asia’s Morning: Behold, The Voice of Reason

The FOMO-gnomes that inhabit the stock markets of Wall Street has been exceedingly tiresome this week. Whilst they are lovely for intraday volatility, if that’s your thing, they are terrible as an indicator of where the world is really at. A glance at the S&P 500 chart for the past week, shows a series daily rollercoaster flip-flops, which if they were an elevation map for a cycle race, would terrify the most battle-hardened Tour De France alpine specialist.

Having decided the world was saved on Monday, they decided it was doomed on Tuesday, then saved on Wednesday, but condemned yesterday. Asia has, unfortunately, been dragged along for the alpine climbs and descents this week, with today being a long descent, but strangely, leaving none of us feeling healthier for all the exercise. Alas, it is impossible to get the FOMO gnomes and talking heads of Wall Street’s stock markets, some of whom are drinking far too much coffee, to self-isolate. Perhaps the best thing we can do try to ignore them to some extent, and look elsewhere for a more adult view of where the world truly is.

One such location is the world’s bond markets. US Treasury yields have tanked this week, as investors globally piled into high-quality government bonds as portfolio protection, helped along by a 50-basis point rate cut by the Federal Reserve amongst others. The bond market has steadfastly refused to join into the daily flip-flops elsewhere with yields moving lower again overnight. That alone tells us that the longer-term money, as opposed to the 5-minute macro’s, is extremely concerned about the demand shock that the rapidly widening coronavirus outbreak could bring. A plethora of central banks has also cut rates this week, with more to come, signalling that they too are concerned about the health of the global economy.

OPEC in the meantime, having bet that coronavirus would pass quickly, and lost, is busily trying to push through the most extensive production cuts since the global financial crisis. The news wires are full of stories about Force Majeure’s on oil and gas deliveries in Asia – not taking delivery of cargoes because they can’t store or sell it due to an event beyond their control – as well as other products.

A glance around the corporate world shows banking stocks pressured as rates are cut. A procession of airlines is cutting capacity and routes, freezing hiring and warning of massive hits to revenues. That theme has been repeated across many other sectors of the corporate world as corporations warn of supply line disruption, and chuck revenue forecasts into the rubbish bin for 2020. Work teams (including OANDA) are either working from home, self-isolating or working alternative weeks in the office. Most tellingly, every time a new case is announced in a different country, there is a rush to stockpile toilet paper for some odd reason. We all giggled at the panic buying in Singapore initially. But really, they were just the start of a pattern of behaviour repeated globally, including my home, New Zealand.

Gold is making substantial progress towards the $1700.00 an ounce region as reality bites and will in all likelihood rise further still if coronavirus doesn’t go away. Oil remains on its knees, despite OPEC’s impending cuts, although its daily gyrations are almost as schizophrenic as the equity markets.

Rather than being painted as Dr Doom on a Friday – that moniker is already taken – I much prefer the Voice of Reason. Or as my two Millennials would put it, #voiceofreasondad. Even if China has miraculously beaten coronavirus, and I hope they have, it appears to be just getting started internationally. If the world’s efforts to overcome Covid-19 are successful, the world will still be facing an aggregate supply/demand shock.

That will require both a fiscal and monetary response from governments globally, including China, to head of a crunch in working capital requirements of SME’s everywhere. No working capital equals no new orders and fewer jobs in the real world, and the sort of self-perpetuating negative feedback loop I have been warning about for a while. It is a lot to ask of central banks and governments, in an every man for himself, fractured world.

I do, of course, hope I am as correct on this, as I am on most of my gold calls these days, completely wrong. I suspect though; we will see things get worse before they get better. In the meantime, let the kids continue to play in the equity sandpit, but don’t give them coffee, make sure they wash their hands, stock up on loo paper and most importantly concentrate of the big picture instead of listening to their daily nonsense.

Equities

As I have mentioned already, the Biden afterglow, central bank easings kill coronavirus rally on Wednesday, disappeared faster than a roll of toilet paper in a supermarket yesterday. Wall Street decided one day of hope was enough and were back in bear mode overnight. The S&P 500 fell 3.60%, the Nasdaq fell 3.10%, and the Dow Jones fell 3.60%, airlines coming in for some particularly negative attention.

The negative sentiment has infected equity markets in the Asia Pacific, which should come as a surprise to no one. The Nikkei 225 is 3.30% lower, the Hang Seng is down 2.25% and the Straits Times has fallen 1.30%. Mainland exchanges have fared relatively better, the Shanghai Composite falling 1.30% and the CSI 300 by 1.20%. In China’s case supported by falling coronavirus infection rates, a stronger Yuan, and possibly, some “national team’ buying.

The negativity across equity markets in Asia, reflects more realistically, the state of the world right now, rather than rallies built on foundations of sand. Equities are likely to stay under pressure for the remainder of the session. Investors will be looking for salvation from a robust US Non-Farm Payrolls number this evening. However, a surprise weakening may mean stock markets could face a retest of the lows of last week’s sell-off.

Currencies

Haven currencies outperformed overnight, with the Japanese Yen and Swiss Franc making notable gains. Overall, the US Dollar remained on the back foot as US yields continued rallying, narrowing the interest rate differential that has been the rock of US Dollar strength this past year.

USD/JPY fell 1.25% overnight to 106.16, with the Yen strengthening again today to 1095.90 as Asian equities tank. A weak Non-Farm Payrolls number has the potential to chop the legs from under USD/JPY this evening, as it will increase clamours for more Fed rate cuts. That could open a test of 105.00 as early as next week. Resistance, for now, is at 106.50.

Both the Australian and New Zealand Dollars have proven surprisingly durable this week, having been amongst the most unloved major currencies in recent times. Two significant factors are supporting the Antipodean Dollars. Firstly, the strengthening of the Chinese Yuan as coronavirus infections fall on the Mainland. Secondly, the Fed cut has narrowed the interest rate differential and taken the edge of their already record low-interest rates. Both still have a long way to go to recover from medium-term downtrends though and remain acutely vulnerable to increased coronavirus concerns.

USD/CNH has actually crept higher over the last two days, and is this morning, testing the daily picot level at 6.9550. Despite the noise though, both the onshore and offshore Yuan’s appeared anchored here in the middle of their 2020 ranges for now. An improvement in the coronavirus situation in China is being balanced out by a deteriorating one internationally. China not being immune to a demand shock from outside its borders.

Oil

OPEC’s inability to get its proposed additional 1.50 million barrels a day production cuts over the line with Russia saw oil join equities in an aggressive sell-off overnight. Brent crude fell 3.05% to $50.00 a barrel, with WTI falling 2.50% to 46.00 a barrel. That left both contracts just shy of their respective recent lows at $48.00 and $44.00 a barrel.

The inability of oil to rally even as OPEC announces an above-expected production cut is concerning. Worries persist that Saudi Arabia is prepared to walk away from the whole deal if Russia continues to refuse to join in the additional production cuts. That would, of course, be a disaster for oil, with Brent crude almost certainly falling to $30 to $35 a barrel in such a scenario.

I continue to believe that Russia is playing a rather ham-fisted negotiating ploy here, to engineer its share of the cuts being as low as possible. I fully expect them to sign up for the additional cuts, and their share of those, today. Oil has edged slightly lower in Asia as nerves persist, but once Russia agrees, we could see a relief rally of some sort. Overall though, the cuts are there to support prices at present levels, and not to engineer a supply squeeze that changes the structural price outlook for oil.

Gold

Gold pushed higher overnight in another strong session, boosted by a weaker dollar, lower yields and portfolio risk hedging flows. Go9ld rose 2.15% to $1672.00 an ounce, an almost 30-dollar gain for the day.

That leaves golds within shouting distance of its recent highs at $1689.00 an ounce. Gold is unchanged in Asia but will remain strongly supported on intraday dips ahead of the weekend. Support is at $1660.00 and $1653.00 an ounce, with resistance at $1676.00 and $1689.00 an ounce.

There are quite a few moving parts that need to fall into place for gold to test $1700.00 before the weekend. Mostly, it would require a weak Non-Farm Payrolls, an increase in coronavirus rhetoric, and a subsequent further fall in the Dollar and US Treasury yield curve. That is quite a few planets that need to align for the New York session. Any test of $1700.00 will likely have to wait for the next week.

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