An Underwhelming Start to Q2

Financial markets continued to limp into Q2 overnight, with equities and energy continuing to lag as the world’s economy continues to wily under the ongoing COVID-19 pandemic. Energy was front and centre overnight with US Crude Inventories blowing out to 13.8 million barrels and Whiting Petroleum filing for Chapter 11 bankruptcy protection. The CEO used terms such as “right-sized balance sheet” and “enhanced cost structure” to put a brave face on proceedings. No amount of management-speak gobbledygook can cover the fact that US shale is in deep trouble and Whiting Petroleum won’t be the last company in the sector to call in the restructuring experts to “right-size” balance sheets.

One positive notes this morning came from President Trump though, who said that he expected a Saudi Arabia-Russia production deal within days. That sounds like the wild optimism from the President that we know and love. It is hard, though, to see such a deal happening without the US coming to the party in some shape or form, however that may be engineered.

With US and European equity markets wilting again overnight, Asia looks set for a negative day as well. Although perhaps to a lesser extent as the region pins its hopes on a re-emerging China. The Reserve Bank of New Zealand climbed on the dividend buy-back train today, ordering banks to suspend dividend payments. That follows a trend started in Europe where buybacks and dividends are rightly dirty words right now.

I am somewhat flabbergasted that authorities are even having to get involved in this aspect of global commerce, given that many large corporations around the world are in a weak position to weather the coronavirus storm. Much of that being precisely because of their excessive dividend and buy-back policies, whilst all holding out their hands for taxpayer bailouts. I am impressed that legions of c-suite executives are doing just that with a straight face, and I suspect that much hard love is coming their way in the months ahead. They too, will be sharing the pain that everyone else in the world is experiencing. To emphasise just how important this is, the aforementioned Whiting Petroleum CEO will still pocket a “bonus” of $6.4 million for his high-quality work. The rest of the C-suite will snuffle $8.2 million from the corporate trough for their “efforts.” You couldn’t make this up.

The data calendar today is mostly tier-2 with all eyes on the US Initial Jobless Claims this evening. Last week’s blowout 3.3 million increase could be beaten again tonight, with the street forecasting another jump of 3.5 million new claims. With COVID-19 biting its way into US society deeply now, further fiscal packages from the US Government will be inevitable. My biggest concern being can doctrinal differences be put aside for the greater good. Wall Street capitalism looks terrific on paper in a bull market, right up until the moment that it doesn’t.

Tomorrow morning will be interesting for Asia, with final PMI’s from China, Japan, Australia and Singapore. Much hope will be pinned on the continued improvement of data from Asia’s powerhouses. A disappointment on that front will see much of the tentative hope displayed in the region wiped away as quickly as it has begun.

There will be a passing interest in US Non-Farm Payrolls tomorrow evening with the street expecting a drop of 100,000 jobs and Unemployment to remain steady at 3.80%. I believe both may well be wishful thinks when one looks at the jobless claims. In the overall picture, though, terrible data tomorrow night should surprise nobody at all with the progress of the COVID-19 battle being the only thing that really matters.

Equities

Wall Street gave ground again overnight, with all three leading indices falling 4.40% as the new quarter got underway. Both the S&P 500 minis and NASDAQ futures have climbed 1.25% this morning as profit-taking from the previous two days has set in.

That has given a respite to Asian markets, which would have expected a tough day at the office after Wall Street’s price action overnight. The Nikkei 225 is down 0.75% with the Kospi slightly higher, up 0.78%. Mainland China sees the Shanghai Composite gently lower by 0.10% and the CSI 300 by 0.25%.

Singapore is lower by 1.40% along with Jakarta with the Hang Seng down 0.30%. Australia is the worst performer today, perhaps reflecting its outperformance over the previous sessions, the All Ordinaries has fallen 2.80% and the ASC 200 by 1.90%.

Overall, the picture is one of a modest attempt by Asia to hold its nerve, backed by China, as the rest of the world clearly faces more trying times ahead in the face of the COVID-19 pandemic. However, the sentiment is fragile, to say the least, and we expect the region’s markets to resolve to the downside still, particularly once Europe arrives.

Currencies

The US continues to benefit from haven flows and US treasury yields continuing to edge higher. With Europe no closer to overcoming its virus shutdown, EUR/USD fell 0.65% overnight to 1.0940 and a retest of 1.0900 looks set to occur sooner, rather than later. GBP/USD fell 0.40% to 1.2370 and appears to be consolidating in a broader 1.2300/1.2500 range following its March collapse. Further gains past 1.2500 will be challenging in the short to medium term.

Haven currencies fared slightly better with the USD/JPY falling 0.40% to 107.10. The street is still awaiting the much-anticipated Japanese stimulus package that is promising much, but delivering precisely zero on the details front. With the Olympic postponed until next year, the urgency of action required is increasing. The longer the Government vacillates, the more likely it is we will we see USD/JPY turn sharply higher.

USD/CNH turned higher overnight as the greenback strengthened in general. USD/CNH rose 0.40% to 7.1265, although Chinese authorities seem content to allow the Yuan to trade calmly in a 7.0600/7.1600 range for now.

USD/IDR continues to look very vulnerable. Yesterday it was announced that the Bank of Indonesia would directly buy government-issued bonds, as the Finance Ministry scrambles for cash to fight COVID-19 and insulate the economic slowdown. The direct monetisation from the 1998 playbook is unlikely to find friends amongst investors, local or international. A pseudo-lock-down of Jakarta was announced overnight as well, but the language was nebulous, much as it has been from the Government thus far. USD/IDR is hovering just under its recent highs at 16600.00, and a further test of the top side looks to be on the cards sooner rather than later. Indonesia’s most significant challenge ahead will be avoiding capital flight from the domestic population.

Overall the US Dollar strength looks set to continue, supported by its haven designation, yields and the ongoing demand for US funding from around the globe.

Oil

Oil has rallied impressively this morning in Asia after a lacklustre session overnight. Hope that US President Trump can get Saudi Arabia and Russia to the negotiating table has seen both Brent and WTI shrug of last night’s massive climb in US Crude Inventories.

Brent crude futures are 5.90% high at $26.30 a barrel this morning, with WTI futures 4.60% higher at $21.25 a barrel. Brent crude’s next resistance is at $28.00 a barrel, and WTI has resistance at $22.00 a barrel.

I would warn, however, that any glimmer of a production deal will need the participation fo the United States, given that is effectively Russia and Saudi Arabia’s main gripe int he first place. The free ride enjoyed by US shale as the weight of cuts to maintain prices fell upon OPEC+. From a legal point of view, how the US could participate in an effectively cartel-like action escapes me. We should also note that the world is facing a massive demand shock even without a price war to complicate things. Therefore, excessive hope on oil prices is likely to be mostly priced in at these levels. Anyone thinking of going long at these price levels should think very carefully about doing so.

Gold

Gold picked itself up of the floor overnight, finally seeing some haven-based flows into the yellow metal. Gold rose 0.90% to $1588.00 an ounce in overnight trading and is unchanged this morning in Asia.

Gold still needs to reclaim $1600.00 an ounce to alleviate near-term technical concerns though. And beyond that, the $1640.00 an ounce region is formidable technical resistance.

Gold’s next real test will be if equity markets move aggressively lower again tonight in New York. Gold weathered the storm yesterday, but we do not yet know if the rush to cash during stock selloffs has ceased to be an important driver of gold performance. With that in mind, bargain hunters at these levels should avoid loading up too heavily with a break of $1560.00 an ounce, likely to provoke stop-loss selling.

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