Asia Finding Love On The Rebound

Asian financial markets are enjoying a positive day as Wall Street continues to ignore bond market warnings, or warnings anywhere else for that matter, and more positive headlines rolled out in trading this morning. China and US trade ambassadors enjoyed a positive call today, reiterating the commitment from China to meet its obligations under the Phase-1 trade agreement signed earlier this year. That will be of substantial relief to markets, as the last thing the world economy needed right now, was an escalation in hostilities on that front. To be fair to China, they have two years to meet the commitment, a detail that appears to over often overlooked. And COVID-19 has most definitely put a spanner in the works these past months.

Australia to had positive news with Prime Minister Scott Morrison announcing the intention for the economy to reopen in stages up until early July. More importantly, he stated that Treasury forecasts suggest that 850,000 jobs will return quickly once restrictions domestically end.

US Initial Jobless Claims overnight saw another 4.174 million American’s heading to the jobless queues for the week. In of itself, a disastrous number, but in the strange times we live in, it was less than the 5 million of the previous weeks. Thus, living a falling coronavirus death toll, markets construed this as a positive trend and that America is “flattening the curve’ on the jobless front.

PayPal shares soared 14.0% overnight, in another win for big-tech, which as a sector, continues to outperform as the winner in the battle with legacy companies in the COVID-19 world. That boosted the NASDAQ, which has now unwound nearly all of its coronavirus sell-off. The peak virus reopening trade continues to subsume the carnage on the street in the real world.

The US bond markets, ever a bastion caution, continues to take a somewhat more negative “forward-looking” view of the work. US Fed Funds futures pricing in the possibility of negative rates next year and the US 2-year note hit a record low yield. Clearly, bond markets do not share the rosy outlook of equity and energy markets. The US government’s galactic levels of debt raising requirements, will sensibly, be concentrated in the long end of the curve, hinting that the curve itself, will steepen markedly in the months to come. I believe both equity and bond markets are incorrect to some extent. Inflation, and if things don’t go to plan, stagflation are the more likely outcomes of the coronavirus pandemic. But that will be a story for another day.

Most of Europe is on holiday today, which will dampen volatility in Asia. Tonight’s highlight will be the US Non-Farm Payrolls which are expected to plummet by a mind-boggling 22 million jobs. That fall, though has been well telegraphed by the fall in the weekly employment numbers over the past month. Therefore, terrible as the number will be, its impact on markets is almost certainly fully priced in.

Overall, financial markets continue to disconnect themselves from reality on the ground under the pretext of forward-looking genius. I have severe doubts about the wisdom of that thesis. What cannot be denied; however, is the momentum of the peak virus trade right now. The ayes have it and will continue to do so for the near future at least, making top picking a dangerous game. If you are not in the peak virus camp, sitting on the side-lines and looking forward to the weekend will be the best way to preserve capital.

Equities march higher in Asia as the positive headlines roll in.

Wall Street had another positive day, boosted by big-tech and the peak virus trade, and record low yields at the short end of the US curve. The S&P 500 rose 1.15%, the NASDAQ leapt 1.40% with the DOW Jones climbing 0.90%. In aftermarket futures trading, both the S&P mini and NASDAQ futures have surged 1.20% in Asia.

Asia started the day positively on the back of Wall Street, with positive US-China trade communications, and a timetable for reopening Australia further boosting equity markets regionally. The Nikkei 225 has climbed 2.0% with the Korean Kospi up 1.15%. Mainland China’s Shanghai Composite is 0.90% higher, and the CSI 300 has risen 0.60%.

Singapore continues to lag, up only 0.20% today. The index has been dragged lower by Singapore Airlines announcing its first-ever yearly loss, complicated ironically, by fuel hedging losses. HDB property transactions fell nearly 80% in April, and the commodity trading sector continues to be rocked by scandals.

That left Singapore lagging as both Kuala Lumpur rose 1.20% and the Hang Seng rose 0.90%. The Australian All Ordinaries has increased by 0.90% and the ASX 200 by 0.85%. Jakarta and Manilla are down 0.20% as economic worries and a continuing climb in coronavirus cases cloud both countries outlooks.

With Europe closed, Asian equity trading will likely wind down to a quiet finish. Asia’s laggards, Indonesia, Philippines and Singapore, will continue to underperform as each grapple with specific national issues. For the rest of the region though, the peak virus trade continues to boost positive momentum, and I see no reason why that will not continue into North American trade this evening.

The US Dollar retreats on falling US and “peak virus.”

The US Dollar continued its retreat overnight as the US yields out to the 10-year tenor all continued falling, and in the case of the 2-year Note, hit record lows. The US Dollar Index fell 0.20% to 99.89 with both majors and developing markets gaining versus the greenback.

The main driver, though, has been the more positive risk environment as Europe, the US and parts of the Asia Pacific continue with plans to reopen their economies after coronavirus lockdowns. The perception that peak virus is behind us has seen a rotation into emerging markets currencies and out of the haven Dollar.

As stated, the bad news from tonight’s Non-Farm Payrolls is priced in and unlikely to derail the risk-on trade unless we have a blow-out number closer to 30 million. It is a strange world that we live in, when a drop in employment from the 22 million jobs expected, to say 30 million jobs, would be considered a blow-out result. With potential trade concerns receding this morning, the short-term momentum is still with the global recovery trade, and the US Dollar should continue to give ground into the week’s end.

Oil recovers some of its losses in Asian trading.

Oil saw profit-taking sellers emerge overnight after an impressive rally over the past week, and ahead of US data this evening. Brent crude falling 2.0% and WTI falling 3.50%. The apparent de-escalation of potential trade hostilities from this morning US-China phone call has seen bullish sentiment return to both contracts. Brent crude rising 1.40% to $29.90 a barrel, and WTI increasing 1.50% to $23.90 a barrel.

Even more so than equities, oil has a vast amount of good news priced into it. Both contracts are dabbling with their 50-day moving averages at these levels. Indeed, those 50-days have capped gains on both over the past three trading sessions. The inability of either contract to close above their moving averages is a slight concern and suggests that short-term momentum may be waning. Investors should tread lightly and be wary of bullish exuberance at these price levels for now.

Gold rallies impressively but is still stuck in its range.

Gold rallied by 1.80 % overnight to $1715.50 an ounce, as both the Dollar and US treasury yields fell. The 30-dollar rally, although impressive on paper, still leaves gold stuck in the middle of its one-month range between $1650.00 and $1750.00 an ounce.

It is essential to separate short-term momentum, flip-flopping sentiment and day-to-day noise from structural moves. Gold has had a lot of the former for the past month, and very little of the later. Until gold closes above or below the extremes of its one-month range, trading should remain the preserve of the intra-day trader. Golds fundamentals are screaming for higher levels to come, possibly much higher, but it must navigate the doldrums first. Patience is required.

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