Asia Morning: Putting Out Fires, With Gasoline

The frenetic gyrations in the oil market did not subside overnight, following the carnage in the front month May WTI contract over the previous days. Attention moved to the June WTI contract, the new front month, where more gasoline was poured onto the fire, as worries continued about the Cushing Oklahoma oil hub running out of storage in the next few weeks. The June contract plunged by 43% at one stage, falling from $20.00 a barrel to $11.60 a barrel in frantic trading. 

I will deal with oil in more detail later, but needless to say, the ravages in energy spilled over into the broader financial markets. Equities finally had to confront reality – a seemingly rare event these days – with broader indices falling in Europe and the US. Price declines in oil driving home the extent of the economic slowdown on the global economy from COVID-19, as opposed to artfully constructed rallies on the back of flawed v-shaped optimism and Federal Reserve quantitative easings. 

US Treasury yields also fell as safe-haven buyers returned to government bonds. Those flows and the general flight to safety also boosted the US Dollar generally, making its rally more broad-based having been previously confined to Petro-currencies. The market’s sentiment is flip-flopping daily though on currency and bond markets, suggesting that the street is in headless chicken mode, chasing intra-day momentum while desperately awaiting clarity on the bigger picture. From an investors point of view in these types of markets, it is much better to be the chicken on a perch watching the world go by, than a headless one, running around in random directions covered in blood.

In more positive news, the US Senate appears to have passed the latest $500 billion stimulus package, which now moves to the House of Representatives. That has been balanced out though by President Trump issuing an executive order overnight, blocking all immigration to the US for 90 days, to protect American jobs ostensibly. That is an easy win for an election year President though; no one is immigrating anywhere in the world right now, unless it is on a repatriation flight. Nor is anyone likely to be migrating anywhere for the foreseeable future either. The net result has been market neutral, with both headlines cancelling each other out in effect.

Speculation out of North Korea that Kim Jong Un was on death’s door yesterday caused a flurry of volatility in North Asian markets. Apart from the merits of some well-known tier-1 news channels placing a first Tweet above fact checking, no evidence has emerged one way or the other to confirm it. South Korea’s Government denied there was any evidence that this was even the case, although President Trump wished him a speedy recovery this morning. Where there is smoke, there is fire perhaps. Until Mr Kim reappears in public, an uncertainty discount will be built into South Korean stocks and the Won, but not markedly so. Because of his relative youth, a succession battle to Mr Kim would likely be a messy one and would increase the uncertainty discount.

On the data front, Australia’s March preliminary Retail Sales jumped by a seasonally adjusted 8.20% M/M, an impressive result. The huge rise was led by food retailing, as Australian’s rushed to supermarkets to stockpile toilet paper, pasta and canned food. That has mollified losses on their stock markets today and allowed the AUD to make back half of its risk-aversion losses from overnight.

Given that oil is the front and centre of the financial market’s attention at the moment, the Official US Government, and American Petroleum Institute’s respective crude inventory figures. will be tonight’s data highlight. The EIA data is due at 2230 SGT with inventories forecast to fall from 19.25 million barrels to 16.15 million barrels. The API data is released at 0500 SGT tomorrow morning, with markets looking for a drop from last weeks climb of 13.15 million barrels. Given how tenuous oils recovery has been in Asia today, above forecast prints on either or both numbers could see another wave of sellers crash into oil markets.

Equities in Asia head south after Wall Street sell-off overnight.

Oil prices crashed again overnight, and they seem to have assumed a proxy role for the extent of the COVID-19 pandemic slowdown. Wall Street fell for the 2nd day in a row in a reality bites retreat. The S&P 500 fell 3.1%, the NASDAQ declined 3.50%, and the Dow Jones fell 2.70% as the US earning season continued with its series of underwhelming results.

Asia’s response has been somewhat less negative, although stock markets are mostly in the red. Mainland China has performed the best with the Shanghai Composite and CSI 300 both flat on the day. The Nikkei 225 and Korean Kospi are down by 1.0%, with some Kim Jong Un nerves persisting.

Australia’s ASX 200 is down only 0.35% after impressive preliminary retail sales data saved the day. News that Australia is preparing to buy, now very cheap oil from the US SPR has also had a boosting effect. The Hang Seng meanwhile, has eased in sympathy with the rest of the region, dropping 0.80% today.

The Straits Times has eased 1.50% as scandals shake the oil trading market there and the official lock-down was extended until the 1st June. The one-month extension is sure to hit Singapore REITS and mall retailers hard even as the Government announced another S$2.70 billion package. Singapore shares are likely to underperform the region in the near term. 

Although Asia may well be viewing the travails of the US oil market as a US-centric problem, the falls of the last two days highlight the extent of the demand slowdown in the world. Hence, price action cannot be entirely ignored. Equity markets seem to be reluctantly facing up to this reality, with the US $500 billion stimulus package hardly causing a ripple on Wall Street. When good news stops lifting equity markets, momentum has likely waned for now. The downside of the equity markets globally most definitely is the soft side for now.

US Dollar strengthens overnight, but Asia remains side-lined.

Asian markets remain reluctant this week to continue overnight moves, and given the flip-flop nature of daily sentiment, it is hard to blame them. Such was the case overnight, where another bout of volatility in oil markets saw the US Dollar strengthen on safe-haven demand. US Treasury yields also fell as investors piled into government bonds and out of commodities and equities.

Resource-based currencies such as the AUD and NZD were under pressure, with both falling around 1.0% yesterday. The same could also be said for Petro-currencies, with the selloffs continuing on the Russian Ruble, Norwegian Krone, Canadian Dollar and Mexican Peso. The later not helped by a 50-basis point cut by the Central Bank. With oil focusing on the world’s mind on the extent of the global contraction, the resource/oil grouping are likely to remain unloved this week.

Asian currencies have proved surprisingly resilient this week. Resource proxies the IDR and MYR easing only slightly against the Dollar. That same story is repeated elsewhere with USD/JPY unchanged for the week, and the KRW and CNY only modestly weaker. The fall in oil prices, while a burden for producing countries, is a boon for importing countries. Asia is the world’s largest importer, and the falls in oil are acting as a natural support for regional currencies. In Indonesia’s case, although it exports crude, it refines very little and imports most of its refined petroleum products. Pertamina is chartering ships to go bargain hunting globally now, and thus the fall in crude prices has not been the burden on Indonesia, one would logically think it would be.

WTI sees profit-taking buyers, but Brent is under pressure.

WTI’s June futures, the new front month, fell the chill of the US oversupply situation yesterday, plunging 33% to $12.80 a barrel, having tested $11.50 a barrel earlier in the session. Knowing what the price of US oil futures and the US over the counter grades is becoming a challenging business. I see a considerable divergence in my WTI feeds across different providers. Some physical delivery grades, such as Alaskan crude, are still trading at negative prices. That is, they will pay you to take them off their hands.

On a spot basis, WTI finished around $12.80 a barrel yesterday. After an initial profit taking rally, sellers have quickly swamped WTI, and it is now trading just above $12.00 a barrel. Sentiment has not been helped by the Texas Railway Commission -the state quango with the powers to enact production cuts- deciding to put off its decision on production cuts until early May. The urgency with which oil longs positioned in the June contracts, want to roll into a still illiquid July contract suggests that selling interest remains unabated. June WTI will move below $10 a barrel sooner, rather than later.

Brent crude is seeing further panic selling in Asia today. Having fallen by a gigantic 24% to $19.60 yesterday, Brent has collapsed again in Asia after an early dead cat bounce. Brent has fallen 16.0% to $16.50 a barrel this morning, the November 2001 lows. The sell-off today has a capitulation look about it, after OPEC+ tried to convene communications last night, but with no signs of progress. 

Brent should find technical support at this level initially, however, a move through $16.00 a barrel will re-open calls for a test of the late 1998 lows around $10.00 a barrel, which is the only meaningful technical support can see from here.  

The panic buttons will be being pushed across OPEC+ this morning and rightly so. State budgets will be devastated if prices remain at these levels, exacerbating the COVID-19 slowdown to many countries who can least afford to sustain it. I suspect the IMF’s phone will be ringing hot this morning. The only plausible action from here would be another round of follow-up cuts from OPEC+ and enacted immediately.

Gold falls as the rush for cash correlation returns.

The correlation to equities for gold reappeared with force overnight, investors selling gold to raise case as stock markets dived sharply lower. Gold slumped by $36 at one stage to $1661.50 an ounce. It salvaged some pride later in the session and rose to close at $1687.00 an ounce. Gold has eased with equities again in Asia, falling five dollars to $1682.00 an ounce in muted trading.

With the return of the linear equity/gold correlation, the positive outlook for gold fundamentally becomes far more muddied. Equity markets face a potentially tricky couple of weeks ahead. If the correlation holds true, gold will now struggle to sustain gains above $1700.00 an ounce, let alone mount a challenge to $1800.00 an ounce. The latter now looks technically insurmountable in the current environment.

If anything, further losses in equity markets make a retest of the $1640.00 support region more likely for gold. Stop-losses from frustrated longs will inevitably appear if that support breaks. Gold probably trades in a wide, but real, range of $1640.00 to $1710.00 an ounce for the remainder of the week. 

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