Federal Reserve KaPow-ells Markets

The Federal Chairman Jerome Powell sent markets lower overnight with a three-punch combination that would have done Batman proud. Chairman Powell firstly poured water on the prospect of negative interest rates from the Fed, saying that the evidence the policy is effective is marginal. Secondly, he stated that the post-virus growth and recovery would be lower for longer. Thirdly, and in my mind, much more importantly, he urged the Federal Government to enact more fiscal support and set aside bipartisanship to get the job done.

The last statement is significant, representing for the first time, a rather forceful statement that the Federal Reserve could not do the job alone, and cutting straight to the heart of much of the criticism of the Federal government’s coronavirus response to date. Indeed, the US President last night said that the latest Democratic crafted stimulus bill was “dead on arrival.” To be fair to President Trump, the proposed legislation had been crafted by the Democrats alone, with not a shred of bipartisan participation. A necessary cornerstone of any fiscal response legislation in these times.

President Trump himself sent some shivers through markets. Labelling his advisor, Dr Anthony Fauci’s warnings on the premature reopening of state economies, unacceptable. He also waded into China, criticising their adherence to the trade deal and labelling coronavirus “the Chinese plague.” None of the above was viewed as particularly constructive by markets, who promptly voted with their feet and pressed the sell button.

The clouds in Asia have not lifted today with more bad news emerging from down under. Australia Employment for April fell by an astounding 594,000 jobs with the ABS saying the number is probably worse than the headline. New Zealand also announced its budget statement. New Zealand will issue NZD 165 billion of government bonds over the next four years, and government debt as a percentage of GDP will rise from 19% to 56%. That unwinds perhaps decades of hard work by successive New Zealand government to reduce the national debt, although that number still leaves the Kiwis in a better fiscal position than most.

What it does illustrate though, is the economic toll the coronavirus pandemic will wreck on national budgets across the globe, and the long recovery ahead. It perhaps also shows the disconnect of the peak virus FOMO trade so beloved of financial markets over the last month, from the cold hard reality on the ground. Government borrowing requirements around the world will aggressively compete with, and possibly crowd out, the private sectors for many years to come unless the globe can generate a few years of juicy inflation to deflate the whole mess.

Asia and Europe’s data for today is mostly 2nd tier, with most attention on the US Initial Jobless Claims for the week this evening. Another 3.5 million jobs are forecast to have been lost, although pundits may point to a falling trend continuing, that number being lower than the previous of 4.2 million jobs. That is unless you are one of those people that make up those statistics.

Asia’s highlight for the week will arrive tomorrow morning with the release of China’s Industrial Production and Retail Sales for April. Industrial Production is predicted to rise by 1.50%, versus last month’s 1.10% fall. Retail sales are expected to have fallen by 7%, better than March’s 15.80% fall. With so much expected of China to lead the world out of the global economic slump, on a first-in, first-out basis, poor numbers may continue to erode the confidence of the market’s peak virus trade.

Asian equities head South after Wall Street sell-off.

Wall Street gave up more of its recent gains overnight following comments from the Federal Reserve and the US President. The S&P 500 fell by 1,75%, with the NASDAQ dropping 1.50% and the Dow Jones falling 2.19%.

Asia today is a sea of red, although like yesterday, it is not reflecting the extent of the Wall Street retreat. The Nikkei 225 is 0.70% lower; the Kospi is 1.10% lower with China’s Shanghai Composite down 0.85%, and the CSI 300 down 0.80%. Singapore has fallen 1.25%, with Jakarta and Kuala Lumpur both 0.40% lower. The Australian All Ordinaries has declined 1.10%, with the ASX 200 down 1.25%. The NZX 50 has weathered the storm comparatively, down 0.20% after the government budget announcement; possibly supported by the prospect of interest rates being much lower for longer and an uber dovish RBNZ yesterday.

The scale of the recovery in global equities since the mid-March nadir, renders the falls of the past two days remain almost inconsequential. It is still not clear as yet, whether this is merely corrective unwinding of extended long positioning, or whether the peak virus trade has indeed run its course for now with equity markets being to align with the economic reality in the real world. What is clear is that nervousness has increased and that equity markets are far more susceptible to negative headlines than they have been at any stage in the past few weeks.

US Dollar rises on defensive rotation.

The US Dollar edged higher against the major currencies overnight, with the dollar index rising 0.28% to 100.21 and the EUR/USD falling to 1.0820, giving up much of its recent days’ gains. A fall in oil prices overnight saw the Dollar also record substantial gains against petro and emerging markets currencies.

That defensive tone has continued into Asia with USD/IDR, USD/KRW and USD/MYR rising by 0.20%. USD/JPY has fallen 0.15% to 106.90 as Japanese investors also buy the safe-haven Yen. USD/CNH though remains becalmed mid-range at 7.1000. USD/CNH has been locked between 7.0500 and 7.1500 for almost two months, and only a rise through 7.2000 is likely to set alarm bells ringing in the near-term. That looks unlikely as the Chinese look to damp anti-China rhetoric from the US.

Both the Australian and New Zealand Dollars remain under pressure this morning following yesterday’s significant falls. The NZD/USD is eroding support at 0.5990 with .5900 it’s next technical target. The AUD/USD has eased another 0.25% lower to 0.6435 today post the employment data. Support lies at 0.6375 and then 0.6300.

The US Dollar should continue to outperform into Europe with markets increasingly nervous about the longevity of the peak virus trade.

Oil almost unchanged in Asia after falling overnight.

A fall in US crude inventories overnight could not undo the damage of Jerome Powell’s comments, with the Chairman’s dose of reality leading to the further unwinding of speculative longs on Brent Crude and WTI. Brent crude fell by 2.20% to $29.30 a barrel, with WTI falling by a lesser 1.10% to $25.50 a barrel. Asia is having a quiet session though, with both contracts almost unchanged throughout the morning session.

The technical picture suggests that further downside correction is imminent on both contracts as markets start to get cold feet on the global recovery trade. Brent crude tested and failed $32.00 a barrel twice last week, and the price action since has been a series of lower highs. The 50-day moving average is at $29.10 a barrel today and has been moving lower the past week as well, capping intra-day gains. Support is very nearby at $28.80 a barrel, with a break opening a test of $28.00 a barrel. Should that level give way, a deeper correction $25.50 a barrel could be imminent.

WTI has failed twice ahead of $28.00 a barrel and has resistance at $29.00 a barrel. Support is nearby in the $24.50 a barrel area, and a break of that level suggests further losses to $23.50 a barrel. A loss of $23.50 opens the possibility of a much deeper correction to the $20.00 a barrel region.

Overall, oil is at its most vulnerable to adverse headline developments; then it has been for the past two weeks.

Gold rises on Powell comments overnight.

Gold climbed by just shy of 1.0% overnight, to $1715.50 an ounce, after the Federal Reserve’s call for more bi-partisan fiscal stimulus from the US Government. The reality though is that gold remains locked in a range trading scenario, with the overnight range, roughly average for the past month. I will reiterate, it is essential to differentiate between swings in daily sentiment and a structural change in gold prices. If we remain locked between $1650.00 and $1750.00 an ounce, we are in the former, and not the latter scenario. That said, the technical picture is, at last, becoming more interesting.

Gold has technical resistance at $1725.00 and then $1750.00 an ounce. Support today, from an ascending line, comes in at $1700.00 an ounce. Gold is forming an ascending wedge, made up of a two-week series of higher lows. That implies that a more substantial move is on the way. A break of $1725.00 an ounce implies a test of the significant $1750.00 resistance zone. Conversely, a daily close under $1700.00 an ounce, suggests a deeper correction to $1675.00 an ounce, and possibly as far at $1650.00 an ounce. I also note that the 50-day moving average is also at $1650.00 an ounce now, increasing the importance of this level to remain intact for bullish gold positioning.

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