Conflicting information continues to pile up in financial markets, making a confusing picture for investors and the rest of the world trying to make sense of it. On the one hand, Wall Street rallied hard overnight as the V-shaped desperados seized on news that various States are now developing lock-down exit plans as a sign that peak-virus is upon much of the United States. That contrasted with a massive increase in bad debt provisioning by J Morgan and Wells Fargo Bank overnight at their Q1 earnings call. In fairness, they appear to be front-loading the bad news, which is an eminently sensible strategy, sure to be followed by the rest of the sector. That said, both emphasised that dark times are coming for the US and global economies.
President Trump announced that he was withholding funding from the World Health Organisation as they are in thrall to China, although legally, he may not be allowed to it. If anything, given the China telecom ban last week, the White House seems intent on escalating conflicted relations with China, even as the COVID-19 pandemic rages worldwide. The President also noted that only he, on the advice of a committee containing his trade negotiator, Treasury Secretary, Son in Law and Daughter, can tell people in the US to go back to work. A fact strongly disputed by the Governors of the states contemplating reopening plans. Overnight, Dr Anthony Fauci, the defacto public health spokesman for the Whitehouse COVID-19 taskforce, contradicted President Trump’s May 1st target for restarting the economy was ‘overly optimistic.’ I fear he may soon be the former spokesman.
Meanwhile, deaths spiked yet again in New York epicentre overnight from COVID-19, cases spiral in Singapore, the previous COVID-19 control poster boy, China is launching a giant exercise to track asymptomatic carriers, and India and France are extending national lock-downs. The IMF also announced overnight that the world economy is facing its worst slowdown since the 1930s.
It is hard, therefore, to reconcile the impressive rally in equity markets over the past two weeks, when clearly COVID-19 continues to lock down large parts of the world. Even an easing of restrictions will not mean a return to normal life and movement. International relations remain fraught, even as the world should be working together. Unemployment is spiking globally along with COVID-19 deaths; developing countries are lining up for help at the IMF, which is also warning of a 1930s style recession, which I hope they are incorrect about.
Signals from other parts of the financial world may shed a more realistic light on proceedings. Gold has rallied above $1700.00 an ounce, not far away from record highs. It is still to be determined whether it is the correlation with equities that is responsible though. A pullback in stock markets will test this theory. Oil too has fallen overnight quite sharply, as the world digests the OPEC+ production cut agreement and sees it for the paper tiger it truly is.
My belief though, is the driver of the equity rally, with the S&P 500 now back at mid-2019 levels and trading on a juicy 17+ times P/E ratio, is the growth of the Federal Reserve’s balance sheet. That has jumped from $4 trillion to well over $6 trillion in the past two months as it buys every debt instrument on the street. That trend will continue after last week’s announcement that it would offer another $2.3 trillion, this time to the high-yield, or junk, corporate debt market. If you are a VC that has loaded a company purchase with junk debt, or your business that was in trouble, even before COVID-19, or you need to raise cash desperately, but can only fund at jink bond rates, the Federal Reserve will be there to buy it all.
The Fed has effectively moved into the business of backstopping poor investment decisions and keeping basket cases alive as the mega-lender of last resort. With the Central Bank effectively backstopping any investment decision in the United States for the foreseeable future, it is no surprise that US equities, and by default, the world’s, are on a roll. Likely, they will remain so for some time yet, with the Fed’s actions being mistaken for the V-shaped recovery theory. Reality will bite eventually, possibly in the shape of extended US lockdowns, a second wave of COVID-19 cases, a massive conflict between Congress and the President, or the President and State governors, or all of the above. Thanks to the Fed, short-term optimists are likely to be continued to be rewarded. Those who are patient and waiting for better levels to enter the market should fear not though; you are also likely to be rewarded eventually.
Equities in Asia higher following Wall Street rally.
Wall Street shrugged on Q1 results from JP Morgan and Wells Fargo overnight, preferring to focus on the possibility of an easing of lock-down restrictions within the United States. The S&P 500 finishing 3.05% higher, the NASDAQ rising 3.95%, and the Dow Jones climbing 2.40%.
Aftermarket futures have eased in all three today in Asia on the usual profit-taking flows, but Asia has preferred to focus on the overnight results. That has seen most of Asia enjoy a positive session thus far. The Nikkei 225 is flat, but the rest of Asia has made steady gains. China’s Shanghai Composite and CSI 300 are 1.80% higher, and the Kospi is 1,70% higher. The Hang Seng remains flat, but Singapore has surged 2.35% despite another jump in COVID-19 cases. The Australian All Ordinaries looks set for a strong finish, presently up 1.90%.
With equity markets following Wall Street slavishly and choosing to place more emphasis on an easing on COVID-19 restrictions, we expect Asian stocks to continue to trade from the positive side. That will likely flow into Europe with little ion the data-front to rock the boat. The US announces Industrial Production this evening, along with results from Goldman Sachs. Given the price action overnight, a poor reading is unlikely to change the momentum in the short-term.
Improved investor sentiment weighs on the US Dollar.
The improvement in investor confidence that we are nearing peak virus saw a reversal of haven flows out of the US Dollar overnight, aided by much better than expected China trade numbers earlier in the day. Major currencies all rallied against the greenback, with China proxies, the AUD and NZD, notable outperformers. The dollar index fell 0.48% to 98.89. Even Petro-currencies such as the NOK, MXN and CAD all managed to carve out gains versus the greenback, ignoring falls in oil prices.
Regional currencies in Asia though, have refused to climb on board the peak virus bandwagon today, being almost unchanged versus the Dollar. The AUD and NZD though, have seen profit-taking this morning with the AUD easing 0.55% to 0.6410, and the NZD falling 0.60% to 0.6070. As proxies to world trade, and China, in particular, both Antipodean’s have a lot of good news baked into their current prices. They face challenging resistance from here between 0.6500/06600 for AUD, and above 0.6200 in the Kiwi’s case.
The USD/CNY continues to edge lower, trading at 7.0600 this morning, reflecting the strength seen in non-USD currencies. For now, the CNY and CNH remain carefully managed by the PBOC. Both are likely to remain snoozing between 7.0000 and 7.1000 for the foreseeable future.
Overall the US Dollar remains under some pressure as markets price in emergence from COVID-19 restrictions and a tentative economic recovery into markets. That recovery though is tentative, and probably only one headline away from sharply reversing.
Oil falls as OPEC+ reality hits.
Oil remained a surprising bastion of sensibility amongst the V-shaped euphoria overnight, as prices on both Brent crude and WTI fell following the underwhelming OPEC+ production cut agreement. Brent crude eased by 5.50% to $28.80 a barrel, and WTI fell 7.50% to $20.60 a barrel.
Both contracts remained unchanged in subdued Asian trading. It is clear though that markets have decided that the oil demand shock will be larger for longer, even if countries start to relax COVID-19 lockdowns, no certainty by any measure. Despite OPEC’s protestations, the production agreement in no way begins to address the yawning gap between what the world will consume each day, and what producers are pumping out of the ground. Storage also remains at near maxed-out capacity globally.
Overnight the US API Crude Inventory figures showed yet another climb to above 13 million barrels. The official EIA Inventory numbers this evening should confirm that the US is awash in oil it can’t sell. Against this background, we continue to expect oil to ease lower with a fall through $19.00 to $20.00 on WTI, inducing panic amongst US producers. The best they can hope for though is that Texas regulators decide to limit production in the State.
Gold rises modestly as it consolidates recent gains.
Gold rose by 1.0% to $1729.00 an ounce overnight, a still impressive 20 Dollar gain. Whether the rise was due to its unholy direct correlation to equities in recent times, or because many investors are taking the recent apparent good news with a massive grain of salt, is still unconfirmed. I am, off course, in the latter camp.
Gold is unchanged in Asia with the region in wait and see mode for further developments from Europe and North America. Fundamentally though, gold has all the reasons it needs to move higher, not least the latest $2.3 Trillion package from the Federal Reserve.
That said, technical resistance at the $1800.00 an ounce level is formidable, and gold has come a long way in the past two weeks. Some consolidation at these levels before the next advance would make sense. Having tested $1750.00 an ounce yesterday and failed, that is likely to remain the top for the next few days, probably until China GDP on Friday.