The rallies enjoyed by equities around the world recently, look to be running out of steam for now. Wall Street and Asian stocks are giving back some of their previous day’s gains. Oil’s roller coaster ride continues ahead of the critical OPEC++++++ meeting on Thursday, that will hopefully set meaningful production cuts amongst producers across the world. The US Dollar though continues to remain on the back foot, with currency markets continuing to price in the alleged flattening of the COVID-19 curve. That trend is most noticeable amongst the Petro-currency and EM groupings along with the Euro.


The data calendar has been very light again today in Asia and mostly backwards looking into February before the COVID-19 pandemic really made its presence felt. Australia Homes Loans, Japan Machinery Orders and the Philippines Trade balance all fell modestly but beat expectations. Of more interest today has been S&P placing Australia’s coveted AAA credit rating on a negative outlook. It was hardly surprising given the amount of fiscal spending the Government is being obliged to conduct.


US API Crude Inventories climbed again early this morning to 11.938 million barrels, underscoring the demand shock producers are experiencing, and the challenges of finding somewhere to store excess production. Even with a production deal on Thursday, the challenges to the US shale sector remain immense, with high production costs and heavy debt loads blighting the industry. No amount of US tariffs will offset those structural issues, and we can expect more culling of weaker players in the US oil industry in the months to come.


COVID-19 continues to be the centre of everyone’s attention though, with an intensive focus on death rates and new cases at the epicentres of the pandemic now, the United States and Europe. A lot of good news has been built into asset markets this week on the most tenuous signs that the outbreak is peaking. Should that be proved premature, and I hope I am wrong on this, the correction lower by as the momentum gnomes rush for the exit door, could be very ugly indeed. Readers should not mistake a bear market rally for the start of a v-shaped recovery. The best we can hope for is a U, with a W in a close second place.


Asia today though, looks as if it is going to pause for breath, with asset markets seeing some profit-taking and/or consolidation after impressive rallies in recent days. That is likely the correct strategy as we await tomorrow OPEC++++ meeting and more concrete evidence that peak-virus may finally be upon Europe at least.


Equities fall in a corrective pullback.


Wall Street had a very choppy session overnight, with the equities rallying aggressively only to give back the entire day’s gains in the last hour of trading. The S&P 500 and Dow Jones closing lower by 0.15% and the NASDAQ falling 0.35%.


No one signal turned the ship. Instead, I believe the price action highlights the dominance of intra-day momentum-based trading models on price action at the moment. The willingness of these gaggles of sheep to hold any sort of adverse risk is zero, meaning that as soon as momentum wanes, there is a mass rush for the exit door. Hence the overnight price action on Wall Street.


With Wall Street index futures all about the square in aftermarket trading today, Asia seems content to bank some profits from the past few days, with the regions stock markets mostly recording modest falls. S&P’s credit watch note on Australia has seen the All Ordinaries underperform, falling 1.0%. Elsewhere the Nikkei 225 has given up early stimulus package gains and has declined 0.15%. The Kospi is 0.50% lower with the Hang Seng falling 1.0%. As Singapore enters day 2 of its circuit breaker lockdown, more strict rules on gatherings from the Government, has seen the STI fall 2.10%. The Mainland China indices are trading quietly, easing by around 0.40%.


We expect equities to remain negative for the rest of the session, although not aggressively so. Europe will likely play catch-up with Wall Street and resolve lower this afternoon as we await clarity on some significant event risk into the week’s end.


US Dollar continues to trade on the weaker side.


While equity and energy markets saw corrective selling overnight, currency markets seem content to price in the recovery trade still. The US Dollar falling against developed and emerging market currencies overnight. 


Both the IDR and MYR continued their recoveries, boosted by higher resource prices. The USD/IDR falling to 16,400 today and the USD/MYR was falling to 4.3450. Indonesia’s successful US bond offering this week, at lower yields than expected and in both 30 and 50-year tenors, has instilled some confidence in regional markets. With Jakarta almost certain to enter an official COVID-19 lockdown on Friday though, the newly found confidence will be sorely tested if things go badly elsewhere in the world.


Both Australia and New Zealand Dollars gave back some of their gains this morning. The AUD/USD fell 0.63% to 0.6130 after S&P’s negative credit watch announcement. NZD/USD has declined 0.40% to 0.5925 after the RBNZ indicated it could expand its asset-buying programme. Both Antipodeans appear to be making solid COVID-19 containment progress, but a lot of good news is now baked into both. From here, it is challenging to justify AUD/USD moving above 0.6200, and NZD/USD moving above 0.6000 for any meaningful amount of time.


Oil’s extreme gyrations continue ahead of Thursday’s meeting.


Oil’s rally came to an abrupt halt on Wall Street overnight, as a massive 11.40 million-barrel climb in US API Crude Inventories, gave oil bulls a hard dose of reality. Brent crude fell 2.60% to $32.20 a barrel, with WTI taking the brunt of the sell-off, falling 7.70% to $ 24.10 a barrel.


Prices, however, have rallied sharply in Asia with Brent crude climbing 0.50% to $32.55, and WTI jumping 2.80% to $24.80, reflecting the severity of the overnight moves on each contract. The rally this morning looks more profit-taking driven as opposed to a fundamental change in sentiment. That said, oil prices held up relatively well given the scale of the increase in US inventories.


The underlying strength in prices reflects the optimism markets have int the outcome of tomorrows OPEC+++ meeting to decide on production cuts. President Trump has not said that the US will participate, yet, but I suspect in some shape or form that Uncle Sam will have a part to play. I remain confident that OEPC+++ will surprise to the upside with cuts coming in around the 20-million-barrel mark. In the bigger picture, that won’t be enough to offset the entire demand shock producers have and will continue to suffer, but that will be a story for next week, not this week.


Gold’s slavish attachment to equities continues.


Gold fell 0.80% to $1649.00 an ounce overnight, even as the US Dollar faded against most currencies. The main driver appears to be the fall in equities on Wall Street late in the session, reinforcing my view that the direct correlation between gold and equities remains alive and well, if less noisy than in previous weeks. With Wall Street index futures flat in Asian trading, unsurprisingly, gold is also unchanged on the day.


Although the macro-economic backdrop in the world is screaming that gold should be much higher, until it breaks its correlation with equities, that screaming will remain unheard. Gold has resistance at $1680.00 an ounce, and support at $1640.00 an ounce, but it will be stock markets that dictate gold’s next big move.


Ahead of event risk tomorrow, I expect gold to struggle above $1660.00 an ounce as equity positions continue to be lightened ahead of OPEC+.