In many ways today could mark a defining point in the markets. It is just a view, and like any view the need to accept when you’re wrong is paramount. The ability to move with the flow of news and sentiment and change is the very crux of trading, and never be married to anything in this game.

However, the defining point is that it feels like the news flow is changing, or at least I am detecting an increased amount of positive news flow. I may be reading that wrong, and I am not calling a bottom in risk, but simply the backdrop through which price operates is more balanced. It therefore suggests today’s trading session could offer much insight into the feel of the market.

Market reaction

FX markets are opening on a mixed footing, with small buying in the AUD, with traders eyeing tomorrow’s RBA meeting where the RBA should be comfortable with how bond markets are responding to yield curve controls and QE, with a solid build up of excess reserves also seen. We’re seeing small selling in the GBP, and no real reaction to news Boris Johnson admitted to hospital for tests after suffering with the virus for the past 10 days.

S&P500 futures have pushed 1.3% higher, despite a plunge in crude on open, and we’ll see if traders build on this position or fade the move as we go through Asia trade. As I say, the tape will reveal a lot, and it feels like the point where I am wrong in the S&P500 is a move through 2467 to 2413 in the cash.

Of course, we still watch credit spreads and the USD is still too strong, but if the S&P500 is building a base with falling intra-day range and lower implied vol, then that is positive too.

The backdrop

First, I consider the virus itself. As I logged onto my workstation at Chateaux Weston, I saw headlines that “France reports fewest daily coronavirus deaths since Tuesday”, and Italy reports the “lowest deaths since March 19”. The growth rate in Spain has pulled back a touch, while in Ireland even the PM, a qualified doctor, is getting stuck in and asking not of what his country can do for him, but what he can do for his country. In Australia, the new case count has fallen for four straight days and without jinxing the situation the curve seems to be doing the right thing.

In Austria and Denmark there is talk the government will outline plans today on an exit strategy… Well, that will be worth following, because without a vaccine and without herd immunity, the public will continue to be at risk. I am clearly not qualified to talk about this; hence I say listen to the experts and how they plan to get people back to work without the risk of it flaring up again.

In the US, the situation remains at critical juncture and we see over 333,000 total cases of COVID-19. However, the growth rate has slowed, and NY has reported 5.7% less deaths on Sunday, and a 35% decline in new cases. Trump has declared that the next two weeks could be painful, so, the market will be sensitive to the case count above other factors this week – Just look at the reaction in the wake of an incredible poor NFP report, where 701,000 net jobs were lost, far higher than the consensus of 100,000 – On first blush, the algo’s took S&P500 futures down 0.5%, which in a market with the VIX north of 50% is a really a blemish – however, from then it was all buyers and over the next hour the index rallied 1.8% – USDJPY followed closed.

We ask how much bad news is priced in and how much of a cushion we give the data? Subsequently we now look to this week’s US jobless claims, and the market react if it solidifies estimates that the April NFP print (on 8 May) could be as high as 20 million jobs lost – an insane number, but the question is will the market react to it..? is it discounted? Its hard to say, and personally, when I see the spread of analysts estimates for US Q2 GDP (ranging from -9% to -40%), its hard to call a bottom in risk when we have absolutely no conviction in pricing economics. Still, a market failing to really respond to poor economics is interesting.

Moves in crude

Being long oil vol seems to be the trade, as we could be seeing crude up or down 30% by Friday, although sellers are prevalent this morning.

I missed the 60% rally in crude and wasn’t prepared to chase, as I saw this predominantly driven by short covering – that said, it feels like something is brewing in the background. We know that OPEC’s ‘virtual’ meeting has been pushed back a few days to Thursday. The Saudi’s are open to an output cut, as are many of the OPEC nations, but if the cuts are conditional on the US being involved then there is a major snag right there. What’s more, if OPEC cuts do not go through, despite these being conditional on US involvement, the US (and Canada) could slap tariffs on Saudi and Russian imports.

What’s more, Aramco have delayed releasing its official selling price (OSP) until the day after the OPEC meeting, which of course suggests if we don’t see any agreement at all, then the Saudi’s could take the price war further and hit us with an even bigger discount on its crude price then we’ll through $20 on WTI and not far off in brent. This on the same day as a G20 energy ministers meeting is being organized.

Published by Chris Weston, Head of Research, Pepperstone