US equities were weaker overnight while oil rebounded 5.9% on near-term supply concerns after a container ship found itself sideways on the Suez Canal.
As risk asset remains challenged by the recent COVID-19 surge and catching stock markets at the wrong time, some estimates predict there will be as much as $88.5 bn of month-end rebalancing out of equities and into US fixed income. These factors continue to weigh on risk.
But when the short-term wobbles, investors naturally start to fret about those lingering longer-term concerns. They are also hurting sentiment with renewed worries about US tax policy and a realisation that any lingering hope of a reset in US-China trade relations is unwarranted.
The later is quite a worrying proposition as the two economic behemoths draw battlegrounds, setting the stage for a real dust-up as the superpowers shift from vying for supply chain domination to battling it out for global internet technology supremacy.
Buckle in for this one as it could make the Trump era trade war legacy look like little more than Axis and Allies board game.
With so much economical and growth optimism priced into Q 2, the recent global growth scare has likely validated that the value rotation looks likely to peak and exhaust.
Hence, any watering down of growth expectations suggest those optimistic stock market valuation could feel a near term pinch, especially if the economic data remains less supportive or turns sour.
Europe is light on cyclical – Growth stocks. If Value doesn’t perform, it isn’t easy to see Europe outperform over the medium term. Historically, in periods of outperformance of cyclical when Value lags Growth, Europe has struggled to keep pace with other regions due to this relative lack of cyclical-Growth stocks.
Exposure to short end rates continues to be a massive forward-looking overhang. Small firms would take significant earnings hit once the US Fed starts raising rates, possibly as early as 2022.
Until we get a better idea of month-end mobility data on both sides of the pond, the risk backdrop could remain challenged by the economic knock-on effect from the COVID -19 scare even though some if not all the headwinds are transitory (i.e. reopening’s are delayed, not derailed).
And even if the broader constructive narrative remains intact, some areas of the market, like travel and leisure, were priced for a near-perfect recovery and are very susceptible to a reopening delay.
For example, pressure on airlines is becoming acute as British Airways need to offer their lucrative ‘crown jewel’ landing slots at London’s airports as collateral to secure funding. Other airlines have already headed this way, but it is the first time BA and owner IAG have needed to offer such valuable collateral.
Oil prices rebound on potential supply disruption
An unlikely course of events has come to the rescue of the oil market in the form of a wayward vessel. Oil rallied on the news of a giant ship blocking the Suez Canal, disrupting a primary supply chain conduit. And positive European economic data assuaged some of the newfound growth implications, EU backyards and factories remain super busy despite being in soft or rolling lockdowns for most of the year.
But one of the possible vital contributing factors to the bounce-back might be Germany’s Angela Merkel announcing she would cancel the stricter Easter lockdown restrictions after the decision received widespread criticism.
To the extent that European lockdowns may have triggered the recent pullback in the Oil markets reopening optimism, this could, on the margin, help to calm some of the negative sentiment around the demand impact.
As it became apparent the canal will not reopen as quickly as initially envisaged, prices continued to rally despite a negative oil stockpile report. However, gasoline demand has increased, which tends to be a reliable soothsayer.
For crude, this means increased Oil on the water – either queuing for the canal or diverting around Africa. The extra voyage time is akin to “filling a pipeline” and should support the very jittery market that has seen the rush for the door over the past five sessions.
While it’s a bit early to guess what cards, OPEC is holding up their sleeves. Still, the weakness in Oil this week seems to have validated the cautious view expressed by Saudi Arabia at the last meeting. And it increases the probability of yet another rollover of current production levels.
US dollar extends its rally
The USD has extended its rally overnight, with FX traders fixated on equities to signal broader risk sentiment. The news flow around the US economy has not changed. And the Fed’s upbeat message on growth without sounding any alarm bells on inflation provided a solid backdrop for the US dollar beyond its safe-haven appeal.
You don’t have to look too far to support that view. Even the robust March PMI data from the Eurozone failed to deliver any lift higher in EUR as COVID-19 concerns persist.
The resilient US dollar is likely the biggest obstacle for the ringgit and USD/Asia right now as even higher oil prices are failing to boost traditional oil currency betas overnight, with the Canadian dollar only improving marginally despite a 5.7 % underlying price recovery.
While higher oil prices could stem the ringgits bleeding, it might not be enough to trigger a bullish revival.
Gold scores minor gains
Gold shrugged off USD strength overnight and finally reversed some losses thank to lower US yields. Bullion could see further upside traction if US bond yields stay sluggish, especially in this risk-averse environment with US-Sino tension starting to bubble again.
Market analysis from Stephen Innes, Chief Global Market Strategist at Axi