US equities closed higher Monday, S&P 500 up 1.5% after a number of US states took steps to reopen over the weekend. Oil came under pressure again, the WTI benchmark contract down 20.3% after the United States Oil Fund, as we suggested earlier, would roll contract further along the curve at a massive premium given the super contango.
Investors continue to play off the bullish for growth narrative as several economies around the world set to re-open to the timely central bank week where guidance will pledge to expand existing asset-purchase schemes if conditions deteriorate.
The Fed, on Monday, announced an expansion of the scope and tenor of its Municipal Liquidity Facility (MLF). The Fed will purchase up to $500 billion of short-term notes issued by states and counties with a population of at least 500k residents, and cities with a population of at least 250k residents. Notes must mature no later than 36 months from the date of issuance—an increase from the previously announced 24-months. The notes must have had an investment-grade rating as of Apr. 8 from at least two major rating organizations.
And while the global economy is climbing out of a bottomless hole, even baby steps up the ladder will be viewed in a positive light. The massive global stimulus efforts are providing the stable surface anchoring the ladder while limiting side slipping ahead of a slew of corporate earnings.
Investors are taking comfort in the simplest of all things, and that was to stay home. That was the one practice that flattened the Covid-19 curve faster than most understood.
I’m not sure there is much need to pile on the front-month contract narrative, which was pretty much watered-down last week.
At some point, there have to be a few lines in the headline messaging so we can finally get back to talking about real oil markets, global growth, and all the right things.
But with storage saturation levels rising quickly, the oil markets do not have that luxury these days as it is all about the spot price as active traders need to stay focused on the present instead of thinking or hoping about the future.
Make no mistake; it’s still a dislocated market that will take the time get resolved organically by the industry supply elasticity to Oil prices dropping below production break evens. I do not have any unique insight there. Still, it’s happening quickly around the world. At some point in the not too distant future, the story will soon be about how quickly we can offload those supertankers anchored off the coast of Singapore and California and where ever else seaborne storage leases out.
Gold dipped on profit-taking as risk-on sentiment was too hard to ignore, but the economic climate is far too risky for a significant sell-off below $1700. That pesky deflationary oil price correlation also reared its ugly head again on Monday
A bright “risk-on” mood in the Asian and European financial markets put gold on the defensive. The USD was slightly weaker while European and Asian equities pushed higher, but the dollar didn’t sell-off with a great deal of enthusiasm staying pretty much rangy around 100 DXY
I got this one wrong yesterday as I expected oil to remain supported and the dollar to weaken more precipitously. I think that trade is still there, but we need to get through this critical Central Bank week. But with Bank’s expected to wax guidance dovish, this should be supportive for gold.
Typically, a week with BOJ, FOMC, and ECB would be cause for some excitement, but the current central bank apparatus is atypical. The BOJ passed without fanfare as they continue to play the yields vs the numbers game.
The FOMC has so many new programs in play; it is doubtful they follow with anything new. The ECB could do something though it is not clear what they would do or why they would do anything as the fiscal integration story continues to be the main narrative.
I’m still way too early for the US dollar meltdown trade.
Still, Coronavirus numbers in Europe are on the decline, and S&P didn’t downgrade Italy on Friday. Peripheral bonds are rallying on the back of that, with BTPs standing out, tightening significantly vs. Germany compared to Friday’s levels.
Accordingly, the Euro enjoyed a relief rally after a week of wonder. Look to fade the extremes, selling above 1.09, and buying closer to 1.0750 seems to be the consensus on the street right now.
But the peak in LIBOR in 2008 was a signal that panic USD buying was done, and a few weeks later, the USD fell precipitously. A good portion of the USD buying since March has been of the global USD shortage variety, and tumbling LIBOR is yet another signal that the shortage is dissipating.
The Aussie is the apple of my eye.
AUDUSD remains the standout performer as is an emergency fiscal measure that allows two $A10k tax-free withdrawals from Superannuation funds that have significant foreign investments. Aussie demand is picking up, but CTAs remain massive short and are well overripe for a position squeeze while iron ore demand is making AUD an excellent proxy to a Chinese normalisation compared to more risky emerging market currencies.
The Range-bound Ringgit
It’s hard to be bullish given the Oil market scrim. Still, it is equally hard to be bearish, given China’s economy is reopening and getting showered with a stream of monetary and fiscal policy. And while the MCO extension is a problem, it’s probably a quickly reversible problem when lifted provided policy support has reached those that need it the most.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp