Complete pandemonium at the open as investors wake up shell shocked to the realization that last night’s risk meltdown nightmare wasn’t just a bad dream.
Covid-19 contagion dominates the market psychology; proxy hedges are still oh so attractive, especially with early signs credit is bleeding in Europe. The themes/triggers of last week’s sell-off remain just as demonstrative this week even more so once investors add an oil overlay with Saudi’s announcing an oil price cut.
The yen surged with much enthusiasm at the market open this week as investors dove into safe havens on accelerating Covid-19 cases in Europe, and as Saudi Arabia triggers a price war for oil, adding another level of unwanted panic to a market already thick with fear.
Crude crashed at the open with WTI opening down 27 % lower as trader frantically attempt to re-price the curve. The shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty. Russia baulking was one thing, but Saudi ramping up production is a bird of another feather.
We’re probably one US super spreader headline away from sending WTI reeling to the mid 20’s prices could remain under pressure.
It sure seems inevitable that US virus headcount numbers will climb substantially higher from current levels, possibly in an explosive way, once testing is rolled out on a large scale, the oil market could remain under pressure for the foreseeable future until maybe Russia and the Saudis walk back their new world order for oil threat.
Gold shot higher out of the gates as haven demand soars with investors buckling in for perhaps an unprecedented VaR implosion as oil plummets compounded by the fact, we’re on the event horizon of a massive credit risk vortex due to the Covid19 negative economic effect. Indeed, given the expected bankruptcies, increased NPLs, and enormous demand for short-term credit, it is no surprise that European banking stocks are down around 30% and that basis is widening. It is very likely to expand more as all sorts of accounts buy the basis for insurance, but the Euribor fixings are the ones to watch closely. A spike in these will confirm the beginning of a much more major widening move.
Even if central banks step in with new cheap loans and stimulus packages as expected, .it seems that it will take some time before this feeds into the system. But the damage may already be done as Covid-19 has moved through a host of crucial growth sectors like a runaway wrecking ball.
And with precious metals traders recalibrating their buying signals on the JPY vs. XAU correlation, which has historically been hugely positive for gold prices when both move in tandem to risk aversion. (Yen higher Gold higher) Global investors demand all things bullion will come to the fore as universal fear indexes soar (JPY and Vix) with coronavirus growth and dispersion rates remaining the first-order of risk
Reminiscent of 2008, where it was as equally impossible to position risk for an endgame, the only trades that made sense were ‘cheap options’ like Gold and JPY, but even those are not so cheap and becoming expensive with USDJPY at 104 and gold rapidly closing in on $1700
Fed rate expectations are rapidly going towards zero, so I see EURUSD reaching 1.15 possibly this week but admit that investors will need some persuasion that the European containment response will be better than the US.
On that more practical buy EURUSD signal, when it comes to dealing with the virus, Europe has the fortified social safety net. In contrast, the USA lacks the necessary health care stabilizers to deal with an epidemic of massive proportions. Hence the reason they are behind the curve on testing.
As the Treasuries rally continues, the sell-off in the greenback continues. According to positioning, EURUSD is the most vulnerable pair as investors built significant bearish positions earlier in the year. CFTC data shows leverage accounts were most bearish since 2016. Which suggests we are witnessing the tip of the iceberg when it comes to the discretionary trader short positioning unwind
Asia data in focus
The focus will shift to Asia data to create a Covid19 model for growth impact (Japan, New Zealand, China, India, Thailand, Taiwan, and Indonesia all have one or more series to note). Tracking their combined economic data relative to YoY could provide some clarity of actual economic impacts so far from Coronavirus. From there, you can extrapolate to Europe, which doesn’t release data for several more weeks.
In summary, investors to wake up to risk markets buckling that are already stressed to the brim. But compounding the Covid-19 no endgame in sight narrative with probable value-at-risk implosion triggered by the fall in oil prices should give global investors a case of the cold sweats while keeping them awake at night for the foreseeable future.
My weekend coverage frame this morning open. Now that the damage has been down, risk sentiment will probably ebb and flow throughout the next 24 hours period (although I expect risk to sell more) as central bank wax dovish against the backdrop of increasing Covid 19 cases, so please reach out for any live comments.
A new oil world order has arrived, and it will be pronounced by a greater uncertainty principle that will see volatility ratchet higher and oil prices drastically lower as traders agitatedly re-price the curve.
Published by Stephen Innes, Asia Pacific Market Strategist at AxiCorp