US equities were weaker Wednesday, S&P down 2.2% with slightly larger falls through Europe, and following weakness in Asia as well. US 10-Y treasury yields saw the most prominent daily change since 27 March, falling 12bps to 0.63%.
Oil fell a further 1.2%, recovering a bit later in the session after falling to a fresh 18-year low intraday. US data likely added to the negative tone. Retail sales fell 8.7%mom, and industrial production fell 5.4%mom, both for March and both weaker than expected. The NY Fed manufacturing survey plummeted 56.7pts in April.
Several weathered traders and keen students of the market were quick to point out last night’s price action echoed the false starts seen in the 2008 recovery due to worsening economic data even after the VIX peaked. These memories suggest sentiment may only shift more favourably again when we have a sustained ex-China exodus from lockdown.
With most of the market participants still looking for bear, tumbling oil prices mixing with the dreary US data provided the toxic elixir to send markets toppling.
But retail sales weren’t that bad if you look at the underlying numbers while the Empire number, though technically worse than expectations, largely confirms what we already know.
Still, equities have been under continuous pressures, with e-minis ominously matching 24 hours lows at the Asia open. Not only does this suggest policy has stopped papering over the economic cracks, but with central banks tapped out, we could be back to bad news is bad news once again.
Gloomy outlook remains for oil
The EIA reported the most significant weekly crude US inventory build ever – at 19.25mb – shows why the OPEC+ deal won’t be enough to stabilise oil prices. Global inventories near capacity and filling fast will require additional cuts (from OPEC+ or elsewhere) to avoid another step down for oi prices. However, the massive storage build and as counter-intuitive as is sounds did provide some price support as the build also foreshadows that more wellhead closure are just around the corner which effectively trims US supply
It was a pretty gloomy picture painted by both the EIA inventory data and the IEA’s monthly oil market report The EAI expect 2020 oil demand down 9mb/d (UBS estimate 7.5mb/d), with April expected to be the worst month this year.
Despite the OPEC+ deal, the IEA expects global inventories to rise by a large 12mb/d in 1H20, potentially saturating not just storage capacity but overwhelming shipping and pipeline infrastructure. Use of strategic petroleum reserves in China, India, South Korea, and the US could add about 200mb of temporary storage, but this only buys a few months of wiggle room.
With prices holding and not dropping further implied in this sentiment is not only a more rapid pace of shut-in within the US shale industry. But the market is gradually leaning towards a combination of deeper OPEC+ cuts and a more assured response from the G-20 producers to avoid a further collapse in oil.
Investors continue taking refuge from the storm under a gold umbrella. Still, demand was getting crowded out a bit overnight by a firmer US dollar and demand for US treasuries. However, gold remains supported by Covid-19 driven safe-haven demand, which remains bolstered by the unprecedented fiscal and monetary stimuli around the globe.
Currency markets: The US Dollar
A dreary night for the commodity riskies as sentiment was clobbered not only by the fall in oil prices but compounded by a series of horrific economic data prints from the US which confirmed yesterday’s IMF report, which left little to interpretation after inking perhaps the most profound doom and gloom scenario yet.
Indeed, it raises more than a few questions if risk sentiment did jump the gun. And with the S&P 500 gapping lower in rapid succession, risk-off emotion has triggered another wave of haven demand for the US dollar as the market’s infatuation with the Greenback (USD) endures.
Commodity currencies weakened dramatically as oil prices started to shake the trees late in yesterday’s Asia session. WTI dropped below $20/barrel to the lowest since 2002: and sending commodity block currencies tumbling with the Kiwi (NZD) cratering 1.8 standard deviations, the Aussie (AUD) folding 1.6 stdev and the Loonie (CAD) toppling 1.6 stdev
But the commodity bloc of currencies was struggling for traction as industrial metal prices failed to launch after yesterday’s surprise PBoC rate cut yesterday. Pretty much a foreshadowing of nasty to come and London forex traders then predictably showed the dollar bears all the mercy of a Greek tragedy.
A triple whammy of negativity hit the Ringgit as oil demand collapses. The ringgits oil price sensitivities have taken centre stage this week as oil prices collapsed.
However, the 180-degree pivot in risk sentient, which triggered a steep decline in global equity markets, has sent investors back under the umbrella of the US dollar to wait out the storm. In this risk-off environment, traders will continue to shun risky assets like the MYR, preferring the safety of the US dollar and US bonds.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp