WHAT HAPPENED YESTERDAY

As of New York Close 12 May 2020,

FX

U.S. Dollar Index, -0.21%, 100.02
USDJPY, -0.46%, $107.18
EURUSD, +0.36%, $1.0847
GBPUSD, -0.68%, $1.2253
USDCAD, +0.54%, $1.4083
AUDUSD,  -0.58%, $0.6452
NZDUSD,  -0.25%, $0.6066

STOCK INDICES

S&P500, -2.05%, 2,870.12
Dow Jones, -1.89%, 23,764.78
Nasdaq, -2.06%, 9,002.55
Nikkei Futures, -2.10%, 20,060.0

COMMODITIES

Gold Spot, +0.31%, 1,702.64
Brent Oil Spot, -1.90%, 27.36

SUMMARY:

Dollar was mixed on Tuesday, gaining against commodity currencies but lost ground against EUR and JPY as the mood turned cautious a day ahead of Federal Reserve Chairman Jerome Powell’s speech on economic issues and as investors weighed the chances of negative U.S. interest rates. Although Powell and Fed officials have all but ruled out cutting interest rates below zero, several markets have started to price in such a cut. Fed funds futures on Tuesday priced in negative interest rates of about half a basis point in April 2021.

S&P 500 fell 2.05% on Tuesday, with a bulk of losses coming in afternoon trade and into the close. The Dow Jones Industrial Average (-1.89%) and Nasdaq Composite (-2.06%) declined comparably to the benchmark index, while the Russell 2000 underperformed with a 3.5% decline. U.S. 2yr yield remained flat at 0.17% and U.S. 10yr yield fell 4bp to 0.69%.

The risk-off sentiment might have been fueled by legislation put forth by Senate Republicans to impose sanctions on China and by Los Angeles reportedly planning to extend the county’s stay-at-home order for another three months.

Bank stocks were pressured by a modest decline in Treasury yields and by Trump rehashing calls for negative interest rates. Airline stocks were pressured by Boeing (BA 125.22, -3.69, -2.9%) CEO Calhoun telling NBC’s “Today” show that a major U.S. airline could go bankrupt because of Covid-19 disruptions.

TRUMP ADMINISTRATION SEEKS TO STOP U.S. FEDERAL PENSION FUND INVESTMENT IN CHINESE STOCKS 

Trump administration is pressing a board charged with overseeing billions in federal retirement dollars to halt plans to invest in Chinese companies that Washington suspects of abusing human rights or threatening U.S. security. The issue is whether administrators of the Thrift Savings Plan (TSP), a retirement savings fund for federal employees and members of the military, should allow its international fund to track an index that includes some China-based stocks of companies under scrutiny in Washington.

IMPACT: Trump has accused Beijing of failing to alert the world to the severity and scope of the virus, which has killed over 80,0000 Americans and was first reported in the city of Wuhan, China late last year. China has denied the allegations. Expect more geopolitical volatility in the months ahead, any retaliation by China towards the U.S. and its allies will be bad for risk-currencies like the Aussie, especially since China has recently turned its sights onto Australia’s barley and meat export in light of PM Scott Morrison’s suggestion for an investigation on Covid-19.

FAUCI WARNS OF NEW OUTBREAK RISK IF U.S. STATES REOPEN TOO SOON

Fauci on Tuesday warned Congress that a premature lifting of lockdowns could lead to additional outbreaks of the deadly Covid-19, which has killed 80,000 Americans and brought the economy to its knees.

“There is a real risk that you will trigger an outbreak that you may not be able to control and, in fact paradoxically, will set you back, not only leading to some suffering and death that could be avoided but could even set you back on the road to try to get economic recovery,” Fauci said.

IMPACT: Trump, who previously made the strength of the economy central to his pitch for his November re-election, has encouraged states to reopen businesses that had been deemed non-essential amid the pandemic. His administration has largely left it to states to decide whether and how to reopen. State governors are taking varying approaches, with a growing number relaxing tough restrictions enacted to slow the outbreak, even as opinion polls show most Americans are concerned about reopening too soon. As we’ve seen with South Korea and China, a second wave of infection is a highly probable scenario even though strict measures have been taken to prevent the spread of the virus. With America’s relaxed measures, it is almost a certainty we will witness another spike in the number of cases. This will be bad for risk currencies and good for Safe Havens like the Japanese Yen. Opening states up prematurely only to have it shutdown again is amplifying the already protracted impact of the virus.

U.S. HOUSE DEMOCRATS FLOAT $3 TRILLION COVID-19 BILL

Democrats in the U.S. House of Representatives on Tuesday unveiled a $3 trillion-plus Covid-19 relief package with funding for states, businesses, food support, and families, only to see the measure flatly rejected by Senate Republicans.

The new legislation, which would more than double Congress’s financial response to the crisis, includes nearly $1 trillion in long-sought assistance for state and local governments that are bearing the brunt of a pandemic that has infected 1,359,000 in the United States and killed at least 80,600.

It also includes $75 billion for testing people for the novel coronavirus, direct payments of up to $6,000 per U.S. household, $10 billion in emergency grants for small businesses, and $25 billion for the U.S. Postal Service. The bill would also extend enhanced federal unemployment payments through next January.

The House is due to meet at 9 a.m. EDT on Friday for expected votes on the legislation and on a rules change allowing members to vote by proxy during the pandemic.

IMPACT: Republicans say they want to hold off on new coronavirus relief legislation to assess the impact of nearly $3 trillion in response assistance that Congress has allocated since early March, as states move to reopen a shuttered U.S. economy. The Fed and the U.S government has made it clear that they will backstop the American economy. Expect more incessant money printing and stimulus to be thrown at the situation as it turns south. This will be inflationary in the long run and good for Gold.

PROPOSED BILL TO SANCTION CHINA 

Sen. Lindsey Graham on Tuesday introduced legislation that would allow Trump to impose a wide range of sanctions on the Chinese government if it refuses to cooperate with an international investigation into the origins of the Covid-19.  “I’m convinced that without Chinese Communist Party deception the virus would not be here in the United States,” Graham said in a statement. “China refuses to allow the international community to go into the Wuhan lab to investigate. They refuse to allow investigators to study how this outbreak started. I’m convinced China will never cooperate with a serious investigation unless they are made to do so. This hard-hitting piece of legislation will sanction China until they cooperate with investigators.“

IMPACT: With regards to the bill, it would authorize the president to impose a range of sanctions, including asset freezes, travel bans and visa revocations, as well as restrictions on loans to Chinese businesses by U.S. institutions and banning Chinese firms from listing on U.S. exchanges. Embedded within the bill is the requirement that China releases HK pro-democracy advocates in post Covid-19 crackdowns. The Bill serves no purpose beyond antagonising China and it’s not going to end well. Expect more risk aversion inducing headlines as tensions continue to rise.

TRUMP’S DESIRE FOR NEGATIVE RATES & FED PUSHBACK

Trump on Tuesday tweeted that the US should accept the “gift” of negative interest rates, joining other countries that already have them. “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!” Trump tweeted.

In an attempt to push back on the idea, St. Louis Federal Reserve Bank President James Bullard said negative rates would interfere with short-term funding markets that U.S. companies use for liquidity. “We’ve talked about negative rates on and off over the years,” Bullard said Tuesday in a webinar sponsored by the Official Monetary and Financial Institutions Forum. “It’s not a good solution in the U.S.”

Federal Reserve Chairman Jerome Powell is also expected to oppose the idea of negative interest rates when he speaks later today.

IMPACT:  Fed speakers have so far been consistently against negative rates. However, markets will continue to price for it as things worsen. The Fed funds futures on Tuesday priced in negative interest rates of about half a basis point in April 2021, this inadvertently led to Dollar weakness.

DAY AHEAD

It will be the UK’s turn next to post dire economic output figures as the Covid-19 leaves no country spared. First-quarter GDP estimates are due later today and they will likely only be a taste of what to expect in the second quarter. With Britain resisting the urge to relax social distancing measures too significantly, the economic costs of containing the virus outbreak are mounting, clouding the outlook for the GBP.

The Bank’s quantitative easing (QE) program is one of the most aggressive in the latest wave of central bank easing around the world and at the current rate of purchases, the BoE looks set to achieve its target of £200 billion sometime in early July. Hence, the odds that the size of QE will be boosted at the next meeting are very high and a weaker-than-expected GDP report would reinforce this.

SENTIMENT

OVERALL SENTIMENT: 

Stocks weakened aggressively towards NY close as increasingly tough rhetoric from US politicians against China and the bleak economic outlook painted by Fed speakers finally took its toll. Strained relations between the world’s two biggest economies is the last thing the world needs right now, but indications are that China is not about to just lie quietly and take the bashing as its actions against Australia thus far shows. 

Expect more headline bombs from this front going forward.

FX

STOCK INDICES

TRADING TIP

There Are Many Ways To Skin A Cat

It is a trying time for many investors and traders alike as a confluence of factors such as unprecedented monetary policies, rising geopolitical tensions, and crushed economic fundamentals are working together concurrently to skew asset prices in unfathomable ways no matter which angle you look at it. 

In a time of many unknown unknowns, there are still trends that will make sense in the grand scheme of things, like Gold and Tech Stocks. Do not miss the forest for the trees by focusing on short term myopic trading. If the going gets tough, take a step back and look for the inevitable trend. It may be a slower ride, but it sure is better than death by a thousand cuts in trying to trade the whipsawing market.

WHAT HAPPENED YESTERDAY

As of New York Close 11 May 2020,

FX

U.S. Dollar Index, +0.48%, 100.21
USDJPY, +0.87%, $107.60
EURUSD, -0.29%, $1.0809
GBPUSD, -0.62%, $1.2332
USDCAD, +0.67%, $1.4021
AUDUSD,  -0.69%, $0.6485
NZDUSD,  -0.95%, $0.6077

STOCK INDICES

S&P500, +0.02%, 2,930.32
Dow Jones, -0.45%, 24,221.99
Nasdaq, +0.78%, 9,192.34
Nikkei Futures, +1.33%, 20,408.0

COMMODITIES

Gold Spot, -0.27%, 1,697.97
Brent Oil Spot, -1.06%, 27.89

SUMMARY:

Dollar, which typically functions as a safe-haven, rose on Monday even as investors added risk to their portfolios, buying U.S. stocks and selling Treasury bonds. The USD started out weak in the Asian hours with the AUD and NZD leading the charge higher, testing above 0.6550 and 0.6150 respectively. Just when it looked like USD was going to be in for yet another torrid day, Fed speakers’ pushback against negative interest rates started to hit the newswires, and USD started regaining some ground. Stops of weak USD shorts were triggered as new shorts were sent running for cover.

Investors had mixed risk expectations, with an eye on warnings of a second wave of Covid-19 infections as more countries eased lockdown restrictions. Germany reported on Monday that new Covid-19 infections were accelerating exponentially after early steps to ease its lockdown, news that sounded a global alarm even as businesses ranging from Paris hair salons to Shanghai’s Disneyland reopened. South Korean infections also rebounded to a one-month high. Japan said on Monday it could end its state of emergency in many regions this week and New Zealand said it could ease restrictions on Thursday. The UK has also set out plans to ease the lockdown, while in France shops re-opened on Monday.

The S&P 500 finished flat on Monday in a resilient session that started with the benchmark index down 0.9%. The Nasdaq Composite, powered by its mega-cap components, rose 0.78% while the Dow Jones Industrial Average (-0.45%) and Russell 2000 (-0.6%) closed lower. U.S. 2yr yield rose 1bp to 0.17% and U.S. 10yr yield rose 4bp to 0.73%. 

Monday’s lower start was seemingly rooted in pestering worries that reopening the economy too soon could cause additional outbreaks of Covid-19, especially after reports pointed to an uptick in cases in Germany and South Korea. Positive news included New York Governor Cuomo saying he will end state-wide restrictions this Friday, allowing for the re-opening of some low-risk businesses, and Quidel (QDEL 208.95, +50.35, +31.8%) receiving FDA approval for its antigen test for Covid-19. The resilience of the market likely pulled in under-allocated investors fearful of missing out on further gains.

In early trading today, China escalated trade tensions this time with Australia, imposing an import ban on four Australian abattoirs just days after flagging plans to introduce an 80 percent tariff on Australian barley. The move was speculated to be in retaliation to Australian PM Scott Morrison’s request for an independent investigation into the Covid-19 outbreak. AUD is down -0.65% since this morning as a result. If China continues to put pressure on trade with Australia (likely as a punishment for Australia’s call for investigation into the Covid-19 virus), AUDNZD could start to trend lower. 

COVID-19 SPREAD ACCELERATES AGAIN IN GERMANY

New Covid-19 infections are accelerating again in Germany just days after its leaders loosened social restrictions. The Robert Koch Institute for disease control said in a daily bulletin the number of people each sick person now infects – known as the reproduction rate, or R0 – had risen to 1.1. When it goes above 1, it means the number of infections is growing.

IMPACT: Chancellor Angela Merkel, bowing to pressure from leaders of Germany’s 16 federal states to restart social life and revive the economy, announced measures that included more shop openings and a gradual return to school. As we have been warning, a second wave of infection is a highly probable scenario and this will eventually dampen recent optimism that slowing infection numbers mean that life can return quickly back to normal.

WUHAN REPORTS FIRST COVID-19 CLUSTER SINCE LOCKDOWN LIFTED

Wuhan reported its first cluster of COVID-19 infections since a lockdown on the city, the epicentre of the outbreak in China, was lifted a month ago, stoking concerns of a wider resurgence. The five new confirmed cases, all from the same residential compound, come amid efforts to ease restrictions across China as businesses restart and individuals get back to work.

IMPACT: Wuhan plans to conduct nucleic acid testing over a period of 10 days, sources familiar with the situation said, with every district told to submit a detailed testing plan by Tuesday. China implemented the strictest measures to control the virus and the testing in Wuhan should be followed, if infected cases spike in the city after the lockdown, we can be sure other countries like the U.S. and Europe whose measures are relaxed will see a second wave of infection. The USD is strengthening on the back of this scenario as markets are starting to price it in.

SHALE PIONEER CHESAPEAKE CONSIDERS BANKRUPTCY

Chesapeake Energy Corp said on Monday it is no longer able to access financing and is considering a bankruptcy court restructuring of its over $9 billion debt if oil prices don’t recover from their sharp fall caused by the Covid-19 pandemic. A bankruptcy filing would cap a long reversal of fortunes for Chesapeake, a company that helped revolutionize the energy industry through the relentless extraction of untapped oil and natural gas from shale rock formations, an environmentally controversial method that became known as fracking.

IMPACT: The company was trying to pivot from natural gas to a greater emphasis on oil when a Saudi-Russian energy price war earlier this year upended its plans and the wider crude market. It was dealt another blow by the Covid-19 outbreak, which caused energy demand to dwindle by shutting down large swaths of the global economy. More shut-ins like Chesapeake will cause the market to organically correct itself and solve the supply glut over time. Keep an eye on the rate of bankruptcies and shut-ins because the fact is that the more it happens, the faster Oil will find a bottom in price, and this is supportive to Oil-linked currencies like the Canadian Dollar.

FED OFFICIALS PUSH BACK ON NEGATIVE RATES

Two FED presidents pushed back on the possibility of negative rates on Monday after the Fed Funds futures markets last week priced in the possibility that the central bank will cut its policy rate below zero in 2021.

“At best, we’d have to study it more, but I don’t anticipate that being a tool we would be using in the U.S.,” Federal Reserve Bank of Chicago President Charles Evans said from Chicago.

“I am not a big fan of going into the negative rate territory,” Atlanta Fed President Raphael Bostic said in Atlanta.

IMPACT: The commentary gave the USD some support after it traded weakly last week as Fed Funds futures were implying negative rates. In a world where developed world central banks like the BoJ, ECB and SNB are already in negative and RBNZ keeping the possibility on the table, Fed’s reassurance will keep the implied rates from sinking in negative territory and provide support to the USD. 

DAY AHEAD

The Reserve Bank of New Zealand will wrap up its policy meeting tomorrow morning, and recent developments suggest that more stimulus is needed. A rate cut is probably off the cards, for now, so the central bank is more likely to expand its QE program instead. As for the NZD, its reaction may depend mainly on how open policymakers appear about easing again in the future. In this sense, the risks surrounding the currency seem asymmetric and tilted to the upside, as a lot of gloom has been priced in already.

SENTIMENT

OVERALL SENTIMENT: 

Just when it seemed like it’s always a good bet to buy risk assets during Asian hours, US equity futures started the day weak and remained weak till US hours started. Just when it looked like it was going to be a down day for US stocks, the big tech companies surged and turned the NASDAQ index positive and up more than a percent intraday. Just when USD looked like it was doomed to test lower, pushback from Fed speakers on negative interest rates triggered weak stops and gave it new life. Trading sure does seem difficult these days! With markets changing on a dime on random headlines, it is imperative to keep one’s emotions in check to preserve sanity while waiting for easier times.

FX

STOCK INDICES

TRADING TIP

Trading In The Trenches
Trading is indeed, not an easy vocation. Most people have the misconception that all it takes is a few clicks and money will miraculously pile up in your trading account. Even the most obvious of views will sometimes not show up in market prices. This can be extremely energy sapping and demoralising. 

However, there will always be periods like this in a career of trading. It is important to get through rough patches like this in one piece, because eventually, market trends will become easier to identify again. 

The trick is to keep your head down, keep your risk light and size your trades appropriately till “easier times” are back! Save your risk capital till you get into the right trading rhythm again. Be true to your process and keep calm!

WHAT HAPPENED YESTERDAY

As of New York Close 8 May 2020,

FX

U.S. Dollar Index, -0.08%, 99.73
USDJPY, +0.36%, $106.67
EURUSD, +0.06%, $1.0841
GBPUSD, +0.37%, $1.2409
USDCAD, -0.32%, $1.3927
AUDUSD,  +0.54%, $0.6530
NZDUSD,  +0.82%, $0.6135

STOCK INDICES

S&P500, +1.69%, 2,929.80
Dow Jones, +1.91%, 24,331.32
Nasdaq, +1.58%, 9,121.32
Nikkei Futures, +2.23%, 20,140.0

COMMODITIES

Gold Spot, -0.89%, 1,702.65
Brent Oil Spot, +5.58%, 28.19

SUMMARY:

US key jobs number, the Non-farm payrolls for April declined by 20.5 million (consensus -21.00 million), and the unemployment rate increased to 14.7% (consensus 16.2%). Those were the worst readings in the post-World War II era, but the number of unemployed persons said to be on “temporary layoff” increased about ten-fold to 18.1 million in April. This is noteworthy because it shows that most workers who were recently laid off are optimistic about being reemployed. That sentiment would be consistent with 1) the market’s view that the jobs data can’t get any worse and 2) news that more companies are restarting operations as states move along with their reopening plans. If those assumptions turn out to be wrong, then the jobs market will be even more dire in the weeks ahead. 

Dollar posted its largest weekly gain versus the Euro in more than a month, although that was more related to the European single currency’s issues concerning the German Court’s decision against the European Central Bank’s asset purchases. Separately, U.S.-China tensions appeared to drop a notch today after the two sides reportedly pledged to make progress on their Phase One trade deal.

U.S. stocks extended weekly gains on Friday, as the market saw reasons to stay positive on the economic outlook despite the dismal employment report for April. The S&P 500 (+1.69%), Dow Jones Industrial Average (+1.91%), and Nasdaq Composite (+1.58%) advanced more than 1.5%, while the Russell 2000 rose 3.6%.

Apple (AAPL 310.13, +7.21, +2.4%) plans to reopen stores in several U.S. states next week. Boeing (BA 133.44, +4.79, +3.7%) plans to reopen its 737 MAX factory later this month. Uber (UBER 32.79, +1.86, +6.0%) observed ride-sharing growth over the past three weeks, and tickets to Walt Disney’s (DIS 109.16, +3.59, +3.4%) Shanghai theme park sold out within minutes.

EU PLANS TO RESTART TRAVEL AND TOURISM DESPITE COVID-19

EU states should guarantee vouchers for travel cancelled during the Covid-19 pandemic and start lifting internal border restrictions in a bid to salvage some of the summer tourism season, the bloc’s executive will say this week.

“To provide incentives for passengers and travellers to accept vouchers instead of reimbursement, vouchers should be protected against insolvency of the issuer and remain refundable by the end of their validity if not redeemed,” the draft document said. The EU executive will also tell the bloc’s 27 member countries to gradually lift internal border restrictions and restart some travel to help the ailing tourism sector.

IMPACT: Tourism normally brings in 150 billion euros every season from June through August with some 360 million international arrivals, according to the Commission. Titled “Europe needs a break” the Commission’s tourism strategy will call for targeted restrictions to replace a general ban on travel and seek a gradual lifting of internal border checks where the health situation has improved. “Don’t count the chickens before they hatch” as the old adage says, a second wave of infection is a probable scenario as we’ve witnessed in South Korea over the weekend, such a scenario will be bearish for the Euro. In addition, given how divided the EU is politically, any spikes in the Euro should be sold.

U.S. TO WITHDRAW PATRIOT MISSILES FROM SAUDI ARABIA OVER OIL DISPUTE

The U.S. is pulling two Patriot missile batteries and some fighter aircraft out of Saudi Arabia, an American official said, amid tensions between the kingdom and the Trump administration over oil production. The decision scales back the American presence in Saudi Arabia just months after the Pentagon began a military buildup there to counter threats from Iran. About 300 troops that staff the two batteries would also leave Saudi Arabia, according to the official, who spoke on condition of anonymity to discuss sensitive military operations.

IMPACT: When Saudi Arabia ramped up oil production and slashed prices this year, Republicans accused the kingdom of exacerbating instability in the oil market, which was already suffering because of the Covid-19 pandemic. The volatility and price crash in oil hurt U.S. shale producers, leading to layoffs in the industry, particularly in Republican-run states. Some Republican senators warned in late March that if Saudi Arabia did not change course, it risked losing American defense support and facing a range of potential “levers of statecraft” such as tariffs and other trade restrictions, investigations and sanctions.

This gives Saudi Arabia less reasons to play nice with U.S. Shale, Saudi Arabia is known to have tried to bankrupt U.S. Shale before by flooding the world with Oil, and now they have good reasons to do so. Watch out below for Oil prices and Oil-Linked currencies like the Canadian Dollar and Mexican Peso.

HALF OF SPANIARDS WILL SEE LOCKDOWN EASED FROM TODAY AS DEATH TOLL FALLS

Spain’s daily death toll from the Covid-19 fell to its second-lowest since mid-March on Saturday, as half the country prepared to move to the next phase of an exit from one of Europe’s strictest lockdowns.

Spain began to loosen its lockdown last week, but Phase 1 will include a considerable easing of measures that will allow people to move around their province as well as attend concerts and go to the theatre. Gatherings of up to 10 people will be allowed.

Spain’s daily death toll from the Covid-19 fell to 179 on Saturday, down from 229 the previous day and a fraction of highs above 900 seen in early April. The cumulative death total rose to 26,478 while the number of diagnosed cases rose to 223,578 from 222,857 the day before, the health ministry said.

IMPACT: Some 51% of the population will progress to Phase 1 of a four-step easing plan today after the government decided the regions in which they lived met the necessary criteria. The country’s two biggest cities – Madrid and Barcelona – do not currently meet the criteria for easing and will remain in Phase 0.

In a positive step for Spain’s tourism industry, which contributes around 12% of economic output, hotels will be allowed to open all rooms and nature tourism will be allowed for groups of up to 10. With reference to similar reasons above for the EU, a second wave of infection is a highly probable outcome.

DAY AHEAD

There can be no hiding from the awful economic data that is now pouring in from all angles as we move well into the second quarter. Australian jobs, UK Q1 GDP, and US retail sales and inflation numbers will be the next key releases to showcase the virus-inflicted damage. But amid growing optimism about the pandemic easing, the Reserve Bank of New Zealand will likely err on the side of caution at its policy meeting, posing a downside risk for the Kiwi and other commodity dollars.

SENTIMENT

OVERALL SENTIMENT: 

US stocks continued to grind higher, while Fed Futures edged away from negative interest rates territory to hover around 0%. With interest rates edging higher, Gold lost some momentum and backed off more than 1% from the highs. USD, however, remained weak against most developed currencies except the JPY. With stock sentiment diverging from the economic reality, it has become a market that requires patience as fundamentals will eventually matter again. 

With Australia and New Zealand seemingly doing all the right things to keep the outbreak under control, their currencies are leading the way in this bout of USD weakness. This is likely to continue as food security and optimism on re-opening of economies become key themes going forward.

FX

STOCK INDICES

TRADING TIP

Threat Of Inflation

The Fed’s balance sheet is expected by many estimates to expand from $4 trillion to $10 trillion this year and is already up to $6.7 trillion within two months of the crisis and is still growing at a swift rate. We’re already seeing the largest year-over-year percentage growth in broad money supply in modern history. But outside of essentials like groceries and healthcare, that money isn’t moving around yet, with velocity extremely low. 

In the years ahead, the possibility of broad inflation is back on the table. As pandemic lockdowns ease and ongoing government stimulus tries to get the economy back up off the floor, consumer demand can increase while the new money supply remains in the system. The timeline on which this happens depends on how much stimulus and consumer/business support both the Treasury and Federal Reserve print and hand out to Main Street, and how fast the virus goes away enough such that restaurants, hotels, airlines, and other businesses can partially and then completely re-open.

Over the multi-year longer-run, if we see a trend towards diversification of supply chains by bringing production facilities back to the United States or other higher cost locations, that could further raise inflationary pressures because it would start to undo one of the major deflationary outlets (offshoring) that has been in place for decades.

WHAT HAPPENED YESTERDAY

As of New York Close 7 May 2020,

FX

U.S. Dollar Index, -0.38%, 99.82
USDJPY, +0.20%, $106.36
EURUSD, +0.38%, $1.0836
GBPUSD, +0.25%, $1.2374
USDCAD, -1.21%, $1.3974
AUDUSD,  +1.56%, $0.6501
NZDUSD,  +1.40%, $0.6094

STOCK INDICES

S&P500, +1.15%, 2,881.19
Dow Jones, +0.89%, 23,875.89
Nasdaq, +1.41%, 8,979.66
Nikkei Futures, +2.68%, 19,928.0

COMMODITIES

Gold Spot, +1.69%, 1,714.42
Brent Oil Spot, -1.15%, 26.70

SUMMARY:

Dollar fell from two-week highs on Thursday, as investors booked profits on the currency’s gains this week before today’s U.S. nonfarm payrolls report for April, which could show massive job losses amid a Covid-19 pandemic that has ravaged the global economy. The USD weakness was triggered when Fed Funds futures started to price for negative interest rates in 2021 during the NY trading session. Hard commodity currencies such as AUD and NZD and Gold ripped higher as the implied interest rates slipped below 0% in the US. 

Non-farm business sector labor productivity decreased 2.5% in the first quarter (consensus -6.0%) following a 1.2% increase in the fourth quarter. Unit labor costs increased by 4.8% ( consensus +2.9%) after increasing 0.9% in the fourth quarter. The key takeaway from the report is that productivity was weak, which is a headwind to an increased standard of living. That headwind should be even stronger in the second quarter. Continuing claims, or the total number of Americans receiving unemployment benefits, rose to a fresh record of 22.6 million in the week ended April 25. The weekly pace of filings is decelerating, suggesting the worst of the layoffs may be over as several states embark on limited reopenings of restaurants, retail shops, and other businesses.

Cyclical sectors led the S&P 500 to a 1.15% gain on Thursday, while mega-cap technology stocks carried the Nasdaq Composite to a 1.41% gain and into positive territory for the year. The Dow Jones Industrial Average rose 0.89%, and the Russell 2000 rose 1.6%. U.S. 2yr yield fell 4bp to 0.13% and U.S. 10yr yield fell 9bp to 0.63%. 

The day started with investors receiving economic data that the market construed as relatively good: weekly initial jobless claims totaled 3.169 million (consensus 2.900 million), but it was encouraging that it reflected another 677,000 decline from the prior week. Likewise, China’s imports fell more than expected in April, but an increase in exports was a nice surprise.

FRANCE TO RE-OPEN ON MONDAY

France is ready to start unwinding its Covid-19 lockdown from next Monday as planned, the prime minister said on Thursday, although some regions including the Paris area where the virus is still circulating would keep some restrictions.

The country has made enough progress in slowing down the spread of the virus and reducing strain in hospitals to gradually return to normal, Prime Minister Edouard Philippe said. Schools, cafes and most shops have been shut for nearly two months.

IMPACT: Next week, about 1 million children and 130,000 teachers will return to school, the education minister said. Some 25,809 people have died of Covid-19 in France, according to official data. The Eurozone is already in a fractured state and a second wave of infections will weigh on the Euro as the policy response and government coordination within the EU has been abysmal and ineffective in addressing the virus and its economic impact.

BLAME CHINA. REMAKE ECONOMY

Several Trump aides say their 2020 campaign will now be chiefly defined by two themes: Trump is the only candidate who can resurrect the economy and that Biden will not be as tough on China, a country Trump is blaming for the pandemic.

It is a message resonating with Trump’s base, according to interviews with more than 50 voters in three swing counties in the battleground states of Pennsylvania, Michigan, and Wisconsin – states Trump won in 2016 by less than a percentage point and that will decide whether he can win a second term.

Trump officials say the new messaging, being sent to Republican state leaders across the country and pushed in new anti-Biden ads across swing states, reflects internal and external polling data that shows voters trust Trump more on the economy, and that Americans across party lines distrust China.

IMPACT: The recalibrated strategy comes as Trump faces a more difficult re-election campaign amid an outbreak that has now infected more than 1.2 million in the United States and killed over 70,000 – the world’s highest number of cases and deaths – and led to over 30 million filings for unemployment in the past six weeks. A Pew Research Center survey in late April showed two-thirds of Americans viewed China unfavorably now, up 20 points since the start of the Trump administration in January 2017. Expect more geopolitical headwinds as we head into Nov U.S. elections and for Safe-Haven currencies like the Japanese Yen and U.S. Dollar to trade at a premium relative to risk-assets.

STERLING’S POST-BOE RALLY FADES; POOR OUTLOOK WEIGHS ON POUND-TRADERS

The Bank of England held rates steady and announced no further stimulus, as was broadly expected, and said it was ready to take fresh action to counter the economic fallout from the Covid-19 pandemic.

The bank will consider what it needs to do with its 645 billion Pounds ($796 billion) bond-buying programme in June when it will have more clarity on how the government intends to lift its Covid-19 lockdown, Governor Andrew Bailey said. It was appropriate that the BoE continues with its “aggressive” pace of bond-buying for now, Bailey said. 

IMPACT: As mentioned yesterday in our update, Sterling staged a knee-jerk relief rally, as there had been some expectations that the BoE could extend quantitative easing, but it soon faded into the close. Weighing on Sterling are the ongoing Brexit negotiations. Britain insists that it will not seek an extension to the transition period, which is due to end in December 2020, whether or not a trade deal has been struck. GBP spiked to a high of 1.2418 on the decision but dribbled down to a low of 1.2267 as investors are reminded of the bleak outlook ahead for the UK. However, it managed to recover and spike higher as USD weakened broadly when short term US interest rates for 2021 slipped below 0%.

DAY AHEAD

The American economy is forecast to have lost a breath-taking 20 million jobs, which would push the unemployment rate up to 14%, far above the 10% peak of the previous recession. Average hourly earnings are expected to have lost steam too, but admittedly, the focus will be on job losses, not wage growth.

Also, employment numbers for April are due out of Canada later today, but as far as jobs reports go, this will be one that nobody will be looking forward to. Canada has been no exception in the global pandemic of the Covid-19 and after losing one million jobs in March, the employment picture is about to get much worse. The number of people out of work is projected to have shot up by a record 4 million in April, pushing unemployment to an astonishingly high rate of 18.0% – another record – from 7.8% in March.

Like many other countries, Canada has begun to loosen some of its restrictions, with several provinces allowing some retailers and businesses to reopen. Assuming that all goes to plan and a second wave of infections can be avoided, the April jobs figures may be as bad as they get.

The question now is how quickly economic activity returns to normal and how many businesses will the stimulus packages from the government and central bank manage to save from going bust. The Canadian government has responded with a sizable fiscal aid package amounting to C$260 billion (11% of GDP). The Bank of Canada’s emergency asset purchases are also in that range, totalling C$200 billion, and at its last meeting, it expanded its program to include provincial and high-grade corporate bonds.

Market is getting used to massive numbers in terms of job losses, and is unlikely to react to much. The driver, especially for the currency market, will continue to be US interest rates. Should it slip further into negative territory, USD weakness will accelerate.

SENTIMENT

OVERALL SENTIMENT: 

US Fed Funds futures started to price for negative interest rates for the US policy rate in 2021. This is despite repeated statements from various Fed speakers expressing very little enthusiasm for negative interest rates thus far. USD weakened against most developed currencies and especially so against Gold. It was a perplexing move as no one could really pin down a reason for this, so most experts settled on hedging or stop-outs by banks and other investors. 

Whatever the reason might be, it is a significant development, and the best trade, in our opinion, to profit from this is to be long Gold over the long run. In a world of negative nominal and real rates, Gold will shine. 

If the world was so bleak that negative rates were being priced in the US, it is perplexing that stock markets would be rising but that seems to be the case. Again, it seems to be the wave of free money driving asset markets higher. Stay out of the way for now and get involved with the easier trades.

FX

STOCK INDICES

TRADING TIP

Bitcoin’s Coming of Age

Bitcoin has been around for more than a decade and has survived numerous attacks from policymakers and hackers alike, proving itself to be the antifragile asset it claims to be when Satoshi Nakamoto first invented it. Yesterday, Bitcoin as an asset was given a credibility boost when Hedge Fund legend Paul Tudor Jones announced that he had allocated a percentage of his fund to it as a hedge against the inflation he sees coming from the incessant and indiscriminate central bank money-printing around the world, telling clients that bitcoin reminds him of the role gold played in the 1970s. 

In his own words, “We are witnessing the Great Monetary Inflation — an unprecedented expansion of every form of money, unlike anything the developed world has ever seen.” Indeed, the purpose Satoshi Nakamoto had for Bitcoin was for a time like this, to protect savers from the hubris of government monetary experiments.

Bitcoin is transitioning from being a collectible that appeals to the millennials to a store of value taken seriously by the great investors of our time. As a non-sovereign monetary good, it is possible that at some stage in the future Bitcoin will become a trusted store of value much like Gold did during the classical gold standard of the 19th century.

WHAT HAPPENED YESTERDAY

As of New York Close 6 May 2020,

FX

U.S. Dollar Index, +0.40%, 100.20
USDJPY, -0.36%, $106.21
EURUSD, -0.38%, $1.0799
GBPUSD, -0.90%, $1.2325
USDCAD, +0.83%, $1.4164
AUDUSD,  -0.63%, $0.6392
NZDUSD,  -0.75%, $0.6007

STOCK INDICES

S&P500, -0.70%, 2,848.42
Dow Jones, -0.91%, 23,664.64
Nasdaq, +0.51%, 8,854.39
Nikkei Futures, -0.96%, 19,407.5

COMMODITIES

Gold Spot, -1.01%, 1,690.00
Brent Oil Spot, -6.25%, 27.01

SUMMARY:

Safe-haven Yen and Dollar rose on Wednesday, as investors sought refuge in these currencies in the wake of dire global economic numbers, manufacturing data in the Eurozone and the bleak picture painted by the UK – the country that was “the most reluctant in Europe to impose a lockdown has become the most cautious to start reopening”, with public opinion frightened of the consequences and Boris Johnson eager to avoid breaking Italy’s “sad record” , undermining the Euro and Sterling. U.S. private payroll data also showed a record of more than 20 million jobs lost in April based on the ADP National Employment Report, but the Dollar held gains.

Mega-cap technology stocks carried the Nasdaq Composite to a 0.5% gain on Wednesday, but another late fade in the market left the S&P 500 (-0.7%), Dow Jones Industrial Average (-0.9%), and Russell 2000 (-0.8%) in negative territory. U.S. 2yr yield fell 2bp to 0.17% and U.S. 10yr yield rose 6bp to 0.72%. The fade was attributable to Trump’s comments on China near the close, he cited – “This is really the worst attack we’ve ever had. This is worse than Pearl Harbor. This is worse than the World Trade Center. There’s never been an attack like this,” Trump said at the White House on Wednesday. “And it should’ve never happened. It could’ve been stopped at the source. It could’ve been stopped in China. It should’ve been stopped right at the source, and it wasn’t.” Describing it as an attack worse than Pearl Harbour and 9/11 is not going to help with US-China relations. 

For most of the day, money continued to flow into Apple (AAPL 300.63, +3.07, +1.0%), Microsoft (MSFT 182.54, +1.78, +1.0%), Amazon (AMZN 2351.26, +33.46, +1.4%), Facebook (FB 208.47, +1.40, +0.7%), and Alphabet (GOOG 1347.30, -3.81, -0.3%). Typically, wherever these stocks move, the broader market follows.

TRUMP TO REFOCUS COVID-19 TASK FORCE ON ECONOMIC REVIVAL, CONCEDES RISKS

Trump said on Wednesday his coronavirus task force would shift its primary focus to reviving U.S. business and social life while acknowledging that reopening the economy could put more lives at risk.

In a series of tweets, Trump said the White House task force he formed in March would not wind down, as he suggested on Tuesday, but would instead add some advisers and center its attention on “SAFETY & OPENING UP OUR COUNTRY AGAIN.”

Asked later if Americans will have to accept that reopening will lead to more deaths, Trump told reporters: “You have to be warriors. We can’t keep our country closed down for years and we have to do something. Hopefully, that won’t be the case, but it could very well be the case.”

IMPACT: While New York state, New Jersey and other early U.S. hotspots have lowered their infection curves since mid-April, a number of states, mainly in the Midwest, have posted sharp spikes in new cases and deaths. Minnesota has set a record for new cases nine out of the last 14 days, including 728 cases on Wednesday. Safe-haven Dollar and Yen are already trading strongly in the face of geopolitical and economic headwinds, any spike in infections due to reopening should provide continued strength to those two currencies against most counterparts.

CANADA’S BRITISH COLUMBIA THE LATEST PROVINCE TO UNVEIL RESTART PLAN

British Columbia will begin reopening its economy as early as mid-May, the premier said on Wednesday, as new Covid-19 cases dwindle and other parts of the country, including Quebec and Manitoba, begin to loosen their restrictions. British Columbia has a population of about 5 million people and shares a border with Washington state, where the first major U.S. outbreak occurred.

IMPACT: As of Wednesday, there were 62,458 reported Covid-19 cases in Canada and 4,111 deaths, Chief Public Health Officer Theresa Tam said, adding Canada’s epidemic continued to slow. North American states are eager to reopen, Canada should be prudent about this as well, a global spike in reinfection will prolong the demand destruction in oil, and coupled with a protracted economic crisis, will weigh heavily on the oil-linked commodity currency.

NEW ZEALAND TO RUN DEFICITS FOR EXTENDED PERIOD, DEBT TO EXCEED TARGETS

New Zealand’s Finance Minister said on Thursday the government will be running deficits for an extended period and its debt level would increase to levels well beyond previous targets.

He said the budget, to be released next Thursday, will carry on supporting industries hit by Covid-19 and despite the additional borrowing, New Zealand will remain among the least indebted countries.

IMPACT: The RBNZ has been more liberal with its monetary policy since the start of the crisis, even suggesting that they are considering negative interest rates. The trajectory for the Kiwi should be lower in the long run as the economic impact of the virus unfolds. 

DAY AHEAD

The Bank of England’s new governor Andrew Bailey will brief markets about the central bank’s policy decision and announce his first quarterly economic projections later today, earlier than the usual timing in order to comment on the interim Financial Stability report as well. Having deployed big stimulus firepower in previous meetings, the bank is likely to stand pat this week, with markets turning attention to growth forecasts after warnings of a painful contraction in Q2. A speech by the UK Prime Minister later in the day could be another driver of volatility for the pound as the market is eager to hear about Boris Johnson’s reopening plans.

Any rebound could prove short-lived if policymakers cast doubts about a rapid economic recovery, leading to a continuation this month’s sell-off in the GBP. A cautious speech by Boris Johnson accompanied by a more gradual removal of restrictions than markets expect could add to the bearish sentiment.

SENTIMENT

OVERALL SENTIMENT: 

Stocks tried hard to rally but ended pretty much in the same place. Fixed income tried to sell off, but also ended up pretty much in the same place. Gold futures sold off nearly 2% but managed to recoup about a third of its losses from the low. The EUR continued to trade weak with EURJPY breaking below the 2017 low of around 114.80-85. USD and JPY traded strong for the day, as sentiment seems to be trading on the weaker side. The anti-China rhetoric from Trump and other US

FX

STOCK INDICES

TRADING TIP

Take time to Reflect

There will be times in your trading journey that prices will move in a fashion that is counter to everything you believe to be true. For now, the prices of risk assets seem to be defying the gravity pull of a global economy that is getting devastated by the Covid-19 outbreak.

It is essential at junctures like this to step away from trades that are not working and look instead for trades which are. For instance, a developing theme is the inability of the European governments to agree on a cohesive fiscal policy to save the deteriorating economy. The German court ruling that the ECB’s bond buying programme initiated 5 years ago, for the previous crisis, is unconstitutional is yet another nail in the coffin of European Monetary Union project. 

There will always be trade opportunities that do not require you to fight against the market trend. Concentrate on those while you bide your time and wait for what you believe to be true to play out. The object of trading, as always, is not to be right but to make money. 

When the markets are going against you, take a step back, reflect and find better opportunities!

WHAT HAPPENED YESTERDAY

As of New York Close 5 May 2020,

FX

U.S. Dollar Index, +0.30%, 99.79
USDJPY, -0.27%, $106.46
EURUSD, -0.63%, $1.0839
GBPUSD, 0.00%, $1.2444
USDCAD, -0.32%, $1.4040
AUDUSD,  +0.11%, $0.6434
NZDUSD,  +0.08%, $0.6053

STOCK INDICES

S&P500, +0.90%, 2,868.44
Dow Jones, +0.56%, 23,883.09
Nasdaq, +1.13%, 8,809.12
Nikkei Futures, +0.96%, 19,595.0

COMMODITIES

Gold Spot, +0.14%, 1,704.08
Brent Oil Spot, +14.83%, 28.81

SUMMARY:

U.S. ISM Non-Manufacturing Index for April dropped to 41.8% (consensus 38.5%) from 52.5% in March. A number below 50.0% is indicative of contraction. The April reading was the lowest reading for the index since March 2009. The Dollar Index rose for a third session, primarily because of EUR weakness. The greenback’s gains came at the expense of the Euro, which weakened broadly after a German constitutional court ruled that the Bundesbank must stop buying government bonds if the European Central Bank cannot prove those purchases are needed. The decision did not apply to the ECB’s latest pandemic-fighting program, a 750 billion-euro scheme to prop up the economy, but the ruling unsettled financial markets. The ruling was confusing and unexpected, and the first thing to do when investors do when uncertain is to sell and get to safety. That led to EURJPY breaking the support at 115.50. Expect EURJPY to go even lower in time to come.

U.S. stocks, bolstered by the prospect of reopenings in some American states and countries around the world, as well as U.S. ISM data that was stronger than market expectations had a good day. S&P 500 rallied as much as 2.0% on Tuesday, as investors continued to buy into the reopening narrative, but stocks pared gains late in the day to leave the benchmark index up 0.9% for the session. The Nasdaq Composite increased 1.13%, the Dow Jones Industrial Average increased 0.56%, and the Russell 2000 increased 0.8%. U.S. 2yr yield remained unchanged at 0.19% and U.S. 10yr yield rose 2bp to 0.66%.

Positive reopening news included California announcing plans to reopen parts of its economy as early as Friday, joining a growing list of U.S. states to have already opened or outlined plans. Starbucks (SBUX 72.90, +1.01, +1.4%) said it expects to have 85% of its U.S. stores open again by the end of the week, excluding dine-in service.

The health care space received a sentiment boost by news that Pfizer (PFE 38.51, +0.89, +2.4%) and BioNTech SE (BNTX 50.00, +4.22, +9.2%) conducted a clinical trial of a potential COVID-19 vaccine with their first U.S. patients. Expect more news of such trials from various companies going forward.

Notably, the ISM Non-Manufacturing Index for April fell into contraction territory with a 41.8% reading (consensus 38.5%), United Airlines (UAL 24.12, -1.14, -4.5%) warned it will likely cut 30% of its management and administrative staff in October, and Norwegian Cruise Line Holdings (NCLH 11.18, -3.26, -22.6%) expressed “substantial doubt” about its future.

WHITE HOUSE TO WIND DOWN CORONAVIRUS TASK FORCE AS FOCUS SHIFTS TO AFTERMATH

The White House coronavirus task force will wind down as the U.S. moves into a second phase that focuses on the aftermath of the outbreak, Trump said on Tuesday. Trump said Anthony Fauci and Deborah Birx, doctors who assumed a high profile during weeks of nationally televised news briefings, would remain advisers after the group is dismantled. Fauci leads the National Institute of Allergy and Infectious Diseases and Birx was response coordinator for the force.

IMPACT: The focus is now on therapeutics, vaccines, and addressing infection hot spots, the task force members said. Most experts have suggested clinical trials to guarantee a vaccine is safe and effective could take a minimum of 12 to 18 months. The “road to recovery” in America will be a key barometer for market sentiment in the weeks ahead, winding down of the task force at this point in time is not a prudent measure especially given case studies in Asia of a second wave. When that happens and a dedicated body is not in place to tackle the issue, blind optimism will turn to doom and gloom really fast and cause safe haven currencies like the Japanese Yen and Dollar to trade strongly against risk assets.

RESERVE BANK OF AUSTRALIA

After keeping rates on hold at a record 0.25 percent at its monthly board meeting on Tuesday, Governor Lowe said several scenarios for the economy had been considered and would be detailed in the Statement on Monetary Policy to be released on Friday. 

However, he said: “A stronger economic recovery is possible if there is further substantial progress in containing the Covid-19 in the near term and there is a faster return to normal economic activity.” The Prime Minister and national cabinet are expected to make significant revisions to restrictions this Friday, bolstering early signs of a recovery in the economy.

IMPACT: The Australian government has handled the Covid-19 crisis well and this is reflected in the rebound in the Aussie. Hopes of the Australian economy reopening and China starting up the economic engine provided optimism and tailwind that things may resume to normal faster for Australia, as compared to the rest of the world. A caveat to note is that the Aussie is still considered a risk asset and a commodity currency, should risk appetite take turn for the worst, a highly plausible scenario at this point, Aussie will inadvertently be dragged down as well.

BIDEN’S EDGE EVAPORATES AS TRUMP SEEN AS BETTER SUITED FOR ECONOMY

Joe Biden’s advantage over Trump in popular support has eroded in recent weeks as the presumptive Democratic presidential nominee struggles for visibility with voters during the Covid-19 pandemic, according to a poll released on Tuesday.

According to the poll, 45% of Americans said Trump was better suited to create jobs, while 32% said Biden was the better candidate for that. That pushed Trump’s advantage over Biden in terms of job creation to 13 points, compared with the Republican president’s 6-point edge in a similar poll that ran in mid-April.

IMPACT: Trump plays the media like a fiddle and is a master of narratives. He has used this Covid-19 situation well to shore up support and bash rivals. Expect elevated volatility as we head into the November elections and safe-haven currencies like the Japanese Yen should trade stronger against most counterparts this year.  

DAY AHEAD

The Bank of England (BoE) meets tomorrow. Having already slashed rates to almost zero and restarted QE, BoE is unlikely to do any more for now. But it will still have a tough job on its hands, as its new economic forecasts will try to estimate the depth and length of this unique recession.

Sterling’s reaction though may depend mainly on the comments of the new Governor, Andrew Bailey. From a risk-management perspective, Bailey probably has more incentive to maintain a dovish tone and hint that his central bank is prepared to do much more if need be. Anything short of that could trigger a sizable rebound in sterling and a tightening of financial conditions, which the BoE likely wants to avoid.

Overall, the outlook for Sterling seems challenging. In the near term, Britain is one of the few major economies that haven’t announced an opening-up plan so far, and the longer things stay shut, the bleaker the outlook for the economy. Longer-term, Brexit worries could come back to haunt the currency, as PM Johnson insists that he won’t request an extension to the December deadline for the transition period, setting the stage for more eleventh-hour negotiations, brinkmanship, and drama ahead.

SENTIMENT

OVERALL SENTIMENT: 

Trump tones down his anti-China rhetoric, and asset markets regained the positive tone. However, while risk assets were enjoying a good day, the German courts finally delivered a ruling, in a lawsuit that started 5 years ago, that ECB’s indiscriminate bond buying is beyond its mandate. So, the German Central Bank now has to stop participating in the program unless ECB can prove in the next 3 months that the policy is delivering the monetary effects it is supposed to and not just monetising the debts of governments. 

This caused weakness in the EUR but small sell-off in risk did not last. However, it is a theme that needs to be watched going forward.

FX

STOCK INDICES

TRADING TIP

European Fractured Union

The German constitutional court ruled that the German Central Bank, the Bundesbank, must stop buying government bonds if the European Central Bank (ECB) cannot prove those purchases are needed to effectively conduct its monetary policy. The judges believe that it is possible that the ECB has gone beyond its mandate and is now encroaching on the territory of fiscal policies by indiscriminately monetising the debt of governments. The Euro reacted negatively given that such a ruling was not expected, hence the disappointment effect and the confusion that ensued led to investors heading for the exits. In the current times of stress, the ECB easing measures have helped calmed the markets and if that is in doubt, investors will shy away from investing in the currency till clarity is restored.

This is one of the many instances the EU has failed in coming together to solve a crisis. The EU may have survived Brexit, the refugee crisis, and the financial meltdown of 2008, but do not assume the COVID-19 crisis can’t destroy it. The countries hit the worst by the pandemic — Italy, Spain, and France — are the ones that have the least amount of fiscal breathing space, irrespective of the European Commission’s relaxation of fiscal and state aid rules.

The EU’s leaders and the European Central Bank’s president, in particular, face a similar choice. Either they move boldly to help the periphery, or the periphery is going to help itself in whatever way it can — even if it means the unravelling of the eurozone and the EU. Previous calls for exits have always come from the periphery, but with German Chancellor Merkel nearing the end of her term, the new Chancellor may face questions from the masses as to the point of the Monetary Union if the ECB is deemed to be conducting the policies that are unconstitutional and monetising debt has been something that the Bundesbank has historically been averse to. 

With the obvious beneficiaries of such initiatives being periphery countries as well as the financial sector, and no obvious benefit to the everyday person who is losing his job, the backlash that is to come could be game-changing.

WHAT HAPPENED YESTERDAY

As of New York Close 4 May 2020,

FX

U.S. Dollar Index, +0.42%, 99.50
USDJPY, -0.23%, $106.69
EURUSD, -0.75%, $1.0903
GBPUSD, -0.48%, $1.2444
USDCAD, -0.01%, $1.4085
AUDUSD,  +0.11%, $0.6426
NZDUSD,  -0.31%, $0.6050

STOCK INDICES

S&P500, +0.42%, 2,842.74
Dow Jones, +0.11%, 23,749.76
Nasdaq, +1.23%, 8,710.71
Nikkei Futures, -1.13%, 19,408.0

COMMODITIES

Gold Spot, +0.20%, 1,703.88
Brent Oil Spot, +6.54%, 25.09

SUMMARY:

Dollar gained on Monday, bolstered by safe-haven flows as risk appetite waned amid fears that last year’s U.S.-China dispute will be reignited, this time over the Covid-19. Trump and Secretary of State Mike Pompeo have pinned the blame for the pandemic on China, where the Covid-19 outbreak is believed to have originated. The latest salvo came on Sunday from Pompeo, who said there was “a significant amount of evidence” that the virus emerged from a laboratory in the central Chinese city of Wuhan.

S&P 500 advanced 0.42% on Monday, closing near session highs, as strength in the mega-cap technology stocks helped the market overcome an increase in U.S.-China tensions and cautious commentary from Warren Buffett. Dow Jones, +0.11% and Nasdaq, +1.23%. U.S. 2yr yield fell 1bp to 0.19% and U.S. 10yr yield remained unchanged at 0.64%.

Over the weekend, the Trump administration stepped up its accusations against China for covering up the Covid-19 outbreak, and Warren Buffett said he has yet to find any attractive opportunities in the market. Buffett, instead, used the uncertainty and volatility in the market to dump Berkshire Hathaway’s (BRK.B 177.95, -4.72, -2.6%) holdings of airline companies.

These events helped send the S&P 500 down 1.2% shortly after the open, but the market gradually regained its familiar resilience, guided by leadership from Microsoft (MSFT 178.84, +4.27, +2.5%), Amazon (AMZN 2315.99, +29.94, +1.3%), Apple (AAPL 293.16, +4.09, +1.4%), and Facebook (FB 205.26, +2.99, +1.5%).

The major U.S. airlines Berkshire sold — Delta (DAL 22.57, -1.55, -6.4%), United (UAL 25.26, -1.36, -5.1%), American (AAL 9.82, -0.82, -7.7%), and Southwest (LUV 27.56, -1.67, -5.7%) — took noticeable hits (again) and weighed on the Dow Jones Transportation Average (-2.0%).

INTERNAL CHINESE REPORT WARNS BEIJING FACES TIANANMEN-LIKE GLOBAL BACKLASH OVER VIRUS

The report, presented early last month by the Ministry of State Security to top Beijing leaders including President Xi Jinping, concluded that global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown, the sources said. As a result, Beijing faces a wave of anti-China sentiment led by the United States in the aftermath of the pandemic and needs to be prepared in a worst-case scenario for an armed confrontation between the two global powers, according to people familiar with the report’s content, who declined to be identified given the sensitivity of the matter.

IMPACT:  No one could determine to what extent the stark assessment described in the paper (classified) reflects positions held by China’s state leaders, and to what extent, if at all, it would influence policy. But the presentation of the report shows how seriously Beijing takes the threat of a building backlash that could threaten what China sees as its strategic investments overseas and its view of its security standing.

The rhetoric led by Washington will only intensify in the months ahead and this will place more pressure on Chinese dependent trade partners like Australia, New Zealand and the Emerging Market Economies. The push for de-globalization by the U.S. seems uncannily rushed with the world still fighting Covid-19. As Trump’s re-election looms, expect more volatility and risk-assets to finally get the memo that this is indeed a paradigm shift. Expect U.S. Dollar and Safe-Haven currencies (JPY) to trade at a premium in the months ahead.

TRUMP ADMINISTRATION PUSHING TO RIP GLOBAL SUPPLY CHAINS FROM CHINA

Trump administration is “turbocharging” an initiative to remove global industrial supply chains from China as it weighs new tariffs to punish Beijing for its handling of the Covid-19 outbreak, according to officials familiar with U.S. planning.

The U.S. Commerce Department, State, and other agencies are looking for ways to push companies to move both sourcing and manufacturing out of China. Tax incentives and potential re-shoring subsidies are among measures being considered to spur changes, the current and former officials said.

IMPACT: The United States is pushing to create an alliance of “trusted partners” dubbed the “Economic Prosperity Network,” one official said. It would include companies and civil society groups operating under the same set of standards on everything from digital business, energy, and infrastructure to research, trade, education, and commerce.

The U.S. government is working with Australia, India, Japan, New Zealand, South Korea, and Vietnam to “move the global economy forward,” Secretary of State Mike Pompeo said April 29. The re-shoring of global supply chains will be economically bad for China, but beneficial for South-East Asian economies like Vietnam in the future. USD/CNH appears to be trending higher and might test the key 7.20 level soon, a break above that level might warrant a stronger USD/CNH amidst rising geopolitical tensions, trade war and supply chain issues.

RESEARCHERS NEARLY DOUBLE U.S. COVID-19 DEATH PROJECTION DUE TO EASING

The Institute for Health Metrics and Evaluation at the University of Washington’s School of Medicine is now projecting 134,000 Covid-19-related fatalities, up from a previous prediction of 72,000. Factoring in the scientists’ margin of error, the new prediction ranges from 95,000 to 243,000.

The CDC document found some reason for optimism, noting that nationwide, the trajectory of new illnesses in “multiple counties, including hard-hit areas in Louisiana and in the New York City region” has continued to decrease, and that incidence rates have recently plateaued around Chicago.

IMPACT: The alarming modeling comes as some states are already beginning to put parts of the White House’s phased reopening plan into motion despite concerns that the administration’s guidelines for doing so have not yet been met. It also underscores fears that moving too fast to relax strict social-distancing restrictions could fuel a dangerous second wave of infections. Consistent with our theme, if projections come true, expect the US Dollar to trade much higher from here as optimism turns to doom and gloom.

DAY AHEAD

The Reserve Bank of Australia will announce its latest policy decision later today and is not anticipated to make any changes to the cash rate or its quantitative easing (QE) program. But as one of the newest members to the QE club, the RBA may also be the first to exit its emergency programs as the virus is brought under control in Australia and the Bank has had to make fewer purchases lately to keep the target on 3-year government bond yields at 0.25%.

But the Aussie may not be out of the woods just yet. A worrying resurgence of Trump’s anti-China rhetoric in recent days has reawakened trade war fears and this poses a real threat to the global economy’s recovery from the Covid-19 crisis. That prospect has knocked the Aussie’s uptrend off course, and combined with an overly cautious outlook by the RBA, could bring fresh pain for the currency.

SENTIMENT

OVERALL SENTIMENT: 

The battered bears got to enjoy just one and half trading days in the sun before yet being sent back into the cave again. On a day with no significant news, a market which started on the backfoot spent the rest of the day grinding back to close at the highs of the session. 

If even Warren Buffet is divesting all his airlines stocks rather than holding or adding to his position, it is a clear sign that many industries are impaired for protracted periods of time. The going forth remains tough for the battered bears, but rising trade tensions and the deteriorating relationship between the US and China will eventually temper the relentless optimism of markets.

FX

STOCK INDICES

TRADING TIP

The Widening Rift

As the printing presses of governments continue to work overtime, asset markets relentlessly march higher. Stabilising asset markets which were panicking may well be a necessary policy objective, but there is a cost to these policies of indiscriminate money printing. 

While asset prices creep ever higher, and hedge funds and banks profit from positioning for and facilitating the policies, the fate of the everyday Joe could not be more different. Jobs will continue to be lost, and earnings will remain depressed. The stark contrast of the fortunes of Wall Street and Main Street will become clearer as time passes.

The discontent that is inevitable among the masses will eventually boil over if not arrested in time. The masses will soon be looking for someone to blame, and if politicians do not find a convenient bogeyman to pin it on, they will have to bear the brunt of the anger.

WHAT HAPPENED YESTERDAY

As of New York Close 1 May 2020,

FX

U.S. Dollar Index, -0.03%, 99.08
USDJPY, -0.22%, $106.94
EURUSD, +0.26%, $1.0985
GBPUSD, -0.71%, $1.2504
USDCAD, +1.01%, $1.4086
AUDUSD,  -1.41%, $0.6419
NZDUSD,  -0.93%, $0.6069

STOCK INDICES

S&P500, -2.81%, 2,830.71
Dow Jones, -2.55%, 23,723.69
Nasdaq, -3.20%, 8,604.95
Nikkei Futures, -2.14%, 19,630.0

COMMODITIES

Gold Spot, +0.91%, 1,700.41
Brent Oil Spot, +0.04%, 23.55

SUMMARY:

Safe-haven Japanese Yen gained on Friday and riskier currencies, including the Australian Dollar, dropped as risk sentiment soured after Trump threatened to impose new tariffs on China over the Covid-19 crisis. Trump said on Thursday his hard-fought trade deal with China was now of secondary importance to the Covid-19 pandemic and he threatened new tariffs on Beijing, as his administration crafted retaliatory measures over the outbreak.

Expect AUD and NZD, which have rallied off the lows of late, to give back some gains as risk aversion continues to take hold. US-China trade tensions rising will be most keenly felt by these growth dependent currencies

S&P 500 declined 2.81% on Friday, as investors increased profit-taking efforts after Amazon (AMZN 2286.04, -187.96, -7.6%) underwhelmed investors with its earnings report and U.S.-China tensions appeared to escalate. The Dow Jones Industrial Average lost 2.55%, the Nasdaq Composite lost 3.2%, and the Russell 2000 lost 3.8%. U.S. 2yr yield remained unchanged at 0.20% and U.S. 10yr yield remained unchanged at 0.64%.

Amazon warned that Covid-19-related expenses would likely wipe out its expected $4 billion operating income in Q2, providing investors a good excuse to take some profits after a 50% rally off its March low. The notion that stocks have come too far too fast was bluntly put by Tesla (TSLA 701.32, -80.56, -10.3%) CEO Elon Musk tweeting that Tesla’s stock price is too high.

As for the broader market, investors had to contend with Trump threatening new tariffs on China for its handling of the Covid-19 outbreak, as well as the ISM Manufacturing Index for April declining to its lowest level since 2009 with a 41.5% reading (consensus 39.0%). The latter wasn’t too shocking for investors.

Aside from Amazon, Apple (AAPL 289.07, -4.73, -1.6%), Exxon Mobil (XOM 43.14, -33.33, -7.2%), Chevron (CVX 89.44, -2.56, -2.8%), and Visa (V 175.57, -3.15, -1.8%) also succumbed to losses after reporting earnings. Note, Apple shares still rose 2.1% for the week.  Separately, the FDA approved Gilead Sciences’ (GILD 79.95, -4.05, -4.8%) remdesivir for emergency use in treating COVID-19, Gilead shares recouped some losses after the news (+2.25% After Hours) but did not aid the overall market sentiment.

AMERICANS BEGIN TO SURFACE FROM ISOLATION AS STATES EASE CLAMP-DOWNS

Americans in about half of U.S. states, led by Texas and Georgia, began emerging on Friday from home confinement while California and New York held fast to business closures and other restrictions. Texas began a phased-in reopening of businesses shuttered more than a month ago, with restaurants, retail stores, and malls allowed to open at 25% capacity. A second phase is planned for May 18 if infection rates continue to decline.

IMPACT: As of Friday, the number of known infections nationwide had climbed to more than 1 million, including nearly 64,000 deaths. As had happened in other nations, keep an eye out for the second spike in Covid-19 infection the weeks ahead. Any resurgence will cause safe-haven currencies like the Japanese Yen and U.S Dollar to trade stronger against risk assets like the AUD.

U.S. EMERGENCY APPROVAL BROADENS USE OF GILEAD’S COVID-19 DRUG REMDISIVIR

Gilead Science Inc’s antiviral drug remdesivir was granted emergency use authorization by the U.S. Food and Drug Administration for Covid-19 on Friday, clearing the way for broader use of the drug in more hospitals around the United States. U.S. Vice President Mike Pence said the 1.5 million vials would start being distributed to hospitals on Monday.

Gilead said the federal government will coordinate the donation and distribution of remdesivir to hospitals in cities hardest hit by Covid-19. Citing the drug’s limited supply, the company said hospitals with intensive care units and other hospitals that the government deems most in need will receive priority.

IMPACT: Gilead did not immediately respond to a request for the price it plans to charge for the drug after its pledged donations are used up. The Institute for Clinical and Economic Review, which assesses the effectiveness of drugs to determine appropriate prices, but the cost of producing a 10-day course of remdesivir at $10, but suggested that the price would rise to $4,500 based on patient benefits shown in clinical trials. Near term risk appetite will be driven by the effectiveness and availability of cure, watch out for any remdesivir headlines as it should cause knee jerk reactions in risk assets.

TRUMP VS CHINA

Some top Trump administration officials are moving to take a more aggressive stand against China on economic, diplomatic, and scientific issues at the heart of the relationship between the world’s two superpowers, further fraying ties that have reached their lowest point in decades.

White House aides last week have prodded Trump to issue an executive order that would block a government pension fund from investing in Chinese companies, officials said — a move that could upend capital flows across the Pacific. Trump announced on Friday that he was restricting the use of electrical equipment in the domestic grid system with links to “a foreign adversary” — an unspoken reference to China.

IMPACT: Trump’s announcement on electrical equipment on Friday appeared to be another attempt to constrain China. He declared a national emergency and ordered the energy secretary to ban the import of foreign equipment for power plants and transmission systems, arenas where China is becoming increasingly active around the world.

Some White House advisers, including Mnuchin, have cautioned against the steps, saying they could disrupt American financial markets or the trade deal that the United States signed with China in January. Banking executives have also warned of adverse consequences. 

In addition, Secretary of State Mike Pompeo said on Sunday there was “a significant amount of evidence” that the Covid-19 emerged from a Chinese laboratory, but did not dispute U.S. intelligence agencies’ conclusion that it was not man-made. “There is a significant amount of evidence that this came from that laboratory in Wuhan,” Pompeo told ABC’s “This Week,” referring to Covid-19.

As the theme of U.S. ratcheting tensions with China develops, any escalation should see Chinese trade dependent currencies like the Aussie, Kiwi and Singapore Dollar weaken against the greenback.

DAY AHEAD

In Australia, the Reserve Bank is unlikely to act on Tuesday, but that doesn’t mean the meeting will be boring. The Aussie has rallied quite sharply in recent weeks, partly as market participants rewarded the government’s impressive response to the pandemic and partly because the RBA itself has been slightly less aggressive than other central banks, for instance by ruling out negative rates.

Yet, a stronger currency is probably the last thing the RBA wants, as that could depress the nation’s exports even more. That implies policymakers may try to implicitly talk down the Aussie, for example by highlighting that they can still do much more, like buying corporate bonds.

SENTIMENT

OVERALL SENTIMENT: 

Trump’s bashing of China and efforts to pin the blame on China to distract from his abysmal response to the Covid-19 crisis finally took its toll on market sentiment. The stock market weakness was also attributed to underwhelming earnings reports from tech giants, Amazon and Apple. Even Elon Musk’s tweet that Tesla shares was too high was partly to blame. 

Whatever the reasons are, it has been a while since the market reacted negatively to negative news. With share markets in the Middle East down on Sunday (Saudi’s Tadawul All Share Index down 7.4%) as the Saudi Finance Minister warns of “painful measures” ahead due to the Covid-19 crisis and the oil price crash, the Asian trading session is set to start of the week on the backfoot.

FX

STOCK INDICES

TRADING TIP

The Battered Bear Reawakens

Bears have been sent back running into their caves to lick their wounds in recent weeks as the aggressive rally in global stock markets from the low have defied the overwhelmingly bad data on the economic front. For weeks, good news was celebrated, no matter how trivial they are, and bad news was ignored and brushed over. That was a clear sign of a market that was looking for reasons to rally. 

Finally, bad news is being priced as bad and the bears are regaining some signs of life. This is the cue for us to dip our toes once again on risk averse positions. The old adage of “Sell in May and go away” may yet again prove to be good advice.

WHAT HAPPENED YESTERDAY

As of New York Close 30 Apr 2020,

FX

U.S. Dollar Index, -0.38%, 99.11
USDJPY, +0.54%, $107.29
EURUSD, +0.65%, $1.0946
GBPUSD, +0.91%, $1.2581
USDCAD, +0.53%, $1.3953
AUDUSD,  -0.69%, $0.6511
NZDUSD,  -0.11%, $0.6126

STOCK INDICES

S&P500, -0.92%, 2,912.43
Dow Jones, -1.17%, 24,345.72
Nasdaq, -0.28%, 8,889.55
Nikkei Futures, -1.17%, 20,060

COMMODITIES

Gold Spot, -1.60%, 1,685.05
Brent Oil Spot, +9.74%, 23.54

SUMMARY:

Central banks remained committed to supporting the financial system. The Fed expanded the scope and eligibility for its Main Street Lending Program, and the ECB said it will conduct net asset purchases under its EUR750 billion pandemic emergency purchase program through at least the end of the year. Yesterday was month-end and around the London fixing, the EUR, CHF and GBP surged versus the US dollar on flow demand, while the JPY, AUD, NZD and CAD fell vs the greenback. Overall the dollar was marginally lower on the day but mixed overall. Dollar Index fell -0.38%, 99.11. 

S&P 500 declined 0.92% on Thursday to end a strong April with some light profit-taking activity. Mega-cap technology stocks outperformed and limited the Nasdaq Composite’s decline to 0.28%, while the Dow Jones Industrial Average declined 1.17% and the Russell 2000 declined 3.7%. U.S. 2yr yield remained unchanged at 0.20% and U.S. 10yr yield rose 1bp to 0.64%.

Economic data continued to reveal the damage caused by the Covid-19, specifically a 7.5% plunge in personal spending for March (consensus -3.6%) and 3.839 million initial jobless claims (consensus 3.050 million) filed for the week ending April 25. The positive spin regarding the jobs data was that it marked a 603,000 decline from the prior week.

Notably, mega-cap technology stocks remained in favor, with Amazon (AMZN 2474.00, +101.29, +4.3%) and Apple (AAPL 293.95, +6.22, +2.2%) rallying in front of their earnings reports after the close. Facebook (FB 204.35, +10.16, +5.2%) and Microsoft (MSFT 179.13, +1.70, +1.0%) also finished higher following their earnings.

Apple shares were down more than 2% in the after hours market  on Thursday after the company reported a slight increase in second-quarter revenue to $58.3 billion, during a period in which supply and demand for Apple’s products were negatively affected by the Covid-19 pandemic. Apple will also continue to buy back its stock amid the pandemic, the company said. It has authorized an increase of $50 billion in the company’s share repurchase program, in addition to a dividend of $0.82 per share. In Apple’s fiscal 2019, it spent $67.1 billion repurchasing shares and $14.1 billion on dividends.

Amazon reported its first-quarter earnings after the bell on Thursday, revealing the pandemic’s impact on the business that has been a rare bright spot on the stock market. The stock fell about 5% after hours after missing estimates on earnings while beating revenue expectations.

TRUMP THREATENS NEW TARIFFS ON CHINAS AS U.S. MULLS RETALIATORY ACTION OVER VIRUS

Trump said on Thursday his hard-fought trade deal with China was now of secondary importance to the Covid-19 pandemic and he threatened new tariffs on Beijing, as his administration crafted retaliatory measures over the outbreak.

Trump’s sharpened rhetoric against China reflected his growing frustration with Beijing over the pandemic, which has cost tens of thousands of lives in the United States alone, sparked an economic contraction, and threatened his chances of re-election in November.

IMPACT: Two U.S. officials, speaking on condition of anonymity, said a range of options against China were under discussion, but cautioned that efforts were in the early stages. Recommendations have not yet reached the level of Trump’s top national security team or the president. Trump made clear, however, that his concerns about China’s role in the origin and spread of the Covid-19 were taking priority for now over his efforts to build on an initial trade agreement with Beijing that long dominated his dealings with the world’s second-largest economy. Now the word used is tariffs, but who knows when it could be sanctions that are floated. If and when that happens, risk assets will come under heavy pressure and currencies such as AUD and NZD will be in trouble. 

Consistent with the narrative we have been advocating that the U.S’ rhetoric against China will ramp up into the Nov elections, expect increasing geopolitical tensions and risk assets like the Aussie Dollar and Emerging Market currencies to be more volatile for the remainder of the year.

GILEAD TO WORK WITH PARTNERS TO RAMP UP PRODUCTION OF POTENTIAL COVID-19 TREATMENT

The company said it still expects to have more than one million remdesivir treatment courses manufactured by December, “with plans to be able to produce several million treatment courses in 2021.” By the end of next month, Gilead said it expects to have manufactured enough of the drug to treat more than 140,000 patients, and it plans to donate that supply to hospitals.

The company said it has been in constant dialogue with the U.S. Food and Drug Administration about making remdesivir, which is given to hospitalized patients by intravenous infusion, available to patients as quickly as possible.

IMPACT: This is positive development from Gilead and any concrete rollout of the drugs will be positive for risk sentiment as it’s a boost for morale globally. Risk currencies like the Aussie Dollar will do well from near term exuberance.

HALF OF U.S. STATES EASING COVID-19 RESTRICTIONS AS JOBLESS NUMBERS GROW

As White House economic reopening guidance expired on Thursday after two weeks in place, half of all U.S. states forged ahead with easing restrictions on restaurants, retail, and other businesses in hopes of reviving Covid-19-stricken commerce.

The enormous pressure on states to reopen, despite a lack of wide-scale virus testing and other precautions urged by health experts, was highlighted in new Labor Department data showing some 30 million Americans seeking unemployment benefits since March 21.

The jobless toll amounts to more than 18.4% of the U.S. working-age population, a level not seen since the Great Depression of the 1930s.

IMPACT: In recurring fashion, we reiterate that there is a good possibility of a second wave of infection as the U.S. relaxes its measures prematurely. Any spike in Covid-19 deaths will dampen risk sentiment and strengthen the U.S. Dollar when risk aversion hits. One caveat is that markets may view remdesivir as a hedge against Covid-19 deaths, hence if the drug is available and reinfections pick up, the impact on risk assets may not be as severe as before, but deaths is a key barometer to watch. 

DAY AHEAD

Financial markets closed April in a cheerful mood. US stocks had their best month in decades, beaten-down commodity currencies are on the mend, and the defensive dollar is losing some of its shine. It seems that the incredible stimulus measures by governments and central banks, alongside the announcement of plans to re-open many economies and positive signals on the medical front about a treatment, have all done their part to calm investors.

At present, stock market valuations imply a quick, V-shaped rebound for the world economy. Alas, that assumption is probably overly optimistic. First, many small businesses will shut down permanently due to lockdowns. Secondly, the impact on consumption from soaring unemployment is likely to be underestimated. The US just lost all the jobs it created in the last decade, how long will it take to recover those, and what does that imply for consumption? Third, consider the lasting behavioural shock to some consumers, who might be much more defensive with their spending even after things open up, as we’ve seen in China.

Markets are starting the first day of May negatively on the back of Trump’s anti-China rhetoric and poor earnings reports from tech giants, Apple and Amazon. Is the old adage “Sell in May and go away” going to be that name of the game again? With all but the most ardent of bears having capitulated, and bad news finally getting a bearish reaction, this may indeed be time for the massive rally from the lows to end.

SENTIMENT

OVERALL SENTIMENT:

Finally, the market reacts to the incessant anti-China rhetoric from the US policymakers and bad news elicit the appropriately bearish response. Trump now talks of imposing tariffs to punish China for their lack of transparency or “letting it spread”. Now tariffs, the next word could be sanctions as the same rhetoric could be coming from other US allies soon. 

Apple’s disappointing earnings report should not be that big of a surprise to the market given that Apple stores have been closed in various countries due to the virus situation. Yet, the market is not brushing it off as it has tended to do so with most bad news of late. When bad news causes bearish reactions once again, it is time for the wounded bear to awaken once again.

FX

STOCK INDICES

TRADING TIP

Chickens Will Eventually Come Home To Roost

The serenity that has encompassed global markets lately will be put to the test next week when America’s nonfarm payroll data reveal how much destruction the pandemic has left in its wake. The Bank of England and the Reserve Bank of Australia are unlikely to deliver anything new at their meetings, though both will likely maintain a very dovish tone. Overall, the recent flood of liquidity and stimulus has helped stabilize markets, but ultimately, the V-shaped recovery that is now baked into stocks seems unrealistic.

To be clear, all this doesn’t mean the world will end. Rather, that markets may be underplaying the real magnitude of this crisis, how long it will take to get out of it, and its longer-term damage. All told a lot of optimism has been priced back into stocks, suggesting that there’s a lot of room for disappointment if anything goes wrong and that the risk of another move lower from here seems dangerously high.

WHAT HAPPENED YESTERDAY

As of New York Close 29 Apr 2020,

FX

U.S. Dollar Index, -0.37%, 99.49
USDJPY, -0.24%, $106.61
EURUSD, +0.53%, $1.0877
GBPUSD, +0.37%, $1.2471
USDCAD, -0.85%, $1.3875
AUDUSD,  +0.97%, $0.6554
NZDUSD,  +1.39%, $0.6140

STOCK INDICES

S&P500, +2.66%, 2,939.51
Dow Jones, +2.21%, 24,633.86
Nasdaq, +3.57%, 8,914.71
Nikkei Futures, +2.46%, 20,297.5

COMMODITIES

Gold Spot, +0.32%, 1,714.12
Brent Oil Spot, +5.98%, 21.45

SUMMARY:

Dollar fell on Wednesday after the Fed left interest rates unchanged and repeated a vow to do whatever it takes to shore up the economy that has been battered by business shutdowns due to Covid-19. The dollar index against a basket of currencies fell 0.37% to 99.49, but held above a two-week low of 99.44 reached on Tuesday.

USD weakness, especially against AUD and NZD, continues unabated and seems unlikely to stop. For now, Gold is taking a back seat as short term speculative positions seem to be long but once that is unwound, the wave of money that is driving risk assets higher will lift Gold prices as well. In the midst of a risk rally, the JPY remains strangely strong. The JPY tends to weaken when risk appetite is strong. This could be a sign that USDJPY and EURJPY will likely probe lower levels in time to come. 

S&P 500 climbed 2.66% on Wednesday, primarily driven by positive remdesivir news and aided by better-than-feared earnings reports and a market-friendly reminder from the Fed. The Nasdaq Composite rose 3.57%, the Dow Jones Industrial Average rose 2.21%, and the Russell 2000 rose 4.8%. U.S. 2yr yield remained unchanged at 0.20% and U.S. 10yr yield rose 1bp to 0.63%.

The US day started with Gilead Sciences (GILD 83.14, +4.47, +5.7%) affirming that remdesivir, an antiviral treatment for COVID-19, met its primary endpoint in an NIAID placebo-controlled study. The news helped the market open noticeably higher, as it fueled reopening hopes and overshadowed data depicting Q1 GDP contracting at a 4.8% annualized rate (consensus -4.3%).

Alphabet (GOOG 1341.48, +107.81, +8.7%), MasterCard (MA 283.69, +19.09, +7.2%), and Boeing (BA 139.00, +7.70, +5.9%) contributed to the bullish price action following their earnings reports. Energy stocks received an added boost from the 22% spike in oil prices ($15.13/bbl, +2.76, +22.3%).

While most stocks finished the day higher, notable holdouts included Starbucks (SBUX 76.86, -1.83, -2.3%), Advanced Micro Devices (AMD 53.66, -1.85, -3.3%), and General Electric (GE 6.58, -0.22, -3.2%) following their earnings reports.

Later in the day, the Fed unanimously voted to maintain the target range for the fed funds rate at 0.00-0.25%, as was expected and said rates will remain there until the economy is on track to achieve the Fed’s goals of full employment and price stability. The inference is that rates will stay there for much longer, as the record unemployment isn’t expected to return to normal anytime soon. 

Fed Chair Powell acknowledged that low rates alone won’t revive economic activity and reiterated the Fed’s commitment to using its full range of policy tools. Powell also said legislators should embrace policies that protect against avoidable insolvencies. Market reaction was relatively muted to the policy directive and the Fed Chair’s comments.

Microsoft shares rose as much as 5% in extended trading on Wednesday after the company reported fiscal third-quarter sales growth of 15%, fueled by its cloud business. The company said in a statement that Covid-19 “had a minimal net impact on the total company revenue” in the quarter and that “effects of Covid-19 may not be fully reflected in the financial results until future periods.” 

Facebook which gleans nearly all of its revenue through advertising, reported better-than-expected quarterly revenue but missed on earnings. The social-networking giant still managed to double its profit from a year ago, though, and its shares shot up 10% in after-hours trading. “Rather than slamming on the brakes now… it is important to keep on investing and building where other companies turn back,” Zuckerberg said.

DATA ON GILEAD DRUG RAISES HOPES IN PANDEMIC FIGHT, FAUCI CALLS IT ‘HIGHLY SIGNIFICANT’

Preliminary results from a U.S. government trial showing that patients given remdesivir recovered 31% faster than those given a placebo, were hailed by Dr. Anthony Fauci as “highly significant.”

The U.S. Food and Drug Administration said it has been in discussions with Gilead about making remdesivir available to patients as quickly as possible, but the agency declined to comment on any plans to grant the drug regulatory approval.

“I want them to go as quickly as they can,” President Donald Trump said, when asked if he wanted the FDA to grant emergency use authorization for remdesivir. “We want everything to be safe, but we would like to see very quick approvals, especially with things that work.”

IMPACT: Gilead’s shares rose more than 5% on Wednesday to close at $83.14 and are up 27% so far this year. Despite the excitement, Dr. Lawrence K. Altman, a global fellow at The Wilson Center in Washington, DC, was not ready to celebrate the preliminary findings. The new data “offers a glimmer of hope” that remdesivir has an effect against Covid-19, but the more scientific analysis is needed “comparing them to other studies of the drug that have shown mixed results,” he said in a statement. Any positive developments in relation to Gilead’s drug will see risk assets and growth currencies, such as the AUD, get a boost and if the cure is actually found, we may see an unwind in safe-haven assets like the U.S. Dollar.

PRESIDENT TRUMP SAYS CHINA WANTS HIM TO LOSE RE-ELECTION RACE

Trump said on Wednesday he believes China’s handling of the Covid-19 is proof that Beijing “will do anything they can” to make him lose his re-election bid.

In an interview with Reuters in the Oval Office, Trump said he was looking at different options in terms of consequences for China for the virus. “I can do a lot,” he said.

IMPACT: Desperate to win reelection and avoid blame for the U.S.’s Covid-19 disaster, Trump is going all-in on China-bashing. The effects of attacks on China are broad. More China criticism could increase volatility in bond, stock, and affect growth sensitive currencies (AUD, SGD, NZD, etc). Asian governments’ and businesses’ biggest fear is Trump doubling down on import taxes just when China is growing the slowest in 30 years. Following the Covid-19-driven 6.8% contraction in China’s gross domestic product in the first quarter, trade disputes would hardly be welcome.

JAPAN PM SAYS TO CONSULT EXPERTS ON WHETHER TO EXTEND STATE OF EMERGENCY

Japanese Prime Minister Shinzo Abe said on Thursday that the government would consult experts to decide whether to extend the state of emergency beyond May 6.

Abe, speaking in parliament, also said the situation surrounding the Covid-19 epidemic continued to be “severe”. The Nikkei business daily reported on Wednesday that the government was planning to extend the nationwide state of emergency by about one month.

IMPACT: The global economy could this year see the steepest downturn since the Great Depression of the 1930s due to a virus-driven collapse of activity, with Japan’s economy facing stagnation due to its export dependence and soft domestic consumption. Official data on Thursday showed factory output slipped 3.7% in March from the previous month, a smaller decline than the 5.2% drop forecast. We are not out of the woods as major economies are still grappling with the virus and demand destruction is not a light switch that can be turned on and off, the pickup in economic activity will be a protracted grind, hence higher Oil prices might not be entirely sustainable at this point. This in turn affects Oil-linked commodity currencies like the Canadian Dollar and Mexican Peso.

DAY AHEAD

With Europe’s biggest economies shutting down in March as the Covid-19 wreaked havoc across the continent, no one is expecting the Eurozone’s first-quarter GDP estimate later today to be anything but abysmal. But just as in previous crises, it is the European Central Bank that has been first to come to the rescue and with European Union leaders still bickering over the details of a virus recovery fund, it will be up to Lagarde and her team to calm investor’s nerves when they announce their latest policy decision later today.

SENTIMENT

OVERALL SENTIMENT:

US GDP was worse than expected, proving that the economy is bad, but it did not faze the market. At the same time as the data release, news that Gilead’s drug, remdesivir, was showing “positive results’ ‘ in a trial hit the wires, and it was off to the races for risk assets, with US stocks up almost 2% on that.

The Federal Reserve kept policy unchanged, and the Fed Chair, Powell, says the economy is bad and the employment numbers are going to be horrible next. That did not put a dent in the market, and it rallied almost another percent. It seems that good news is good for the market, and bad news is expected and ignored for now.

FX

STOCK INDICES

TRADING TIP

A Fractious Europe

With the virus crisis not looking like it will end anytime soon and the EU dragging its feet on meaningful measures to support the hardest-hit member states, expectations are growing that the ECB will boost the Pandemic Emergency Purchase Programme at today’s meeting. If the expectation is met, the Euro could advance. If, though, the ECB keeps the size of its stimulus unchanged and just fine-tunes existing measures, the Euro would be in danger of revisiting the $1.0775 support as doubts would resurface about the Eurozone’s recovery plan.

In the more medium-term, the ECB’s forward guidance and any hints on the future policy will be more significant for the Euro’s outlook. In particular, should Lagarde suggest that unlimited bond purchases were discussed in the meeting, this could limit future rebounds against currencies where their central banks have also pledged unlimited QE (like the Federal Reserve and Bank of Japan).