Nobody can complain about a lack of volatility over the last 24 hours. US equity markets suffered massive intra-day gyrations ahead off, and following, the Federal Reserve’s surprise 50 basis point rate cut overnight. In hindsight, it perhaps wasn’t such a surprise given that equity markets tanked after the announcement. The US dollar fell, and gold finally rediscovered its mojo, exploding higher, while oil managed to disconnect itself at last from the equity market.
Asian markets, are, by and large, holding their own today despite truly awful China Caixin Services and Hong Kong Markit PMI Services data. Japan and Singapore PMI’s shrank, but by and large, not as bad as expected. After the manufacturing PMI releases across Asia earlier this week, it appears that a lot of bad news is now, by and large, priced in.
The G-7 statement, and three central bank rate cuts yesterday, with Canada appearing to be about to join the party tonight, appears to have backstopped the equity rout for now. As I have stated before, the world’s central banks and finance ministries will need a lot more imagination then sledgehammer rate cuts, to ameliorate an aggregate supply and demand shock, if coronavirus goes pandemic. Cutting the cost of borrowing is meaningless to SME’s, if they can’t get paid, can’t access funding and can’t make the month-end payroll. The rest of the world would do well to take leaves out of the Singapore, China and Hong Kong playbooks to date.
With rate cuts offering a temporary salve to the world’s viral woes, attention today remains lock solidly on the Democratic presidential nomination “Super Tuesday” primaries. Bernie Sander’s will not be feeling the “bern” today, more likely Mr Sanders is feeling bern’t. Although Mr Sanders is on course to win the juicy prizes of California and Texas, he will have to share those spoils with “comeback” Joe Biden, who has also swept the South and part of the North.
Another feeling bern’t will be Michael Bloomberg, who has spent over $500 million to win, American Samoa. The race for the Democratic nomination to face President Trump in November will likely be a two-horse race by tomorrow, with voting seemingly coalescing around the moderate candidate Joe Biden. If anything, that should be mildly market’s positive, as Mr Biden doesn’t terrify the top one per cent and corporate America, nearly as much as Mr Sanders.
Looking ahead, tonight’s highlight will be the Bank of Canada rate decision, with the street pricing in a 50-basis point cut, and the US EIA Crude Inventories data with markets expecting a jump to 2.5 million barrels. The latter being a crucial building block for the punch-drunk comeback that oil has delivered in this week.
Wall Street has an emotional session, with equities falling and then falling aggressively yesterday until the Fed’s surprise rate cut. In a classic buy the rumour, sell the fact setup though, equities than unwound their day’s gains and continued collapsing. The S&P 500 fell 2.80%, the Nasdaq fell 3.0%, and the Dow Jones fell 2.95%.
The Asia Pacific has had a much more varied reaction. Australia followed Wall Street directly to jail with the All Ordinaries falling 1.50% although the NZX 50 rose 0.35%. In Asia itself, markets appear to have been boosted by the Fed’s overnight rate cut, giving room for the region’s central bank’s to ease policy further. Australia is paying the penalty of its own RBA rate yesterday now priced in. Further support being leant by a small profit-taking rally in S&P 500 and Dow Jones futures in Asia today.
The Nikkei is 0.10% higher with China’s Shanghai Composite down 0.25% and the CSI 300 down 0.20%, despite this morning’s nightmare, but expected, services PMI. Hong Kong has had much the same reaction, the Hang Seng being down only 0.20%.
The regions star performers today have been South Korea and Jakarta. The Kospi is higher by 2.10% as markets anticipate further easing and stimulus measures from the Bank of Korea. Jakarta’s ban on short selling, a lowering of bank reserve requirements and an impending extra stimulus package has seen Jakarta jump by 2.0%.
Asia’s mixed performance means that Europe will probably not start as strongly as it finished yesterday. Further ECB cuts will be somewhat meaningless in an already negative interest rate environment. The medicine here is fiscal stimulus, a much more difficult vaccine to produce in the halls of power in Germany.
After the 50-basis point rate cut by the Fed overnight, US 10-year yields plummeted below to the 1.0% mark, an all-time low. A narrowing of the Dollars interest rate advantage was the only thing that could have undermined its hegemony in 2020, and that appears to be what is unfolding now. The US dollar fell broadly against the majors overnight but also gave back some ground against LATAM and Asia currencies. The prospect of further room to ease by EM central banks though, has limited the Dollar’s losses in that space.
The dollar index fell 0.22% overnight with the Japanese Yen and Swiss France notable gainers. USD/JPY fell 1.12% to 107.10 and USD/CHF fell 0.30% to 0.9563. The beleaguered Antipodeans had their first rally in over a week with the AUD/USD rising 0.65% to 0.6585, and the NZD/USD rising 0.25% to 0.6275. With one eye on potential easing from the ECB, the EUR/USD tested 1.1200, but failed, falling back to a still positive close at 1.1175.
The Dollar has rallied mildly today, supported by a small rise in US equity futures in after-hours trading in Asia. USD/JPY rising to 107.40 in trading today and both the AUD and NZD easing slightly. Asian currencies remain for the most part, almost unchanged from yesterday.
Asia’s contentment to take its short-term cues from the US equity futures, suggests that markets here are content to let European and US markets dictate near-term direction. The rally by the Dollar in Asia will likely be short-lived as US yields probe record lows.
Oil gave ground late in the New York session as equities were pounded, but by and large, held onto much of their outsized gains from the previous days. Brent crude fell 1.80% to $51.85 a barrel, and WTI fell 0.90% to $47.10 a barrel.
The falls have been reversed to some extent in Asia, Brent crude rising 1.75% to $52.60 a barrel, and WTI climbing 1.75% to $47.85 a barrel. Oil prices have been supported today by a rise in US equity futures and the expectation of production cuts by the OPEC+ grouping at their meeting, starting tomorrow.
At this stage, markets appear to be anticipating production cuts of around 1 million barrels a day from the grouping. However, Russia has been reluctant to engage in significant scale cuts. It has left the grouping badly behind the curve as demand slumped with the coronavirus epidemic. Against that backdrop, the room for disappointment is large. Even if OPEC+ comes to the party, a million-barrel production cut will only keep the lights on, not structurally change the world’s supply/demand equation at the moment. Therefore, although oil has performed relatively well this week, any further gains are likely to be limited. OPEC+ lacks the agility and will to respond dynamically to the coronavirus situation.
Gold finally had its well overdue, day in the sun yesterday, leaping 3.30%, or over 50 dollars to $1641.00 an ounce in overnight trading. With the US 10-year yield plumbing 1.0%, investors appeared to start rotating into gold in meaningful volume finally. The margin selling pressure of last week being noticeably absent.
With interest rates globally poised to move South, and with the coronavirus epidemic still in full cry, gold is poised to reap the benefit as an alternative asset.
Gold has nearby technical support at $1640.00 an ounce with resistance at $1653.00 and $1660.00 an ounce. A daily close above the latter sets the stage for a test of the $1700.00 an ounce region. Further gains from there, however, will likely require the plunge in global yields to continue, as well as more weakness on global equity markets.
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