The PBOC signalled on Sunday, its intention to engage in more powerful policies to counter the slide in Chinese growth from the COVID-19 pandemic. In a rather Fed-like twin-mandate way, the PBOC stated in its quarterly monetary report that it would concentrate on growth and jobs amongst other things. In a decidedly non-Fed way, it indicated that it would maintain “normal” monetary policy, implying that quantitative easing and its ilk are not in the PBOC’s playbook. That, of course, does not mean that interest rates could not be much lower than where they are today though, and the report does imply that more cuts in the Loan Prime Rate are on the way.
That should be enough to ensure that the welcome to your illusion rally in asset markets continues at full steam ahead in Asia today. That is despite a sudden outbreak of COVID-19 again in South Korea this weekend. Infected partygoers unwittingly exposure potentially thousands of their fellow night clubbers to some very non-uplifting house. Authorities in Seoul shut down bars and clubs in the capital and told the potentially 6000-7000 clubbers potentially exposed, that the only house they will be experiencing, is the four walls of Mum and Dad’s as they self-isolate.
China has partially locked down the city of Jilin near the North Korean border after a surge in coronavirus cases. Singapore and Russian cases continued to climb over the weekend. And even the US White House has not been spared, as Mike Pence’s press secretary and various other staff all tested positive for coronavirus. All of which serves to highlight life after lockdowns for the world, and what an insidious nasty COVID-19 will be to control, let alone eliminate.
With lockdowns being eased across Europe and Australasia, as well as the USA, and the rate of people dying falling in many countries, markets will likely ignore the threat of COVID-19 part two, staying with the momentum of the peak-virus trade. That all ran utterly to plan on Friday night, as expected by the author, unfortunately. The US Non-Farm Payrolls printed a drop of 20.5 million jobs. As stated on Friday, that news was well baked into the markets, and equities and energy rallied strongly, as did the rotation out of haven positions.
With COVID-19 is defeated, or even controlled, you could argue. Millions of jobs are lost, whole industries are facing annihilation and the global economy taking repeated 8-counts. Wiser minds than I are also pondering how Wall Street could be so disconnected from the high street. The answer lies in the in momentum, hope, and central banks prepared to use unlimited amounts of unconventional monetary policy to backstop anybody suffering a loss. Financial markets are incredibly efficient at short term groupthink, seizing the narrative that suits their hopes in a lemming-like fashion, ignoring the bits that don’t. All in an emperor’s new clothes fashion; justified under the guise of being “forward-looking.”
The momentum of the FOMO peak-virus v-shaped recovery Borg collective have the upper hand now, and resistance is futile. Until it isn’t. When that time comes, the reversal could be emotional, indeed. In the meantime, investors should either partially assimilate, or hide and await Star Fleet’s arrival. Another wise man, undoubtedly cleverer than I, John Maynard Keynes, once said: “markets can stay irrational longer than you can stay solvent.” You can build an entire career in investing around that phrase, and never has his sage advice been more relevant—one to beam up Scotty.
Asia is bereft of tier-1 data today, with local markets, therefore, at the mercy of short-term headline volatility to detract from the peak-virus juggernaut. Data highlights for the region include Australian Unemployment on Thursday and China’s Industrial Production and Retail Sales on Friday. With the PBOC signalling, a release of the doves, poor numbers on Friday will be met with an expectation of further China stimulus on the way. In this market, that probably means continuing buying equities. US inflation on Tuesday night is expected to fall from 1.50% to 0.40%. That will probably impact bond markets more than other asset classes, with US yields likely to edge lower again, possibly eroding support for the US Dollar.
PBOC easing bias to support Asian equities.
The PBOC’s intention to more proactively support the Chinese economy is likely to boost equities across Asia today. Wall Street shrugged off a fall in Non-Farm Payrolls of 20.5 million jobs, and an explosion of the Unemployment rate to 14.70%. Both data points were lower than the street’s forecast with stocks not pausing for breath, finishing the session strongly. The S&P 500 rose 1.1%, the NASDAQ rose 1.0%, and the Dow Jones gained 1.3%.
The US Dollar continues to wilt in the face of the peak-virus trade.
The US Dollar mostly edged lower against most major and developing market currencies overnight as bullish momentum in equities and a rotation into EM continued unabated. Notably, the Dollar rose against fellow haven currency, the Japanese Yen, increasing 0.35% to 106.65. Higher oil prices saw the greenback give ground against the CAD, RUB and NOK, with the Mexican Peso notably outperforming, USD/MXN falling 1.50% to 23.6740.
The trade-sensitive Australian Dollar again performed well on Friday, rising 0.55% to 0.6535, just below its 100-day moving average at 0.6540. The AUD/USD is likely to test higher again today in Asia following the dovish PBOC quarterly report released yesterday.
Regional currencies should continue to fare better against the greenback with KRW, IDR and SGD expected to be the primary beneficiaries. Politics may temper gains by the Malaysian Ringgit this week. The Parliamentary Speaker is granting permission for a no-confidence vote to proceed when Parliament reconvenes on May 18th.
Oil enjoys a bumper day as Baker Hughes rig counts fall.
Oil had another outstanding day with the post-virus economic recovery momentum unabated. That was boosted further by the Baker Hughes Rig Count data, which showed the Oil Rigs count hitting a new low of 292 rigs. As recently as March, that count was 683 oil rigs, showing the scale of the new well cutbacks by the US oil industry. The expectations of lower US production, and higher consumption, as lockdowns globally are reduced, was fuel on the fire for oil prices on Friday.
Brent crude leapt 5.05% to $30.85 a barrel, also its 50-day moving average. Brent’s next resistance is at $32.00 a barrel, with a break opening further rallies to $36.00 a barrel. WTI broke its 50-day moving average at $25.40 a barrel on the way to a 5.15% rise to $26.10 a barrel. WTI has resistance at $28.00 and $29.00 a barrel.
The PBOC quarterly report should ensure that any profit-taking seen in early Asia is limited. The prospect of more Chinese stimulus should be positive for oil prices as the Asian session progresses.
Gold continues to make much ado about nothing.
The rotation out of haven positioning on Friday saw gold fall by 0.77% to $1702.50 an ounce, wiping out much of the previous day’s gains. Yet again though, it must be emphasised that gold continues to trade off the whims of day to day sentiment. A clear direction has yet to be established in May.
Gold remains anchored in the middle of its larger $1650.00 to $1750.00 an ounce range. Until one of those sides breaks comprehensively, gold will continue to occupy the cheap seats of the financial market’s theatre.
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