New York Open: Investor confidence soars on the lifting of Covid 19 lockdowns

Market Analysis /
28 Apr 2020

Stock markets
 
Show me a path where I could walk and point me in the right road to follow. Well, last week, the White House released guidelines that laid down that specific path for reopening. Although that it's bound to be fraught with numerous potholes, for some inexplicable reason, the market is taking that road less traveled while triggering several stops along the way when slicing through SPX 2900. The culprit? Besides the FED pledging to expand their current asset-purchase course of actions if warranted, maybe its oil?
 
But what seems plausible is that equity investors are buying today with a boatload of confidence supported by the gradual lifting of coronavirus lockdown measures around the world, with the European markets also punching higher. 
 
Currency markets
 
The risk on the move has triggered a broader USD selloff in G10 FX, with USDJPY and EURUSD breaking some key intraday levels, USDJPY is sub 107, where it held Monday, and EURUSD has finally managed to break above 1.0860, and the AUDUSD took a look above 65.
 
AUDUSD remains the standout performer in part due to the emergency fiscal measure that allows two $A10k tax-free withdrawals from Superannuation funds that have significant foreign investments suggesting repatriation flows to cover those domestic drawdowns. Aussie demand is picking up, but CTA's remain massive short and are well overripe for a position squeeze while iron ore demand is making AUD an excellent proxy to a Chinese normalization compared to more risky emerging market currencies.
 
Japan's globalization is thrown into reverse by new incentives to bring high value-added manufacturing back home. GPIF has finished their bond-buying spree, and real yield differentials are pointing lower. As Libor eases, the market could start positioning for an extended down on USDJPY, suggesting rally's back towards 108 could look attractive selling levels for long term traders. During March, outbound equity flows from Japan likely supported USDJPY as Japanese funds were a big buyer of the SPX dip. But April dynamics, particularly in the last couple of weeks, have seen JPY outperform even as US equities recovered some ground, and this is starting to attract more attention as trader position for weaker USD.
 
Keep in mind the peak in LIBOR in 2008 was a signal that panic USD buying was done, and a few weeks later, the USD fell precipitously. A good portion of the USD buying since March has been of the global USD shortage variety, and tumbling LIBOR is yet another signal that the shortage is dissipating.
 
Oil markets
 
S&P Dow Jones told all clients to pre-roll all WTI June into July contract today; cites risk that WTI June price will go negative ?? Zero?? Not really, assuming they were not crazy enough to say this to the press before all their clients are rolled. If this delivery mess clears, look for the June-July spread to narrow as we move closer to June WTI unofficially classified DNT (do not trade), which should push June higher. 
 
While some  speculative money is moving in on weakness ahead of OPEC + cuts which will start soon and should provide some support
 
Some of the weakness in oil on Tuesday, an extension of Monday's losses, which is probably best explained by the fact ETF selling of the front-month WTI contract spiked, well ahead of contract expiry. 
 
While the widening of the Brent-WTI spread suggests, similar pressure is building to that of the May 2020 settlement debacle; risk protocols say no.
 
And balancing that act, OPEC+ cuts will ramp up in the coming days, and while it will likely take time for the full production cut to be noticeable, there should be a bit of support from a fundamental perspective.
 
Still, price pressure in real oil ( July ) remains skewed to the downside until visible demand returns. And with storage both on and offshore even in focus, all things considered, the most significant element of all is how hard it will be for this " tanker" to change direction from here. 
 
Gold 
 
Gold finally woke up and is gingerly kicking into gear as the dollar weakens, and front-end oil moves higher.

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