New York Open - The Trend Is Your Friend

Market Analysis /
09 Apr 2020

Social media agog with bear market reminders, still the trend is usually your friend. 
 
Stock markets
 
European equities are treading fair dinkum fuelled by energy names, which should see Value again lead in Europe. However, expect volumes to tail off considerably throughout the day similar to what was seen in both the US and in Europe into Wednesday's close amid further position squaring into the weekend and could provide the ultimate rally capper. 
 
Typically, the start of Easter week is when things usually quiet down. But frankly, after contributing to a story for local media about trading at home, I m not sure how that will work out this week as most traders I know are spending far more time than usual behind their screen. And if you have the luxury of living in Asia, you can trade all three markets opens. 
 
Equity markets have become optimistic about when virus restrictions might be lifted. But tonight, will provide a stark reminder of the economics of things. US initial jobless claims are due – over ten million Americans have lost jobs in the past two weekly reports. This should thwart any excessive bullish ambition as will uncertainly over the OPEC deal. 
 
Open-ended economic lockdowns make calculating the impact on production, consumer spending, trade, challenging. And corporate earnings uncertainty, although probably horrendous, makes it challenging valuing any stock market asset in play. However, a fixed exit end date the lockdowns would provide investors with a material standard by which to gauge a rebound. So, risk assets will rally on greater perceived certainty around the global economy opening-up rather than the current economic data itself. In that sense, investors might be more predisposed to look through what usually would be shell shocking data. I'm specifically referring to tonight's US claims. 
 
Currency markets
 
After all, was said and done in Asia, there was not much to be gleaned from the FOMC minutes overnight. Almost all participants agreed to a full percentage point of rate cuts. It was all priced in, although when Fed dove is combined with another fire hose deluge of US fiscal stimulus, one would expect both the dollar to weaken and gold to sprout a second set of wings. 
 
ECB President Lagarde, speaking to the French press this morning, said people shouldn't get fixated on 'corona bonds,' adding that things take time in Europe. It might take a while to get to mutualization, but some form of commonality would at least be a step in the right direction. Indeed, Lagarde also commented on this, saying there can be other forms of European solidarity, such as mutualized spending from a shared budget or a reconstruction fund. This continues to hold back the Euro 
 
Oil markets
 
Oil is not only holding onto overnight gains but has pushed higher and bolstered related equity sectors after Russia made it clear they are on board with oil cut considerations ahead of today's (video) OPEC meeting. 
 
Russia has indicated a willingness to cut 1.6mb/d, or 15% of its output, but the real issues will be the US - major US producers have already rejected formal cuts. US production will decline organically as a result of the lower oil price, and the success of any new deal will depend on how willing Saudi Arabia and Russia are to treat a natural decline as equivalent to cuts.
 
OPEC presumably hopes its virtual meeting fares better than that of the EU . Bleary-eyed EU finance ministers switched off their webcams yesterday, having failed to agree on fiscal support measures.
 
The OPEC+ meeting is at 1500 BST, though it will be a video conference, so there probably won't be the usual volume of conflicting headlines during the session. The aim appears to be for a 10mb/d cut from OPEC and an additional 5mb/d from non-OPEC producers. OPEC cuts are contingent on broader non-OPEC participation.
 
No deal would mean oil prices fall back into the low $20s, so I'd guess all concerned are highly motivated to work something out. But the more important outcome from these meetings will be from signaling of constructive supply-side behavior as the global economy and oil demand recover from the pandemic.
 
 A reliable agreement would imply front-loading cuts and an orderly ramp-up over 2H20 when the virus passes. In contrast, another collapse would signal prolonged chaos for both the oil market and broader capital markets. Even more so, given the fragile state of the global economy – a point Washington correctly continues to drill home. 
 
I want to remind my oil trading colleague that while Algeria's energy minister spoke of "massive" production cuts. The problem is there have been even more massive demand cuts. Remember not to get too greedy on longs as demand will stay extremely low until the economic recovery starts.

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