Asia Session: Equities Rally On Falling Death Rates; Oil Lower

Coronavirus does bring out the morbid ghoulish side of the financial markets, with equities enjoying a bright start as the rate of deaths in Spain, Italy and New York fell. Hundreds of people are passing away each day from the pandemic, but less so than previous days, giving markets hope that that the lockdown measures are finally starting to prove effective. Like the rest of the world, financial markets are searching for any slivers of hope, and although in this case, I hope they are right, still amateur scientists have not had a great track record since January.

The ghoulishness swings both ways, of course. The British pound fell this morning as the UK Prime Minister was taken to hospital having been unable to shake of COVID-19 from isolation at home.

Oil too has endured a torrid early morning session, as quarrels amongst the OPEC+ members sees a virtual meeting postponed until Thursday. Both Saudi Arabia and Russia are finger-pointing over who is to blame for the collapse in oil prices. At the same time, the U.S., a key component in any deal, seems to be threatening tariffs on imported oil and cheap financing to keep the domestic industry afloat. I am somewhat confused why President Trump knocked heads together in the first place if that was his strategy, let OPEC+++ take the pain while insulating the C-Suite ilk of companies in the same sector as Whiting “snouts in the trough” Petroleum (NYSE:WLL).

Indeed, just when the world needs to be working together, there does seem to be an every-man-for-himself feel about international relations at the moment. Especially frustrating when COVID-19 has not even got going amongst some of the developing world’s largest economies and has plenty yet still to run within the United States. India has banned the export of hydroxychloroquine, a favourite Trump drug, although with no proven benefit in fighting COVID-19 as yet. The U.S. is threatening tariffs on foreign oil to protect the local industry. A strategy doomed to failure. Meanwhile, the paper tiger known as the European Union cannot even agree to the joint offering of an EU pandemic bond thanks to resistance from the usual suspects, Germany and the Netherlands.

While Asia should enjoy its moment in the sun, I suspect the summer weather is temporary. As the Friday U.S. Nonfarm Payrolls illustrated, COVID-19 is wreacking almost unimaginable havoc on the world’s economy, which is sadly, mostly being led by leaders who appear to be not fit for purpose.

U.S. stock futures opened higher this morning as Bill Gates said social distancing works, and the rate of deaths fell in the COVID-19 epicentres of Spain, Italy and New York over the weekend. Despite Friday’s nightmare Nonfarm Payrolls number, Wall Street’s major indices only fell by just over 1.50%, suggesting that a lot of bad news is now built into prices. The key is how much bad news has been loaded into prices. The author believes any rally this week is merely a bear market bounce and the v-shaped desperados will soon be put back into isolation.

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That said, S&P 500 and NASDAQ futures are both higher by just over 3.0% this morning, albeit on modest Monday morning volumes. That hope versus reality has spilt into regional exchanges. The Nikkei 225 is 2.05% higher, with the KOSPI 1.75% higher. The Australian ASX 200 is up 2.50% along with the All Ordinaries. The Straits Times has climbed 1.15% and the Hang Seng by 1.0%.

With a very light calendar globally today, there is enough momentum to keep the equity rally running through the course of the day and also into European time. All bets are off after that although I could see a couple of days of positive sentiment ahead, especially if those mortality rates keep falling.

The fall in oil prices this morning has seen the Mexican peso fall 1.75% against the U.S. dollar. USD/MXN has risen to 25.4000, just below the recent high of 25.5000. Remarkably, the Norwegian krone is almost unchanged against both the U.S. dollar and the euro. Still, we would expect it and the Russian ruble later, to come under sustained pressure if this morning’s oil collapse persists. The Malaysian ringgit has also fallen today, USD/MYR rising to 1.30% to 25.3400 with a test of 25.5000 likely with further stop losses triggered if it breaks.

The AUD/USD has enjoyed a positive morning, rising 0.45% to 0.6020. It and the New Zealand dollar will be favourite recovery plays for the COVID-19 pandemic, and as such are likely to enjoy a decent couple of days’ worth of sessions as hopes rise that the worst has passed. For the very brave, one could possibly add the Indonesian rupiah and the South African rand into that grouping, although I emphasise the word “brave.”

The GBP/USD recovered its early Boris A&E losses and is now down only 0.30% at 1.2235. Elsewhere, the USD/JPY has risen by 0.40% to 108.95 as Asia awaits PM Abe’s probable announcement of an official COVID-19 emergency finally. That should have happened weeks ago, and with the Olympics postponed, and a spike in COVID-19 cases in Tokyo, another, not fit for purpose national leader appears to be conceding to the inevitable. USD/JPY is unlikely to see 107.00 again for some time.

Oil enjoyed a mighty session on Friday as production cut hopes saw Brent crude rise 15% and WTI rise 12.25%. Squabbling and finger-pointing by Russia and Saudi Arabia over the weekend have seen the OPEC+ meeting pushed back to Thursday and oil prices collapse in early Asia. With the G-20 energy ministers meeting scheduled for Friday, the pressure is being heaped on the grouping to produce a 10 million barrel cut to shore up energy prices and bring the damaging price war to some sort of truce.

Of course, anything involving Russia and Saudi Arabia is going to be complicated. Both quite rightly are saying the U.S. must be included, despite the legal barriers to doing so. With the Canadian’s and Norwegian’s also indicating they are prepared to do their part in an OPEC++++++ arrangement, it may well fall to the State of Texas to enact powers last used over 50 years ago, forcing production cuts in the Lone Star State.

With oil priced having risen by over 30% last week, it wouldn’t have taken much for some profit-taking to have set in. And with the entire rally built on Trump rhetoric, who could blame them? Brent crude futures have fallen 3.60% to $32.90 a barrel; meanwhile, WTI is 6.0% lower at $26.70 a barrel.

Oil prices will remain vulnerable to further corrections on negative headlines. The reality on the ground is that you cannot find crude storage or buyers for love nor money. Realistically, OPEC+++++ will need to deliver cuts of around 15 million barrels a day by Thursday just to stabilise prices. Even if prices continue rallying this week, any announcement on Thursday will probably be a buy the rumour, sell the fact situation.

Gold rose by 0.35% on Friday to 1619.00 an ounce, as the precious metal continues to see record inflows to bullion ETFs rather than the futures markets. Friday’s closing price puts it dead centre of its recent $1600.00 to $1640.00 current range with Asia showing little interest today, as gold climbs meekly to $1620.00 an ounce.

Although gold is consolidating at the upper end of its recent $150 an ounce range, its next real test will be how it weathers the next sharp equity sell-off. Only then will we see if the 'liquidate everything' correlation has finally come to an end, and that gold is free to choose its own path. Complicating the picture is the strong underlying demand for U.S. dollars globally, which is showing no signs of receding anytime soon.

The sheer volume of central bank quantitative easing and government borrowing should, in the end, be positive for gold.

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Written By: MarketPulse