Positive Momentum Picks Up As Cross-Asset Volatility Ebbs, USD Loses Favor
Stephen Innes | Apr 29, 2020 02:48AM ET
Markets
Markets appear driven exclusively by momentum plays all over the street. But there is the logic behind the madness. The decline in cross-asset vol speaks volumes about how little investors fear or care about how deep a recession goes as they know it will be painful but of short duration. And that the falling VIX also suggests that they see a rosy H2 recovery that even transcends rolling lockdowns.
I have resigned my self to the fact we are in for an unprecedented level of uncertainty going forward as economies reopen to the reality of gloomy hard data suggesting markets will struggle for a steer more times than not. And all things considered, the most significant element of all is how hard it will be to steer this ship from here.
US stocks may have run their near-term course; I do not know as I do not have any particular vision on this move above 2900. And if I do not walk it, I do not talk about it.
Still, regardless of my foggy view on stocks at these levels, I think its time to finally deploy more capital into currency market risk anticipating the much-awaited US dollar capitulation.
Oil
July WTI is trading up 80 cents as I type as street thinks demand has most likely troughed with several large economies now considering 'exit strategies' or 'new normal' and lifting restrictions. All the while, OPEC+ quotas are due to kick in on Friday, May 1, suggesting short term supply conditions have likely peaked.
Also, shorts are covering ahead of the crucial Texas Railroad Commission production curtailment vote, which could be the ultimate US well capper.
With June open interest dropping while possibly opening up some storage in Cushing as leaseholder try to sell off near term contacts, there has been an outsized rally in the front end which is also helping sentiment.
Cushing utilization stood about at 58mb vs. 76 mb capacity as per my report yesterday, suggesting storage was not nearly as worrying as it played out in the hot takes.
Cl1 rebounding is a simple quant trade; open interest goes down, delivery risk ebbs; therefore, June converges to July as buyers of the spread turn seller in quick order. But it's a risky proposition playing against other pros that still sense blood on the other end of the stick.
The former was the premise of my 2-week venture steering through trading June WTI, and all predicated on institutional risk management controls as the from experience I know the boys in the boardroom would start shoulder tapping traders on the floor to cut risk. And many thanks to the USO (NYSE:USO) and S&P Dow Jones or coming through on cue.
As they often say in the commodities markets, the best medicine for low prices is low prices themselves.
What should new oil traders learn for this besides the fact is some "non-oil" analysts are better at hot takes and more suited to cover what they know rather than what they don't. And that it is imperative to be one step ahead of the significant news flows when it comes to trading oil.
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Currencies
Coronavirus divergence trade rather than the interest rate divergence trade is resonating today. The impending or where new daily COVID-19 cases have fallen sharply - e.g., AUD, NZD, and KRW are flourishing again.
The positive impact of slowly-opening Eurozone economies could benefit the EUR as the economy reopenings are excellent for equity inflows as the European stocks race to play catch up with US peers.
The euro does not get help from exporting raw materials to China, unlike Australia, but should still benefit from Asia's demand for those high end and excellent precision consumer goods in the coming weeks, which could stand out.
Similarly, for Korea, where industrial production and exports have been mixed recently, a consistent run of flatlining daily cases could prove a powerful currency counter risk offset, with Wednesday marking the eleventh consecutive sub-15 day.
But overall consistent as I have been of late, the Dollar-supportive factors are fading as the focus shifts from coronavirus containment to economic reopening. The effects of surplus USD liquidity are also set to take hold, and yields no longer favor the greenback.
So, what cannot go up must surely go down.
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