Asia Session: Monday's Rally Extends As Tokyo Unleashes Fiscal Package

Japan has finally come to the party with a reluctant acknowledgement that COVID-19 has not gone away domestically. On the positive side, PM Abe has released the long-awaited government fiscal package to offset the massive slowdown COVID-19 has wrecked on the economy. Impressive it is in size and scale, totaling 108 Trillion yen, or $989 billion in more understandable money. That is roughly equivalent to 20% of Japan’s GDP and has been well worth the wait.

In oil markets, President Trump’s efforts to bash some sense in the key players of OPEC+ also appears to be bearing fruit. With an estimated drop in demand of 35 million barrels per day due to the coronavirus pandemic, a price war between Saudi Arabia and Russia was complete lunacy. Helping proceedings no doubt, is that threat of U.S. sanctions and more importantly, the rapid fall in storage capacity both on land and sea, in which to store all that excess black gold. Thursday’s meeting will now include non-OPEC+ countries Canada and Brazil and implies a real momentum to cut production. U.S. involvement is still problematic from a legal standpoint, although we may yet see Texas participate in any agreement. More than likely the U.S. contribution may involve the dropping of some sanctions already in place on Russia and perhaps Venezuela.

Overall there is reason to be cautiously upbeat with a number of pieces appearing to be falling into place across developed markets. That potential light at the end of the tunnel is a weak one though, and any number of things could come together to switch it off. The v-shaped recovery desperados are almost certainly getting ahead of themselves, especially when the full impact of COVID-19 is yet to make itself felt across key emerging markets such as India, Indonesia, Brazil et al., as well as the United States, ex-New York and California. The momentum must be respected though, and with the world hanging out for some sunshine, the positive energy in financial markets will likely continue until Thursday at least, the OPEC++++ D-Day.

With China returning from holiday and Japan’s stimulus package announcement, the strong momentum started in Asia yesterday has continued this morning across the region. Wall Street overnight needed no second chance to jump on the v-shaped recovery roller coaster, with the three leading indices—the Dow Jones, S&P and NASDAQ—all posting outsized 7.0 per cent plus gains overnight as well.

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Today in Asia the momentum continues, albeit with less exuberance than the Americans. The Nikkei 225 is up 0.80% with the Shanghai Composite and CSI 300 both 1.50% higher. The KOSPI is 0.50% higher, and the trade-centric Straits Times is 1.90% higher. Having led markets higher yesterday, the Australian All Ordinaries is only 0.10% higher this morning, with the bank heavy ASX 200 lower by 1.0% ahead of an expected unchanged RBA today.

With the trend of infections and deaths heading the right way in Europe overnight, there should be enough momentum to keep the rally alive for the remainder of the day. The pieces are coming together amongst OPEC+ members as well, and this will also backstop equities ahead of their Thursday meeting.

GBP/USD tumbled 1.0% to 1.2160 this morning after UK PM Johnson was moved to intensive care suffering coronavirus. That sell-off was quickly reversed as the rest of Asia came online with GBP/USD now o.30% higher on the day at 1.2265.

Sterling’s refusal to roll over is indicative of the positive momentum lifting equity markets overnight leading to a rotation into recovery currencies from the U.S. dollar. Petro-currencies led the charge higher with the Norwegian krone rising 1.60% against the U.S. dollar to 14.4270 overnight and gaining another 0.50% to 10.3750 this morning. The trade-centric Antipodeans also outperformed, the AUD/USD rising 1.55% to 0.6090 and the NZD/USD rising 1.25% to 0.5930. Both have increased by another 30 points respectively this morning.

Asian currencies are recording modest gains against the U.S. dollar today as well. With the USD/IDR and USD/KRW both 0.20% lower, reflecting the regional gains in general. The rally is modest and cautious though, and we would expect local Asian markets to be less inclined to go all-in on the recovery trade until we get past the OPEC+ meeting on Thursday. That is the correct approach in my opinion, as although there is an undeniable positive momentum about markets after weeks of bad news, its foundations are at this stage, still to be genuinely confirmed as trustworthy.

After the enormous rallies seen on Friday, some sort of correction lower was almost inevitable yesterday, as Saudi Arabia and Russia engaged in public bickering. Brent crude ended the overnight session down 2.80% at $33.10 a barrel, while WTI futures fell a much worse 6.85% to $26.20 a barrel. The fall in WTI was driven by news that the main U.S. storage facility in Cushing was running out of storage capacity.

Today, oil has bounced back, with Brent crude rising 2.50% to $33.80 a barrel, and WTI rising 2.80% to $26.80 a barrel.

The OPEC+ meeting on Thursday will be crucial. The addition of non-OPEC+ heavyweights, Canada and Brazil, is, I believe, very positive news. Although talk of a 10 million barrel cut will not change the supply/demand dynamics of oil in the open market, OPEC+ does have a track record of surprising markets when push comes to shove. For that reason, I believe there is a high chance that OPEC+ will surprise markets with a 15-20 million production cut tally and stick to it.

A lot of good news is being rapidly priced into oil markets, and given the situation on the ground, may yet turn out to be premature. However, there is a real sense now that OPEC+ will get “something done.” For that reason, I believe we have seen the lows in oil markets unless the global economy experiences a 2nd coronavirus sell-down.

Gold prices jumped overnight, leaping 2.70% to $1661.00 an ounce. There was no apparent reason for the rally although some analysts are attributing it to an impending stimulus by central banks. They have clearly not noticed the massive amount of stimulus unleashed by, err, central banks, on the world over the past two months.

Fitting a story to the price action aside, I note that equities rallied strongly overnight, and so did gold. That implies to my mind that the direct correlation between equities and gold is still with us, much like coronavirus. As equities rally, long gold trades are being reinstated into the market. Quid pro quo, therefore, suggests that a sudden move down in equities will provoke an equally sudden drop in gold. For that reason, until that correlation is clearly broken, I would be approaching the overnight rally with some trepidation.

Gold’s next resistance levels are $1680.00 and $1700.00 an ounce, although I suspect another jump in global equities will not see gold respect either level. I would look to stock markets for short-term direction for gold prices and resist laying the recent rally at the doorstep of central bank’s stimulus efforts.

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