Market Quick Take - April 7, 2020

What is our trading focus?

• US100.I (NASDAQ 100 Index) and US500.I (US S&P500 Index) – both of these major US indices closed above their key local resistance levels – a move of technical significance that sets in motion further tactical upside risk as long as the move holds – a pivotal session today in particularly on that account.
• DAX.I (German DAX index) – today is an important day for the EU with a Eurogroup meeting and press conference after the market close today as noted below – will the German DAX break resistance in the 10000-10100 area like the major US indices yesterday?
• XAUUSD (Spot gold) – a big rally yesterday of some 40 dollars takes the spot price back close to the cycle high closing level of 1680 and absolute high of 1703. A major contributor was another short squeeze by banks in the June futures contract. The spread to spot widened to more than 50 dollars as it closed above $1700. Fundamentally supported by a weaker US dollar yesterday, but also the general talk of widespread yield-curve control policies by central banks aimed at keeping real rates low (yields all across the curve below inflation) to deleverage debt levels. Another blowout in the spread between spot and COMEX saw the June future break and close above $1700
• BNP:xpar (BNP Paribas) – with the Eurogroup meeting today and the question looming of EU commitment to mutual fiscal stimulus and solidarity across the EU, we pull out the giant French bank BNP Paribas as a bellwether for the major EU banks over the next few days as EU banks have traded weakly and BNP Paribas even touched a new cycle low on Friday and recovered weakly yesterday.
• OILUKJUN20 (Brent crude) and OILUSMAY20 (WTI crude) –  The market focus remains squarely on the world’s biggest producers and their ability to strike a  deal to curb production. The big questions remain who will participate, how much will they cut and from when. All these questions matter as the world otherwise could run out of storage within the next couple of months, something that could send oil back below $20/b. An agreement faces immense hurdles ahead of Thursday’s tentatively scheduled meeting.
• XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – With the current high level of uncertainty and volatility in crude oil markets investor with a long-term view on the energy market could instead consider strong energy companies or ETF’s tracking a basket of oil and gas related stocks.
• AUDUSD – the Aussie was one of the most beaten down currencies within the G10 versus the US dollar on the deleveraging move into mid-March, but has rebounded smartly, with the RBA even floating the idea this morning of a QE taper if conditions improve. A further squeeze on AUD positioning could bring the important 0.6200-50 zone into play once again – deserves watching for the status of both currencies here and the degree to which G10 FX is joining in the US indices attempt to put together a more optimistic stance.
• USDMXN – the Mexican peso weakened to a record low yesterday after a disappointing stimulus package announced by the President Obrador-led government, but with yesterday’s comeback in risk sentiment, virtually all EM’s rallied strongly – this has set a major line in the sand cross EM currencies after many EM’s appeared caught in a negative spiral until yesterday’s action. The EM sector deserves attention as one of the financial markets’ weakest links if conditions don’t continue to improve.
• MGM:xnys (MGM Resorts), MAR:xnas (Marriott International) and BA:xnys (The Boeing Co.)– These three stocks were all among the top ten performers in the S&P500 yesterday and as stocks representing the most beaten down sectors during the epidemic: casinos and entertainment, international hotel chain, and airplane manufacturer, respectively (MGM was down 83% from the 2020 high at its worst, MAR down 69%, BA down 75%). Stocks like these deserve monitoring for relative performance as we assess the quality of this market rally.

What is going on?

UK Prime Minister Boris Johnson admitted to ICU – the UK prime minister’s conditions has worsened and he is receiving oxygen and has been admitted to the ICU in the event he needs access to a ventilator. Foreign secretary Dominic Raab will deputize for the Prime Minister for now.

Japan has announced a JPY 108 trillion stimulus package – nearly 20% of GDP, a move of stunning magnitude relative to what we have seen elsewhere as Japan pulls out all of the stops. The JPY seems unflustered by the implications for Japan’s total debt load from this package and the JPY was firm overnight.

What we are watching next?

Today’s Eurogroup meeting – this week could prove one of the most critical weeks in EU history after the disastrous summit meeting the week before last produced bitter disagreement on “coronabonds” (bonds issued on the EU level that all EMU members would be mutually liable for repaying) and southern EU countries refusing to sign the communique. A Eurogroup meeting of EU finance ministers today with press conference to follow at 20:00 CET is the next crucial meeting for establishing whether we continue to risk an existential political EU crisis on lack of a more forceful fiscal commitment across the EU, even if the ECB can technically keep conditions in sovereign bond markets across the EU orderly.

Risk-on status? – the US indices crossed very important levels yesterday, but the Asian session was a bit of a fizzle overnight after an enthusiastic start to the session. The status of this rally and whether it is merely a brief short squeeze very important for establishing the market’s state of play here.

Oil prices – oil remains a critical factor as low oil prices and reduced demand vastly reduce the dollar volume of global trade, meaning tighter USD funding conditions for global markets, and heighten the risk of corporate and even sovereign defaults, as well as straining the long term credibility of the USD pegs in major Middle East oil producers.

The unfolding shape of the Covid19 crisis and perhaps more importantly, the shape of the recovery. Is the market getting ahead of itself in celebrating the pending peak in Covid19 numbers in the major DM economies in aggregate? Denmark is one of the first EU countries to announce an “opening up” plan, with the first steps only aimed at opening schools for the youngest classes through fifth grade and no further major measures until at least May 10. This points to the very slow pace of normalization.

Calendar today (times GMT)

• 1000 – US Mar. NFIB Small Business Optimism  - an interesting sentiment check for small businesses in the US.
• 1400 – Canada Mar. Ivey PMI – the major Canadian activity survey.
• 2000 – Eurogroup meeting press conference – this meeting may have little practical significance in terms of measures taken, but the tone and the politics around it are rather important given the divisive meeting of two weeks ago.

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