Market Quick Take - March 30, 2020

An important week ahead as we get a look at whether last week’s enormous bounce in risk assets and related strong sell-off in the US dollar will find continued legs this week. The weakening of the US dollar is a particularly important support for global markets.

What is our trading focus?

• US500.I (S&P 500) – up 4% from the opening gap of the 23.6% retracement level (support). We are still viewing the 38.2% retracement level at 2,641 as the big level to be cleared in order for this market to move substantially higher.
• AUDUSD – the USD has rolled over across the board in recent sessions, but still has far to go before we can call a reversal – a pair like AUDUSD offers high beta within G10 currencies to the swings in global risk appetite.
• EURJPY – we continue to look for Europe to provide answers to how it plans on responding to the Covid19 crisis after a disastrous video summit last week that clearly saw the first go at “coronabonds” – a possible back door to debt mutualization, rejected. Downside risk for EUR vs. JPY if existential concerns return here.
• USDZAR - South African sovereign debt was downgraded by Moody’s to junk after a long time of providing the country’s only investment grade rating. ZAR traded to its lowest level ever overnight.
• DBA.arcx (Invesco DB Agriculture Fund) – several countries are beginning to put export bans on some agricultural goods which increases the risk of rising food prices and down the road higher breakeven rates and inflation (longer term stagflation).
• MA:xnys (Mastercard) – there are signs of weakness in China’s consumer credit market which could become the reality in the US and Europe over the coming months as the jump in unemployment cascades into consumer credit market. We are adding Mastercard as a key focus to track this market and interestingly enough the stock was quite weak in Friday’s session.
• OILUKMAY20, OILUSMAY20: Crude oil drops to 17-year low with Goldman’s in report saying that social distancing measures now impact 92% of global GDP. The current consumption of oil demand is down by an estimated 26 million barrels/day or 25%. Matters only being made worse by the expiry of the OPEC+ deal to curb production this week. With producers led by Saudi Arabia saying they will produce at will, the race to the bottom continues.

What is going on?

US President Donald Trump said social distancing will continue in the US until April 30 after previously aiming for a lifting of measures after Easter before mid-month. Local authorities at city and state level have may have more authority in many jurisdictions and in key areas of the economy anyway.

Oil prices remain under pressure – on the demand shock, oil prices remain under extreme pressure and show extreme contango, though the market is predicting that supply destruction from this episode of low prices will mean prices farther down the road will rise to higher levels.

What we are watching next?

Momentum from last week and quarter end– correlations are very tight across asset markets and we saw a profound bounce in sentiment last week – the chief question this week is the degree to which this has established some market low for now as the market feels around for support and to what degree something like month-end and quarter-end rebalancing is behind some of the bounce in equities.

CORNMAY20, SOYBEANSMAY20, WHEATMAY20: US farmers planting intentions for the 2020-21 season will published by the US Department of Agriculture on Tuesday. It is one of the most closely watched reports by the market and it is expected that acres of corn and soybeans could spike

The missing piece – Oil – We continue to watch the oil markets as a key indicator for markets from here as the risk of defaults and insolvency continue at these price levels and a recovery in oil prices will be an important coincident indicator that some more durable stabilization has arrived.

Path to the other side of Covid19 – this is the medium term key.

Calendar today (times GMT)

• 0900 – Euro Zone Mar. Confidence Surveys
• 0100 – China Mar. Manufacturing and Non-manufacturing PMI - China getting back to work just as rest of world shutting down…

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