Agreeing To Disagree | Daily Market Commentary with Jeffrey Halley
A dose of reality swept Wall Street last night, as secondary COVID-19 outbreaks and the threat of renewed US-China trade disputes, muted the peak-virus momentum in markets of the past week. Still, Wall Street stocks managed to finish almost unchanged, which suggests that although some nervousness is around, the underlying recovery-trade momentum is merely taking a vacation and not extended sick leave.
In the case of a market where positioning by the majority of shorter-term players is loaded up one way; it doesn’t take a lot to spur the more nervous ones to head for the exit door. Trade-sensitive Asia, ignoring the secondary COVID-19 outbreaks in China and South Korea yesterday, are clearly more worried about renewed trade disputes. Asian equity markets, by and large, are trading lower this morning as Chinese newspapers are suggesting that the US-China trade agreement should be renegotiated or scrapped.
Dealing with the trade agreement elephant in the room, it is likely to be a storm in a teacup for a few reasons. China itself has taken apparent umbrage at some awkward questions from Australia over the origins of COVID-19. It is reverting to its standard procedure when another country does something it doesn’t like, punish it—in this case, refusing to take some Australian meat exports. It would be slightly hypocritical for China to want to change the trade agreement; therefore, just because the coronavirus pandemic has made execution more difficult. Especially when the United States is asking the same questions. I will only get concerned if China starts banning Australian iron ore and coal exports.
Secondly, it would likely be electoral suicide for President Trump to walk back some or all of the trade agreement terms, having invested such an enormous amount of political capital in it in the first place. The US presidential election is likely to be fought on getting tough on China by both sides. President Trump said as much this morning, stating that he was not considering reconsidering.
Thirdly, the US-China trade agreement was a two-year deal, not a three-month contract. January seems like a millennium ago, but we are actually only four months into the agreement. In that time, the COVID-19 pandemic has shut the world economy down, including China and the US. Compliance would have been nigh on impossible.
The mild correction in asset markets overnight looks like a classic case of the street fitting the events to the narrative to its position and acting accordingly. Put simply; global markets are loaded up to the gunnels on the worldwide recovery trade. Any hint of bad news disrupting that after such an extended one-way run by the herd, is likely to see some of them turn around and run the other way. A good hard dose of reality is undoubtedly coming to the v-shaped recovery trade, but overnight events seem to be more noise than a seminal turn in sentiment.
Asian equities ease on trade fears.
The fall in Asian stock markets is unsurprising, given how sensitive to world trade the region is. However, the falls today are relatively mild given the strength of the rallies of the last week and look more corrective than fundamental. Wall Street itself, managed to shrug the news of with the S&P 500 closing unchanged, the NASDAQ recording a 0.80% gain led by big-tech, and the Dow Jones easing 0.45%.
The Nikkei 225 is slightly lower by only 0.30%, with Mainland China’s Shanghai Composite and CSI 300 both flat for the session. Hardly the reaction you would expect if a trade war was imminent.
The prospect of a further stimulus budget being needed in South Korea has seen the Kospi fall 1.0% today. After an impressive run higher the past week, the Hong Kong Hang Seng has fallen by 1.60% today, reflecting its higher sensitivity to trade concerns. It is a similar story in Singapore, where a relentless rise in COVID-19 cases, trade concerns, and yet another scandal in the commodity trading space, has seen the Straits Times fall 1.0%.
Asian stocks are likely to remain mildly negative for the rest of the session, but the price action looks corrective and is not signalling yet, an unwinding of the global recovery trade.
The US Dollar rises on corrective price action.
It is much the same story in currency markets, where trade concerns have become an excuse to pare back the recent rotation into more risk-seeking positioning. The dollar index climbed 0.43% overnight to 100.16, with the Japanese Yen and Euro notable losers in the basket. Similar price action was seen in the commodity and emerging markets space, where the US Dollar rose as peak-virus trades were reduced and recent profits booked.
Notably, the Australian Dollar failed overnight at its 100-day moving average at 0.6535 and traced out a double top at the sessions high of 0.6560. Trade concerns have seen the AUD/USD fall by 0.65% to 0.6475 today, and the o.6535 and 0.6560 levels now form strong resistance.
Notably, the Indonesian Rupiah continues to outperform. It is climbing yet again this morning with USD/IDR falling from 15,122.00 to 14,932.00 in the past 24 hours. Given that Indonesia is considered one of the most vulnerable countries to the coronavirus pandemic recession, the performance of the IDR is notable. It has now recovered nearly 65% of its March losses. With no sign of the IDR rally running out of steam, this may suggest that the peak-virus trade globally, still has some distance to run, intra-day hiccups aside.
Oil ignores Saudi Arabia and corrects lower. WTI futures expiry to be a damp squib.
One asset class that might be running on empty at these lofty levels could be oil. Both Brent crude and WTI eased overnight even as Saudi Arabia announced an additional 1 million barrel per day production cut, with Kuwait and the UAE also chipping in with small cuts of their own. Unilateral action by Saudi Arabia, the world’s swing producer should have been bullish, but instead, oil prices fell. Traders may have one eye on the expiry of the June WTI Nymex contract today after the carnage of the May expiry.
Brent crude notably failed at its 50-day moving average overnight at $29.30 a barrel, finishing the session 1.80% lower at $27.95 a barrel. It has eased another 1.0% in Asia to $27.60 a barrel. The region between $29.50 and $30.00 a barrel looms as formidable resistance for Brent now. A break of $26.00 a barrel implies a deeper correction is ahead.
WTI clung on to its gains overnight, finishing 2.0% lower and holding just above its 50-day moving average at $25.00 a barrel. The moving average is at $24.50 a barrel this morning, also the lows of the last four days. A break of this level implies a deeper technical correction to the $20.00 a barrel region. Resistance is at the $28.00 a barrel level, where it has failed three times in the past week.
Although I am not expecting a repeat of the carnage of May expiry today, WTI is likely to be its own man as the futures cut-off nears. WTI could easily trade in a ten-dollar range as last-minute position adjustments are arranged. However, it would not surprise me in the least, if the expiry passes with a whimper, as I suspect most June positions that need to be, have long been rolled into the forward futures months.
Gold remains becalmed each side of the $1700.00 region.
Gold eased modestly overnight as the US Dollar strengthened, falling by 0.30% to $1697.50 an ounce. The directionless sideways trading of the past month continued once again, although I note that gold’s multi-week range has compressed into $1675.00 to $1725.00 an ounce. That implies that a breakout is coming, one way or another.
That said, the direction of the breakout is not clear although logic suggests the longer-term trend for gold should be higher, probably much so. I will reiterate though, that a narrowing range aside, the critical longer-term levels remain $1650.00 and $1750,00 an ounce. I will not take my feet off the desk until one of those breaks.