Corrections Are Not Covid-19 Carnage | Daily Market Commentary with Jeffrey Halley
Financial markets suffered a bout of nerves overnight, as equities notably, eased inversely to Covid-19 concerns. The continuing spike in cases across the US Sun Belt states, along with a leadership vacuum from Washington DC, frazzled investor nerves. Putting the falls in context though; the price action merely reflects a minor correction after a five-day winning streak for equity markets globally.
Indeed, the price action itself was actually quite limited in scale. US stock markets remain at, or near, record highs. By my estimates after a quick look at the S&P 500 charts this morning, it could fall 15-20% from here and still be in a longer-term uptrend. Unfortunately, in this day is instant information dissemination, limited attention spans, a schizophrenic press and a life spent hooked intravenously to our smartphones, the tendency is to make mountains out of molehills. The falls seen yesterday look like molehills, driven by a sugar rush of information technology analysis paralysis.
The underlying driver of the biblical global asset market rally recovery is the same as post the GFC. Torrents of central bank monetary stimulus flooding the world’s economies. This time we also have an equally sharp dose of fiscal stimulus around the globe to help things along. Australia is preparing to roll out more of it, and overnight, President Trump was also contemplating throwing another trillion dollars on the fire.
In a nutshell, the world’s central banks have got investors backs. Any material falls in asset markets are likely to be met by even more of the same. The misallocation of resources, capital and the inequality it causes, would make a very long book and will be a price the world will have to pay back in the decades to come. The zombie apocalypse is already unknowingly upon us. But it will be in the form of zombie companies sucking up capital better used elsewhere, not undead humans trying to eat our brains. I’ll take the former thanks.
Having said that, I am increasingly concerned that the US has abjectly failed to manage its Covid-19 outbreak. The abject failure of leadership and social discipline of its people still threaten a double dip in the Land of the Free. Unfortunately, when America catches a cold, the world catches the flu; that maxim has not changed. It does have the potential to delay and depress the world’s nascent recovery. It will, however, introduce some long overdue two-way price action into equity markets, in particular. The Robin Hood massive may have enjoyed stealing from the rich and giving to the poor these past months, but they should realise that the Empire can, and will, strike back.
In Asia today, the data calendar is strictly second tier and unlikely to provide much inspiration to the region’s investors. Markets will await tomorrows Japan Machinery Orders, China Inflation and US Jobless Claims. Of the three, the US number will be of most interest. Consensus suggests Initial jobless Claims will hold steady at 1.5 million. However, if the number comes in much worse than expected, due to new lockdowns across the US Sun Belt, that may be all markets need to hit the sell button into the weeks’ end.
Following headlines suggesting that the US may try to undermine the Hong Kong currency peg to punish China, the Hong Kong Monetary Authority (HKMA) has been vigorously intervening at the low end of the band today. The HKMA has been buying US Dollars at 7.7500 for most of the morning. To be fair though, it has been doing that almost every day since mid-June. HIBOR rates have eased to a three-year low of 0.39% this morning. That is still above the US Fed Funds rate though, and thus downward pressure on USD/HKD will persist.
Speculating on the breaking of the Hong Kong Dollar has been one of the worst trades of the last 25-years. I myself first attempted it during the 1998 Asian financial crisis and was unceremoniously seen off. The US Government getting involved in the mix though may change the dynamic, but I cannot help but feel that Hong Kong and China will inflict the same pain on peg-breakers, that I experienced 22 years ago.
Asian equities are remarkably calm this morning.
Stock markets across Asia are remarkably calm after the falls seen on Wall Street overnight, with most regional bourses at, or near unchanged for the day. Sentiment has been boosted by a minuscule move higher by the US aftermarket futures contracts. More likely, though, the small gains shown by Mainland China and Hong Kong are calming nerves.
US exchanges finally had a small corrective move lower overnight, ending a five-day winning streak. The S&P 500 fell 1.10%, the Nasdaq fell 0.86%, and the Dow Jones fell 1.51%. Covid-19 nerves have eroded confidence and caused equity markets to blink, but for now, the move looks technical, and not structural.
In Asia, the Nikkei 225 and Kospi are down 0.20%, with Singapore, Jakarta and Kuala Lumpur all flat on the day thus far. China’s Mainland continues to edge higher though, as retail investors assume a government back-stop after exhorting them to get long on Monday. The Shanghai Composite is up 0.70%, the CSI 300 is 0.60% higher and the Hang Seng of 0.50% higher led by gains in Tencent.
The new lockdown of Melbourne for six weeks, and the closing of the Victorian border with New South Wales, is weighing on markets Downunder. The ASX 200 is down 0.75%, the All Ordinaries by 0.30%, with New Zealand lower by 0.60%.
Covid-19 worries are genuine. But the fact that investors are finally acknowledging this fact is more due to the overbought nature of the short-term market, and not a structural turn in sentiment. That will likely require an escalation in lockdowns across the US Sun Belt states. The solidity of Asian markets today will bring some relief to investors, with Europe likely to follow suit this afternoon.
Major currencies move back into range trading mode.
The fall in equities markets, driven by Covid-19 concerns, nipped the renewed rotation out of US Dollars in the bud overnight. The US dollar index rising a modest 0.25% in overnight trading. The EUR/USD retreated back under 1.1300 to 1.1280. The AUD/USD shied away from a test of 0.7000, falling to 0.6940, with the USD/JPY edging higher to 107.65. Looking across the G-20 space, currency markets have renewed their slumber, with the majors anchored within their recent ranges, while FX traders await developments elsewhere.
On exception is has been the Chinese Yuan. The PBOC fixing was stronger again this morning, USD/CNY being set at 7.0207 today versus 7.0310 yesterday. Both the USD/CNY and USD/CNH are trading at 7.0180 today, well of yesterday’s 7.0000 low, but comfortably below their respective 200-day moving averages around 7.0380. The Yuan is likely being boosted by foreign inflows into China’s red-hot stock markets. The government may well be trying to project a stable Yuan to the outside world, to reduce domestic outflow pressure. Both USD/CNY and USD/CNY look set to remain between 7.0000 to 7.0400 for the remainder of the week, unless the US Dollar moves substantially.
Across Asia, regional currencies, like the majors, are almost unchanged from their finishing rates in New York. Asian currency traders prefer to wait for Europe to arrive for renewed direction. Only a surprise headline bomb will break the malaise.
Oil retreats slightly on risk aversion.
With one eye on the equity markets overnight, oil markets mirrored the response of currency markets, giving up some of their recent gains and slipping into range trading mode. Brent crude fell slightly by 0.70% to 42.90 a barrel. WTI eased by 0.70% to $40.50 a barrel.
Both contracts are unchanged this morning in Asia, with critical resistance on Brent crude at $44.00 a barrel, and on WTI at $42.00 a barrel. Only a fall below $40.00 a barrel for Brent crude, or $37.00 a barrel for WTI, would suggest that the rally in oil prices has run its course.
Oil prices continue to remain balanced between Covid-19 induced growth concerns, and recovery expectations in Asia and Europe. Oil’s downside is likely to be limited unless the US situation deteriorates dramatically. OPEC+ discipline is high, and the grouping will no doubt find the willingness to extend the headline cuts if the situation calls for it.
Excitement builds for gold longs as $1800.00 approaches.
Anticipation is building in the gold fraternity, with Covid-19 concerns giving a haven boost to prices overnight. Gold rose 0.60% to $1795.00 an ounce, having tested $1797.00 an ounce earlier in the session. Gold’s grind higher is remorseless and pleasingly, appears to have detached itself from negative equity price action for now.
The $1800.00 an ounce region will be a tough nut to crack though. It capped gold’s advance multiple times from 2011 to 2012. I do not doubt that there will be substantial option related offers ahead of it to defend $1800.00 strikes. Nevertheless, gold is girding itself for the long-awaited assault on this critical resistance level. Gold had support at $1775.00 an ounce. Only a daily close below here would delay proceedings. Should $1800.00 an ounce give way, gold is likely to move quickly to the $1820 to $1830 zone, driven by stop loss and algorithmic buying.
Gold is unchanged in Asia today in yet another moribund session. It will probably be left to the New York market to get the job done.