Equities Survive Some Serious Jolts | Daily Market Commentary with Jeffrey Halley
The first cracks in the United State’s immunity to a global slowdown, or a mere speed bump on Trump’s road to economic hegemony? The overnight JOLTS Jobs Openings surprised markets, falling to 6.423 million, severely missing an expected print of 7.0 million. Admittedly the number was for December and didn’t encompass the blow-out Non-Farm Payrolls growth in January.
As we know, two months is an eternity in today’s FOMO-obsessed financial markets. Wall Street shrugged off the JOLTS data and ignored comments by the Federal Reserve Chairman Jerome Powell that the now officially named, Covid-19 virus from China, posed a threat to growth and could change the Federal Reserve’s rate trajectory if needed. For balance, Mr Powell rightly said that the US economy is doing very nicely, thank you. That is despite the shadow of Covid-19, and that he saw no reason to alter the operations normal outlook for now. Equities ignored the former and concentrated on the later, which should surprise no one at all, with Wall Street rallying yet again overnight.
One can, in fact, make a bullish case for equities based on any scenario regarding Covid-19. An escalation in its spread causes a pronounced global slowdown which prompts central banks to cut interest rates aggressively. Buy equities for the v-shaped recovery. The Chinese get on top of Covid-19, and by the end of March, the worst has passed. Buy equities as we reset back to the post-mid-January, US-China trade deal signing, global economic peace dividend.
The fact of the matter is, as long as equities yield more than a deposit in the bank or a government bond and only go up; and the world’s central banks remain wedded never making anyone take a loss; stocks will continue blissfully ignorant of the warning signs. Especially those being flashed by falling government bond yields, energy and commodity prices, as well as by multi-national companies themselves. The stock market rally of 2019/20 may go down as the greatest example of The Emperor’s New Clothes ever, but the fairy tale still has room to run.
Elsewhere Australia’s Westpac Consumer Confidence rose unexpectedly in February by 2.30%. Rising house prices, while a symptom of monetary policy and not the cure, appear to be having a positive effect on domestic confidence. A good dose of rain and the abating of the bush fire emergency have also lifted spirits. Raining on the party is counter-intuitively, a good thing in Australia. As is the saying “go you good thing.” Despite the rain creating a few green shoot new growth, we are a long way away from shouting ‘good you good thing” about Australia’s high street or broader domestic economy.
The Reserve Bank of New Zealand told everybody to calm down this morning, holding rates steady at record lows of 1.0%. In a refreshingly candid statement amongst the global Covid-19 paranoia, the RBNZ Governor’s statement could be summed up as. “We are watching the situation. Still, nobody knows how it will play out. If it’s still around later in the year and impacting forecasts, we have room to cut rates.” The New Zealand stock market hit record highs this morning.
Malaysia has just released disappointing Q4 GDP ending December with YoY growth coming in at 3.60%. Well below the 4.20% the street had forecast and the worst showing since Q3 2009. The Current Account surplus also fell to $7.60%, continuing a 2019 trend of quarterly falls. Weakness in the domestic economy is still evident, as is the fall-out of the US and China trade war. Malaysia’s hoped for respite on the export front from the signing of the US-China Phase-1 trade agreement has likely evaporated with the Covid-19 outbreak. Bank Negara cut by 25 basis points in January to try and stay ahead of the game. Today’s GDP data suggests that more rate cuts are to come.
Singapore releases Retail Sales for December at 1300 SGT with a tepid print of 0.0% expected. There is room in this number for a worse result and January and February’s numbers will undoubtedly be exacerbated by collapsing tourist numbers, caused by the corona virus outbreak. It will increase the clamour for the MAS to ease in April, something they had already signalled last week. The odds of an out of cycle move by the MAS, however, are increasing by the day. The Singapore Dollar is likely to remain under sustained pressure.
Despite the doom and gloom being shown in the real economy, Asian equity markets are a sea of green today. Covid-19 fears have been shrugged off, with regional markets preferring to follow Wall Street’s lead, hoping on the v-shaped recovery, with a Chinese official overnight saying he expected the virus to be controlled in China by April. He would say that, though.
Unfortunately, seas of green are often associated with algal blooms, which tend to suffocate all life in the water within them. The rallies of the past two days should be approached with caution.
That said, the Straits Times has surged 1.0% today despite warnings that tourist arrivals will fall by 25/30% and the quietest Singapore Airshow in memory. The same pattern was repeated across the region with the Nikkei 225 0.55% higher, The Shanghai Composite up 0.20% and the CSI 300 up 0.30%. The Hang Seng has climbed 0.70% and the Australian All Ordinaries by 0.55%.
The positive sentiment, whether based on hope or reality, is likely to flow through into early European trading this afternoon. As they say, the trend is your friend, when it’s going up.
Along with other corners of the world’s financial markets, currencies just aren’t buying into the equities narrative of a v-shaped Covid-19 recovery no matter what the scenario. The US Dollar was mostly unchanged overnight as US yields rose slightly. The British Pound outperformed after another set of solid economic data, rising 50 points to 1.2950 and has continued forming a reasonably strong base under 1.2900.
Today’s big mover was the New Zealand Dollar with the Kiwi jumping 1.0% at one stage to 0.6470 after the RBNZ left interest rates unchanged with a neutral outlook. Resistance lies ahead at 0.6500, but the currency could be set for further gains if the economy remains strong and the Covid-19 crisis ebbs in intensity. The RBNZ will likely only cut rates again this cycle if that situation severely impacts on economic growth, meaning falls in the NZD/USD are likely to be limited in the medium-term.
Across Asia, ranges have been tight today with the US Dollar consolidating its gains over the past week. I see no reason for this situation to change over the remainder of the day.
Oil staged a dead cat bounce once again as bullish traders clutched at the v-shaped recovery straws offered by the equity market. Brent crude rose 1.35% to $54.00 a barrel, and WTI rose a more modest 0.60 to $49.90 a barrel. WTI’s recovery was eroded by a huge API Crude Inventory print of 6 million barrels late in the session.
Both contracts have risen slightly in Asia with Brent crude trading at $54.35 a barrel and WTI at $50.20 a barrel following the cue from Asia’s equity markets. The fact remains, however, that the API inventory number overnight implies the world remains very well supplied with oil. Brent crude has been unable to recapture the critical $55.00 a barrel, and WTI has only managed an awkward crawl of $50.00 a barrel.
With Russia playing chicken with the world economy and hoping that Corvid-19 ends as soon as it appeared, we can expect no action from the broader OPEC+ grouping in the near-term on the production front. The odds will increase as the month ends, of OPEC going it alone if Russia remains defiant and the economic status quo is maintained. But until then, being bullish oil will be a viable strategy, only for the brave or the very fleet of foot.
Gold has reverted to it’s “forgotten war” status and fallen of investors radars once again. For the past few days, it has been content to trade quietly around its mid-range pivot point at $1570.00 an ounce.
The broader critical long-term levels remain $1550.00 an ounce below and $1590.00 an ounce above. Although gold has been consolidating near the top end of its long-term range these past two months, its next significant move will be determined by a break of one of those two fundamental levels.