The Future’s Bright, The Future’s Orange | Daily Market Commentary with Jeffrey Halley
The future’s bright, the future’s orange, was the ubiquitous slogan of a UK telecommunications company in the UK that was called, unsurprisingly, Orange. Orange has been long absorbed into larger Telco’s and consigned to history. But financial markets also appear to be hoping the future is also orange. This time in the shape of US President Donald Trump, with a highly anticipated package of fiscal stimulus goodies, to offset the havoc being wrought upon the economy by the coronavirus epidemic.
Yesterday, Wall Street rose over 5.0% at one stage in a truly remarkable comeback from the havoc of Monday. The rally stopped there as stock market circuit breakers kicked in, ironically, just as they had on Monday as equity markets collapsed. A large part of yesterday’s comeback is due to the anticipation of the announcement of those fiscal measures.
President Trump and his Vice-President, Mike Pence, held a press conference yesterday Asia time on the coronavirus measures being undertaken and promising that a fiscal package was forthcoming. In fairness to them both, it was the most “Presidential” performance I had seen from either of them. I was duly impressed, and it perhaps emphasises how important it is during a national crisis, that leaders of governments look calm and in control, and not run around like headless chickens. Calm leaders’ equal calmer populations and fewer stampedes for the toilet paper sections at supermarkets.
Both oil and equities made remarkable comebacks throughout yesterday after that conference, albeit with some juicy intra-day volatility. The problem facing markets today though is that precisely zero concrete policies have emerged. Extra spending and where it is spent must be approved by Congress, and I suspect therein lies the problem. The usual partisan agendas appear to be quietly emerging. Having decided President Trump will save the world, something that no doubt pleases him tremendously, financial markets could be setting themselves up for a severe disappointment should the promised fiscal goodies get bogged down on Capitol Hill.
After markets futures on the S&P 500 and Nasdaq have quietly eased by 1.50% this morning already, with early trading in Asian markets edging into the red. Financial markets are more nervous and skittish than my cat with the vacuum cleaner going. No one should be under any illusion that the thundering herd of short-term momentum/FOMO traders will run unchecked for the exit door is confidence wanes. The odds of that increase proportionally to delay in any news from the White House.
To put things in perspective though, all this talk of stimulus measures around the world’ are not a panacea for the deflationary shock OPEC+ has foisted on the world. Nor for the rapid spread of coronavirus internationally. The measures that will be announced by the fiscal and monetary authorities of the world, as they must surely do, are not there to boost growth, they are there to keeps the lights on in the global economy. This is about keeping the cogs of the SME world oiled and keeping workers in jobs.
My biggest worry is not the United States; they will eventually get their act together, especially in an election year. My biggest concern is Europe. The great Euro project’s soft underbelly has always been that Europe had a monetary union, but not a fiscal one. Taxes are not collected centrally with fiscal transfers directed to each member. As an example, Italy has effectively locked down the entire country to control the spread of coronavirus. But from a cash perspective, it is effectively on its own. It may even face punishment for the inevitable cratering of its national budget, breaking EU rules.
That soft underbelly may now face a day of reckoning. Europe’s typical playbook since the GFC is to let the ECB do the heavy lifting via monetary policy, as the Bloc is locked into a fiscal austerity prison cell by Germany. Additionally, from the side-lines, they then let the rest of the world do the hard work on the fiscal front in an enduring hope and pray strategy.
That strategy may now have run its course. The ECB Chairperson, Christine Lagarde, has allegedly met resistance to pleas for more help from the governments themselves of Europe to combat the slowdown. She has a point, with the ECB already neck-deep in a QE cycle, and with rates at zero per cent, it has precious little ammunition left. If Europe continues in the thrall of Germany, and its coterie of Northern European austerity gnomes, the impending slowdown may hit Europe very hard and be a drag on an eventual recovery in the global economy.
Perversely, a disappointment in measures from the ECB at its meeting tomorrow could have an unexpected effect. An underwhelming rate cut and or other actions could spark another aggressive leg higher in the Euro as it’s interest rate differential with the US Dollar potentially shrinks again. Mr Trump will be happy. Europe will not.
If readers would like an example of what a proper monetary and fiscal union between a grouping of states looks like, with open borders and unimpeded movement of labour, I present to you, the United States!
Apart from President Trump’s hoped-for stimulus package, attention will be turned this afternoon to the much-delayed UK budget. As coronavirus sweeps the globe and oil prices collapse, yet another hasty rewrite has been necessary. Markets have already priced in a cut from the Bank of England, sooner rather than later, and will be looking for proactive action from the Treasury to combat the coronavirus and oil double punch. A disappointing performance from the government today could erode much of Sterling’s recent gains against the Dollar.
Finally, if the week had not been tumultuous already, the week will finish with a Friday the 13th. Some may argue though, that Jason Vorhees has already been busy with his slasher in the global financial markets.
US stocks staged a rapid recovery yesterday in anticipation of US Government stimulus measures to combat a coronavirus slowdown. Ironically given the meltdown of the day before, the major US indices all hit their limit-up 5.0% threshold in volatile trading yesterday and stayed there.
With no news from the White House today, the first signs of investors lack of patience have emerged. Both the S&P 500 and Nasdaq futures in aftermarkets trading have fallen by around 1.75% this morning. That has infected the Asian markets, where equally nervous participants have marked regional stocks lower.
The Nikkei 225 has fallen 1.40%, although, with the Bank of Japan active in the ETF market, losses may be limited today. The Straits Times has fallen by 1.35% and the Korean Kospi by 1.30%. The Mainland Shanghai Composite and CSI 300 are both higher by 0.40% thus far, boosted by falling coronavirus infection rates and President Xi’s visit to Wuhan yesterday. The Hang Seng has declined by 0.40%. In Australia, the ASX 200 is lower by 1.90%.
One senses that sentiment is fragile in Asia, with all eyes glued to the movement of the US indices futures for direction. Yesterday’s recovery, although pleasing, looked very much like a bullish correction in a bear market. Even an announcement by the White House that boosts stocks is unlikely to have a lasting bullish effect of more than a day or two in this environment.
The gyrations of the USD/JPY continue to hold the street’s attention with some extraordinary volatility and ranges. Having gapped lower on Monday from Friday’s 105.35 close, falling to 101.15, USD/JPY climbed over 3.0% to 105.60 yesterday as stock markets and oil recovered. USD/JPY is clearly now the favourite currency pair for intra-day momentum traders and a proxy for the gyrations of other financial instruments. My best guess is that USD/JPY will trade in 101.00 to 107.00 range for the rest of the week. Wide but real, and a reflection of the reality of the market now.
Elsewhere, the leap in Treasury yields saw the US Dollar make substantial gains against developed market currencies but gave ground against the Petro-currencies and emerging markets. The dollar index enjoyed an outsized gain of 1.65% to 96.46.
Those gains are being eroded today as stock markets edge lower, with eh EUR, GBP, AUD and NZD all slightly higher this morning. Over in the regional Asian space, the Dollar is gaining some ground today as the Stocks/DM/EM correlation trade moves with almost mechanical efficiency. We can expect more of the same until we hear something from the White House.
Offshore and onshore Chinese Yuan continue we quietly range in a narrow band around the 6.9500 level. A veritable oasis of calm in a stormy world, one suspects the PBOC is busy on both sides of the market to keep it that way.
Having risen by around 10.0% overnight, a truly remarkable comeback, both Brent crude and WTI continue to confound both the sceptics and the author today. Brent crude has risen by 3.50% to $38.50 a barrel, and WTI has increased by 2.90% to $35.35 a barrel.
Oil’s resilience and this morning’s price action are impressive, especially as stock markets are unmistakably in the red today. It is even more so when one considers that Russia also announced yesterday, that it would also ramp up production in April, following Saudi Arabia’s lead.
It could well be that the street expects both parties to return to the negotiating table, bargain hunting from Asia importers, or misplaced naivety that a coordinated global fiscal stimulus is anything other than keeping the world’s lights on. From the author’s point of view, the rally of the last 24 hours still looks like a misguided bear market rally.
Outside of any of the above actually occurring, it is hard to construct a case where a price above $40.00 a barrel on Brent crude is justified. I also note that US API Crude Inventories blew out to 6.4 million barrels in New York overnight. A perceived failure by President Trump to get his economic measures over the line will see oil’s gains vanish into thin air. Traders should tread very carefully being long at these elevated levels.
Gold continues to confound and astound. Having been capped at $1700.00 an ounce by margin induced selling elsewhere in Monday, the gains in stocks, US Treasury yields and commodities pulled the carpet from under it overnight. Gold fell by 1.80% to $1649.00 an ounce, having fallen as much as $40 an ounce to $1641.00 earlier in the day.
Gold’s inability to rise regardless of the price action of financial instruments elsewhere is disappointing. The $1700.00 zone looks to be an insurmountable barrier for gold this week. Nevertheless, I keep the faith that gold’s fundamental point to higher levels ahead, it just won’t be a linear progression.
Gold has risen in Asia today as stocks have weakened, rising 10.0 Dollars to $1659.00 an ounce. That leaves my daily technical support at $1650.00 an ounce intact, just. Realistically however, we must accept that gold could have potential spikes lower, possibly even as far at $1620.00 an ounce, despite its constructive case. It’s just that sort of week.