Equities hold ranges, gold jumps as US real yields sink

Morning Note

Equity markets are still looking for direction as they flit about the middle of recent ranges. Fear of a second wave of cases is denting the mood today, as the so-called R-number in Germany jumps to 2.88, US cases hit the highest level since early May, and Apple closes more stores in the US.

White House trade adviser Peter Navarro said the US is preparing for a second wave in the autumn – it’s debatable whether the current spike in cases in some states is still part of the first wave. Equity markets remain sensitive to headline risk around virus numbers, stimulus and economic data, but we are still awaiting signs of whether the strong uptrend reasserts itself or whether we see a more serious pullback.

Looking at the pullback over the second week of June, the major indices are still hovering either side of the 50% retracement of the move. Momentum may start to build to the downside should cases rise, and restrictions are re-imposed. For now, the indices are simply bouncing around these ranges. The question is whether markets finally catch up with the real economy – the disconnect between Wall Street and Main Street is a worry for those who think the market has rallied too far, too fast.

Economic data will continue to show a rebound, glossing over the fact that the numbers on the whole still indicate a severe recession. However, to make the bull case – the Fed and central bank peers are on hand and the old maxim still stands: don’t fight the Fed. Meanwhile there are record amounts of cash sitting on the side lines and bond yields on the floor – and will be for a long while – making equities (FTSE 100 dividend yield at 4% for example), more appealing.

The FTSE 100 opened down 1% and tested the 50% line at 6,223, whilst the DAX pulled away from its 50% level around 12,250 ahead of the open to fall through 12,200 before paring the losses. Asian markets were softer, whilst US futures indicated a lower open after falling on Friday – ex-tech.

Oil (WTI – Aug) ran out of gas as it tried to clear the Jun peak at $40.66 but remains reasonably well supported around the $39-40 level. We look at a potential double top formation that could suggest a pullback to the neckline support at $35. Imposing fresh restrictions on movement may affect sentiment ahead of any impact on demand itself, but OPEC+ cuts are starting to feed through to the market and we could be in a state of undersupply before long.

The risk-off tone helped lift gold to break free of the $1745 resistance, before pulling back to test this level again. The rally fizzled before the top of the recent range and recent multi-year highs were achieved at $1764. Whilst benchmark yields have not moved aggressively lower, with US 10s at 0.7%, real yields as indicated by the Treasury Inflation Protected Securities (TIPS) are weaker. 10yr TIPS moved sharply lower over the last two US sessions, from –0.52% to –0.6%, marking a new low for the year and taking these ‘real yields’ the lowest they’ve been since 2013.

Real yields are currently negative all the way out to 30 years.

In FX, GBPUSD started the week lower but has pulled away off the bottom a little. The momentum however remains to the downside after the failure to recover 1.2450. Bulls will need to clear the last swing high at this level to end the downtrend, though this morning the 1.24 round number is the first hurdle and is offering resistance.

CFTC data shows speculative positioning remains net short on GBP. Meanwhile net long positioning on the euro has jumped to over 117k contracts, from a steady 70-80k through May. Nevertheless, the current trend remains south though the 1.12 round number is acting support – the question is having seen the 1.1230 long-term Fib level broken, do we now and perhaps test the late March high at 1.1150.

Hong Kong dents optimism but stocks remain on track

Morning Note

US shares surged on Tuesday, with the Dow rising more than 2%, briefly trading above the 25k level again before closing a little short. The S&P 500 rose over 1%, traded above 3,000 for the first time since March 5th hitting a high at 3,021 before it too closed below this psychologically important level. The broad index traded above the important 200-day moving average but failed to close above this indicator.

Economies continue to reopen a little quicker than we’d feared. US airlines are reporting a uptick in passenger levels vs where they were last month, but were down about 80% from the same Memorial holiday weekend a year before. Globally, it seems as though countries are able to ease lockdown restrictions without sparking immediate secondary waves of infections – albeit the risk of such emerging down the line should not be ignored.

The higher the S&P 500 rises without earnings picking up the pricier it gets. PE multiples already look stretched and further gains for the index would come despite declining earnings, stretching these valuations still further. What happens when banks really lay bare all the non-performing loans they are going to need to write off?

US stock markets test key 200-day SMA

In the last two major recessions (see below chart), the 200-day simple moving average has been the ceiling for the market. A breakout here would be important for recovering market highs – failure could suggest it will contain price action for a while. I hate to say it but this time could be different – central bank largesse was not a factor like it is today. This only concentrates the power of the largest capitalised companies.

What’s going on in the real economy is not reflected by markets. Even as we reopen, the economic uncertainty and long-term health fears will support household deleveraging, boost savings rates and knock consumer spending.

Today the Fed will release its Beige Book providing anecdotal evidence of business activity across the US – there will be some very grim stories to tell and will underline how it will take a long time to get businesses and people moving at the same rate they were before the crisis.

Tensions in Hong Kong weigh on global equities – will the US sanction China?

The rally in global equities seen at the start of the week ran out of steam a little in Asia overnight though as tensions in Hong Kong hove into view once more. Riot police fired pepper pellets at groups gathering to protest a bill that would ban people from insulting the Chinese national anthem. This comes as tensions were stoked by China’s planned introduction of sweeping national security powers in Hong Kong.

There is a strong chance that the anti-Beijing feeling grows and leads to the kind of unrest we saw over several months last year. The US is said to be considering sanctions against China; Beijing said yesterday it was increasing its readiness for military combat. Whilst the eyes of the world are on Hong Kong, China is already engaged in a military standoff on its border with India.

Asia soft, European stocks firm

Asian shares fell broadly, although Tokyo held up as Japan said it will carry out another $1.1 trillion stimulus package on top of a $1.1tn programme already launched last month. The Hang Seng dipped by almost 1%. But European shares rose with the FTSE 100 recapturing 6100 and making a sally towards 6200 and to close the early March gap.

Yesterday the DAX made the move back towards its Mach 6th close at 11,541 to fill the gap but failed to complete the move on the close. This morning the DAX moved strongly through this level after a pause at the open, moving back to 11,600.

Euro, pound come off highs, retreat from key technical levels

In FX, both the euro and pound failed to really make any real breach despite a strong gain yesterday and have come off their highs. EURUSD moved back towards the middle of the recent range, having fallen short of a move back to 1.10 and was last trading around 1.0960.  GBPUSD has retreated under 1.23 having fallen short of the 50% retracement of the move lower over the last month around 1.2375.

After Germany and France proposed a €500bn bailout fund based on mutual debt issuance (what some have dubbed Europe’s Hamiltonian moment), EC President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal and call for a €1 trillion plan. If the budget talks are successful it should lower the risk premium on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets. It would also mark a major step towards EU fiscal policy coordination and possible fiscal union. The frugal four remain a hindrance but Merkel’s weight is behind this.

We’re also looking at the appearance before MPs today by Michael Gove and UK Brexit negotiator David Frost.

Gold falls to test $1700, WTI crude oil edges down to $34

Gold was weaker, testing $1700 again as US yields rallied on economic reopening, but 10yr Treasury yields peeled back off the highs at 0.7% due perhaps to the US-China tension.

WTI (Aug) has retreated further from the $35 level and is testing support around $34. The pattern suggests a pause for thought as we try to figure out the mess of supply and demand. The pattern is one of consolidation with a bullish flag forming, with better demand forming the basis for the move alongside supply impairment that was evidenced by a new report from the IEA saying Covid-19 will cause investment in the energy sector to decline by $400bn this year. That is the kind of capex carnage that will remove a lot of supply and force rebalance quickly.

Chart: The 200-day line has been a ceiling in past recessions

Stocks stage fightback, Trump raises China stakes

Morning Note

US stocks staged a mighty comeback and closed at the highs as beaten-up financials managed to recover ground. The S&P 500 traded under the 50% retracement level at 2790, dipping as low as 2766 as US jobless claims rose by another 3m, before rallying to close up 1% at 2852. Financials, which have failed to really take part in the rally since March, led the way as Wells Fargo rose 6.8% and Bank of America and JPMorgan both rallied 4%. Energy stocks also firmed as oil prices rallied.

European indices were softer on Thursday but managed to recover a little ground in early trade on Friday. The FTSE 100 rose over 1% to clear 5,800, with the DAX up a similar amount and trying gamely to recover 10,500. Asian shares have largely drifted into the weekend with no clear direction.

The rally for Wall Street snapped a 3-day losing streak but the indices are still on for the worst weekly performance since mid-March. We’re still in this tug-of-war phase as the real-world impacts of Covid-19 run up against the stimulus and central bank support. Markets are still trying to figure it all out.  SPX needs to rally to 2915 today to finish the week flat, while the FTSE 100 requires 5,935.

The deterioration in US-China relations is another worry for investors, with Donald Trump saying he doesn’t even want to speak to President Xi and threated to ‘cut off’ China ties. He’s not angry, he just ‘very disappointed’. As I’ve pointed out in a past note, in an election year with the economy suffering from the worst recession in memory, Trump is likely to go very hard against China, particularly as this has bi-partisan support and polls indicate anti-China feeling running high. This will be partly a political game, partly what the US ought to be doing anyway, but either way it will likely provide yet another downside risk for investors.

Neckline support of the head and shoulders pattern is feeling pressure but yesterday’s rally is positive for bulls. Expect further push-and-pull around this region.

Overnight data showed Chinese factory output rise while consumer demand slowed. Retail sales declined 7.5% vs 7% expected in April. US retail sales today  are forecast at -12%, or -8.6% for the core reading.

Oil put on a good show with front month WTI rising above $28. The August WTI crude oil contract trades a little higher than $29, meaning the contango spread has narrowed by two-thirds in the last week. Price action suggests traders are far less worried about the underlying demand and storage constraints that have dogged prices for the last couple of months.

In FX, as flagged sterling tested the Apr 6th low, which has held for the time being and GBPUSD has recovered the 1.22 handle. Risks look to the downside, but short-term momentum looks like we could see a nudge up.

Gold has driven off the support and was last up a $1736. Whilst Covid-19 is initially a deflationary shock (negative for gold), the extent to which governments have fired up the printing presses and the fact that monetization of this debt seems the only way out, a significant period of inflation could be around the corner. Gold is still the best hedge against inflation. The Apr 23rd high at $1738 is first test before a retest of the previous top at $1747 and then $1750 to call for a breakout to $1800.

Upbeat start for European equities

Morning Note

No Monday morning blues for equities after the Bank of Japan announced more stimulus and we’ve some good news from Italy at last and even Deutsche Bank has reported a profit.

The BOJ laid down the gauntlet to the Federal Reserve and European Central Bank, who both meet later this week, by raising its package of support. The BOJ will now buy unlimited government bonds (JGBs), catching up with market expectations, and is increasing how much corporate and commercial paper it buys.

The moved gave an upbeat tone to trading in Asia. Tokyo rose 2.7% whilst Hong Kong rose 2%. European shares followed suit with the FTSE 100 opening above 5800 and the DAX reclaiming 10,500. Indices remain in consolidation phase and risk rolling over as momentum fades, but the news today is quite positive. US futures are positive after closing higher on Friday but falling over the course of the week.

Italian and German yield spreads came in after S&P didn’t downgrade Italian debt. This is good news for the ECB, which may well increase its pandemic asset purchase programme by €500bn this week.

On the Covid-19 front, Italy is also making progress and will relax lockdown measures from May 4th. Spain has reported its lowest daily death toll in a month. Boris Johnson is back to work.

Meanwhile Deutsche Bank reported exceeded expectations on profits and revenues in the first quarter but warned on loan defaults as a result of Covid-19. Investors shrugged off the warning and shares rose 7%, sending European banking stocks higher by around 3%. It’s a very big week for earnings releases – HSBC, BP, Shell, Amazon, Alphabet, Facebook and the rest.

Oil has taken a turn lower as fears of approaching ‘tank tops’ imminently. The June WTI contract is starting to show stress, gapping lower at the open last night and trending lower to approach $14. Brent is –5% or so at $23.50. Goldman Sachs estimates global storage capacity will be reached in just three weeks, which would require a shut-in of 20% of global output. That would chime with what we’ve been tracking and suggests OPEC+ cuts of 9.7m are – as anticipated – not nearly enough. It will make the Brent front-month contract liable to volatility, though perhaps not quite what we have seen in WTI. Baker Hughes says oil rigs in the US were down 60 in the week to Apr 24th to 378, the fewest active since 2016 and well under half the number this time a year ago.

In FX, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission shows euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since. The last time a move like this occurred in EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Meanwhile, speculators net short bets on the USD are now at the highest in two years as traders call the top in the dollar. Traders habitually call the top in the dollar and get it wrong. Various actions taken by the Fed to improve liquidity and an easing in the market panic we saw in March has helped, but the dollar remains the preferred safe harbour in times of market stress.

EURUSD – the last time specs turned this long was in May 2017.

DAX – rangebound, approaching top Bollinger band.

Stocks head lower after Gilead, EU disappointments

Morning Note

US stocks faded and European equity markets are broadly weaker following on reports Gilead’s Remdesivir drug isn’t what it was cracked up to be. It had been indications of early positive results for treating Covid-19 patients with the drug that sent markets up at the tail end of last week. We should note these are all leaked reports and the data is sketchy at best. What it shows is how the market is prepared to read into positive vaccine or anti-viral news with extreme optimism, setting the bar high for disappointment.

Data on the economy isn’t offering any disappointment – the bar is already so low that nothing can really be really upsetting. US initial jobless claims rose by more than 4m again, taking total unemployment claims to 26m from Covid-19. UK retail sales fell by a record 5.1% in March, but a drop of this magnitude was widely anticipated. Consumer confidence didn’t decline, but held steady at an 11-year low at -34.

Stimulus is being worked out. The US House of Representatives on Thursday approved the $484bn package for small businesses and hospitals.  More will be needed, you feel. Today’s data of note is the US durable goods orders, which are seen falling 12%, with the important core reading down 6%.

In Europe, Angela Merkel made sure Germany’s economic weight will stand behind a €1tn package for the Eurozone to prevent weaker economies from recovering a lot more slowly than richer ones. This will be defining moment for the EU – if it cannot pull together now, what is the point of it? Of course, there are still strong differences between nations on the actual size and nature of the fund. Critically, we don’t know whether cash will be dispensed as loans or grants. There was a definite sense from Thursday’s meeting of the EU kicking the can down the road. The problem for the EU and the euro is that we’re heading towards a world debt monetization and it cannot take part. German and Italian spreads widened.  Support needs to be agred – Lufthansa today says it will run out cash in weeks.

The euro continues to come under pressure on the disappointment and yesterday’s PMI horror show. Support at the early Apr lows around 1.07750 was tested as I suggested in yesterday’s note, which could open up a move back to 1.0640 without much support in the way.

Heading into the final day of trading for the week, the UK was outperforming – the Dow down 3% this week, while the FTSE was about 0.7% higher. The FTSE 100 shed about 100 points though in early trade Friday to give up its 5800 handle and head for a weekly loss.

Overall, it’s been a pretty indecisive week for indices with no significant developments in terms of the virus or economic data. It’s interesting that in terms of earnings releases, we are not seeing much other than a huge amount of uncertainty as companies scrap guidance. American Express is the main large cap reporting today. It’s already warned that Covid-19 would hit payments as lockdown measures force people to stay home. The momentum of the rally from the trough has faded this week and could see stocks roll over next week if there no more good news. It’s either a bullish flag pause, or a roll over to be signalled by a MACD bearish crossover. The question is do you think stocks should be down 10% or 20% from the all-time highs?

DAX: momentum fading

S&P 500: 50-day SMA proves the resistance with 2800. Watch the MACD.

Oil is proving to be more stable. Oklahoma’s energy regulator has said producers can close wells without losing their licences. Donald Trump started to look desperate, stoking tensions with Iran. You would not be surprised if it were a dastardly plan to boost oil prices. Treasury Secretary Mnuchin suggested the White House was looking at a bailout for the oil industry.

Today’s Baker Hughes rig count will be closely watched to see how much production is being shut in. Last week’s figures showed the sharpest decline in active rigs for 5 years, falling 66 to 438, around half the number drilling for oil the same time a year ago.

PMIs crash as social distancing looks set to last, European shares softer

Morning Note

Britain faces future of social distancing. The chief medical officer for England, Chris Witty, says some disruptive lockdown measures will remain in force for the rest of the year. Pubs and restaurants may not open until Christmas. If they can before, you only need to do the arithmetic and work out that a pub which could usually count on being chock full of a Friday night won’t do much business if everyone is forced to stand six feet apart. They will lose less money by staying shut. It’s increasingly looking like a total failure by the British government to implement the testing required to get the country moving. Lockdown measures cannot become normalised.

The economic damage from these lockdowns is still providing some remarkably ugly numbers, but I think equity markets have already discounted the worst. France’s services PMI slid to 10.4 in April, while the composite index slipped to 11.2 vs 26 forecast. Germany’s composite PMI was a little better, but services were also uber-weak at 15.9. This follows some hideous PMIs overnight as Japan’s services PMI sank to its weakest since 2007. It’s notable that the severe lockdown measures that we have across Europe are not in place in Japan. Australia’s services survey down to a record low 19.6, but Australian exports climbed 29% in March thanks to a bounce back in iron ore shipments to China after a sharp decline in Jan and Feb.

When an economy has been effectively shut down it’s no surprise the PMIs will reflect it. It’s like looking in the rear-view mirror at a horrible accident – better to focus on the road ahead. France’s finance minister Bruno Le Maire says the government wants all retail outlets to open by May 11th. However, this excludes bars and restaurants – what’s the point? Germany has just announced a new €10bn package of support and is already lifting some lockdown restrictions. Test, test, test.

Meanwhile, the European Central Bank is loosening its rules on asset purchases to enable it buy so-called ‘fallen angel’ bonds – paper issued by companies not rated investment grade. Credit ratings agencies are expected to downgrade a slew of corporates from investment to junk, so this merely lets the ECB to operate how it wants – it doesn’t want to narrow the pool of available bonds and only prop up the ones who need it the least.

After the stramash of the last few days, oil has regained some stability, but I would be cautious about reading too much into any gains until we see the supply shut-ins and OPEC cuts start to reduce the flow, and the demand picks up again. Brent futures for June touched a low under $16 yesterday but rallied through to $22 and are last trading around $21.50. WTI for June also rallied from yesterday’s lows at $6.50 but twice failed to recover $16 and were last trading under $15.

European markets tried to sketch out gains in early trade as oil prices recovered some ground but the PMIs started to weigh. Shell and BP – big FTSE weightings – led the way higher before the economic hit dragged on sentiment. The FTSE 100 put on a good show yesterday, rallying 2.3% and closing near the highs at 5,770. Wall Street rallied 2% yesterday as the Senate passed a relief bill and oil recovered its footing, but stocks finished off the highs and the S&P 500 failed to close above 2800. Futures indicate mild gains.

The DAX was also firmer by 1.6% yesterday but failed to recover the trend line and has turned weaker again this morning. Daily momentum indicators have turned across indices and suggest a period of weakness.

In FX, the dollar is a tad softer at the start of the session but the dollar index remains firmly above the 100 level at 100.480. GBPUSD is flirting with the trend resistance having backed away from this yesterday following the crossover on the 1hr MACD. Bias remains to the downside, support at 1.2250 may be looked at.

EURUSD also maintains a bearish bias and took fright at the PMI horror show to dip under 1.08. Support at the early Apr lows around 1.07750 may be tested, which could open up a move back to 1.0640.

Europe firms as Brent follows WTI’s lead lower

Morning Note

European markets are cautiously higher after yesterday’s decline, but the daily momentum indicators are fading. The reality of economic collapse is being seen in oil markets, but – juiced by central bank support and of course being much more forward-looking than, for instance the June oil contract – equity markets are displaying greater optimism. I’d say oil markets are telling us how bad things are right now, while equity markets tell us how good or bad investors hope/fear things will be next year.

Now it’s the turn for Brent. Turmoil in global oil markets dragged Brent futures under $16, leaving the front month trading at its weakest since 1999. The collapse in WTI at the start of the week has spooked the market and now we see similar concerns about floating storage starting to fill up as physical storage constraints worrying WTI. The roll this Friday could be gappy, although Brent is cash settled, not physically, so in theory it ought not to be as troubled and negative prices are unlikely. That said, if global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero.

WTI remains under pressure with the June contract suffering a ‘flash crash’ yesterday as it slumped as low as $6.50 before recovering above $10. The June contract, whilst not immediately facing the same liquidity problems as the May contract did on Monday, is going to be under pressure all the way to expiry with nowhere left in the US to take physical delivery. It too could turn negative if paper traders are left holding the baby close to expiry. July is trading around $18.40, August is above $21. Edward Morse, head of commodities at Citigroup, says oil could bounce back to $50 by the end of the year.

Meanwhile the damage is being felt in oil ETFs which are needing to shift their holdings further out in future months. The United States Oil Fund (USO) is ditching its June holdings as it tries to shore its balance sheet, and this will be having an impact on the front month trading. It will also be sharpening the super contango. It becomes a vicious circle as long as no one wants to take delivery. Yesterday saw more than 2m June contracts traded, the CME Group said, the busiest single day for the month ever.

The pain in oil markets is unsettling risk appetite more broadly, with the S&P 500 down 3% and the Dow shedding over 600 points yesterday. It was the worst day for the three main indices since April 1st. Charts and momentum suggesting the rally has lost steam and 50-day SMAs (blue line) almost seem to be frightening the market and forcing it to back off. The question is whether sentiment sours from here and we retest the lows or it’s just a pause in the rally. Earnings are not telling us an awful lot as uncertainty reigns. The key is the emergence from lockdown and restart of economies. And of course, finding a vaccine.

Dow Cash, 1-Day Chart, Marketsx – 08.32 UTC+1, April 22nd, 2020

Whilst European markets are higher today after yesterday’s drop, the momentum is fading and the DAX has broken under trend support. Again the 50-day SMA is major barrier.

DAX Cash, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

A major boost for Netflix as it added almost 16m new subscribers in the first quarter, well ahead of expectations. The company has been boosted by lockdown measures and should see more net subscriber adds in Q2 but notes in the circumstances it’s all ‘guess work’. But this might be as good as it gets this year – Netflix won’t get a better opportunity to gain new members than now. I’d also be concerned that after such a big runup in the stock to all-time highs, the upside is pretty well discounted now and viewing figures will start to decline as lockdowns end. A stronger dollar is hitting foreign earnings and spending on content is delayed by production shutdowns. EPS was a slight miss but Netflix profits are always a little lumpy due to inconsistent spending on content.

In FX, GBPUSD broke down through near-term horizontal support and out of its range yesterday and with the bearish bias persisting the next level comes in around 1.2160, the Apr 6th and late March swing lows. Near-term though the 1hr MACD is positive after a potentially bullish crossover late yesterday.

GBP/USD, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

 

Oil tumult worries investors as equities retreat

Morning Note

Gyrations and anomalies in the crude oil market grabbed all the attention yesterday, Rightly so, as West Texas Intermediate (WTI) crude – the US benchmark – tumbled into negative territory for the first time ever. Prices plunged at one stage to -$40, before climbing back into positive territory.  It was a staggering event.

A few things need to be considered. First this only related to the May contract which was about to expire and had become very illiquid as major trading desks had given up on it several days prior. CME Group data indicated volume of 122k for May contract vs 780k for Jun. Two, the Jun contract remained much firmer, albeit it too was dragged lower towards $20.

You need to bear in mind that Nymex WTI is a physical contract – if you hold it expiration you need to take delivery. Normally as you approach expiration of a futures contract, traders simply roll their positions over to the next month without any fuss. What we saw yesterday was very much a roll over problem – traders holding the May contract couldn’t find any buyers because no one with the ability to take delivery wanted it.

This is because of the collapse in physical demand for crude products like petrol and jet fuel, which means the storage capacity at hubs like Cushing, Oklahoma is near to ‘tank tops’. So, what we got was a severe dislocation as paper traders found they had to offload positions without any liquidity or bid in the market. A unique event, but one that reflects how financial markets can become very dysfunctional very quickly when things go bad.

And whilst it wasn’t a good day for the oil majors, Chevron and Exxon Mobil fell around 4%, hardly the meltdown suggested by the front month implosion. The kind of dislocation witnessed yesterday, however much some may downplay it, points to a fundamental problem in oil markets, namely a lack of storage capacity and demand. But it also shows the market trying to do its job, forcing the price down enough to shut production. The problem is closing down production sites is not that easy and not cheap, so producers are desperately trying to avoid it.

Donald Trump says he will add 75m barrels to the US SPR – always one for a deal. OPEC is said to be looking at cutting oil output immediately, rather than waiting until next month. You should note that Brent is much more stable, albeit still pressured to the downside, as OPEC+ cuts are due to take effect and storage constraints are less pronounced.

WTI – for Jun – was down testing the $20. It’s hard to see how it can hold up against the immense pressure from the lack of storage.

Equities are only 15% from their February all-time highs, but the world seems ‘more than 15% screwed up’. That’s how Howard Marks, the co-founder of Oaktree Capital Management, summed up the current state of the bear market rally whilst talking to CNBC yesterday.

The S&P 500 finished the day lower by 1.8%, with futures pointing lower again today and now under the 50-day moving average. European markets are softer, with the FTSE 100 trading under 5700 but remains in the bullish channel, with support coming in at 5600. The DAX is testing trend support around 10,500.

Germany 30 Cash, 1-Hour Chart, Marketsx – 08.16 UTC+1, April 21st, 2020

In FX, the pound retains its bearish bias with GBPUSD making fresh lows overnight before bouncing back into the horizontal channel that has dominated since last Wednesday. The 1-hr MACD may be about to show a positive move. Price action is anchored on the lower Bollinger band.

GBP/USD, 1-Hour Chart, Marketsx – 08.20 UTC+1, April 21st, 2020

UK unemployment figures were a lot better than expected, with the claimant count change up just 12k vs 170k expected. Unemployment emerged at 4%, up from the 3.9% before while average earnings fell to +2.8% vs 3% previously. There will be a lot of hope that the furlough scheme is working, and the UK government support is enough to prevent an unemployment crisis. But a lot depends on how quick you end the restrictions.

Markets still rattled by coronavirus fears after yesterday’s brutal sell-off

Equities
Forex
Indices

Investors fled to safety en masse yesterday as a spike in coronavirus cases in Italy, South Korea, and Iran raised fears that the outbreak was becoming a pandemic.

$1.5 trillion was wiped from global equity markets; the Dow recorded only its third ever 1,000 point drop, and the VIX ‘fear index’ spiked to the highest levels since January. Oil sank 4% and gold leapt to a seven-year high.

Today, the sell-off has paused, but the market is hugely indecisive.

Stocks, oil, volatile as markets await next major development

Since the European open today we’ve seen major indices like the DAX, FTSE 100, and Euro Stoxx 50 extend gains towards 1%, drop to multi-month lows, and rebound above opening levels. US stock market futures have gone from indicating a 200-point gain for the Dow on the open to minor losses, and back to signalling a positive open.

The FX market continues to see a shift towards the safety of the US dollar, although cable has managed to hold some gains despite easing back after rising to test $1.30 earlier in the session.

Gold is down around 0.8% and silver has suffered losses of more than 1.3% on profit-taking, but risk-appetite is clearly still absent as crude and Brent oil are struggling to hold opening levels. Like stock markets, the two benchmarks climbed on the open, then fell into the red, before recovering somewhat.

New coronavirus cases reported in Italy, Iran, Austria, Croatia, Tenerife

Markets are caught between buying the dips and pricing in further worrying developments. The first case of coronavirus has been reported in Southern Italy, and Austria and Croatia have reported their first cases today as well. The two Austrian cases are in the province of Tyrol, which borders Northern Italy, while the young man infected in Croatia had recently returned after spending several days in Milan.

Meanwhile, hundreds of people are being tested and many guests quarantined in a hotel in Tenerife after a case of the virus was confirmed there. Iran has also provided an update on the outbreak there: the number of cases is up to 95 and 16 people have died – the Deputy Health Minister is one of those infected.

We’ve also had a slew of companies warning that COVID-19 will impact their earnings. UK blue-chips Meggitt and Croda are weighing on the FTSE 100 after issuing warnings over the impact of the virus upon their businesses.

Markets may gain more direction when the US markets open, but even then uncertainty looks to be the order of the day.

Euro dives on Draghi, stocks rally

Forex

The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.

The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.

Speaking at the annual central banker bean feast in Sintra, Draghi said: ‘Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,’ and added that the asset purchase programme ‘still has considerable headroom’ and that in the absence of inflation returning to target, additional stimulus will be required.

Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode now, the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks like a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.

This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing Eurozone economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps lately sunk to record lows- below 1.2% for the first time. Economic indicators continue to show a deep and persistent slowdown.

The euro dived lower and the breakout now looks lost. EURUSD was trading at 1.1240, already under pressure having slipped the 1.13 handle, before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed meeting is unlikely to help the euro with dovishness well and truly baked in – in fact the Fed has a low bar for a hawkish surprise that could put more pressure on the euro.

German bund yields are lower again, with the 10-year sinking towards -0.3%.

This Draghi put lifted stocks – the Euro Stoxx 50 rallied over 30 points quickly to trade at 3409, having been languishing around 3370. The DAX shot up more than 150 points. All else equal, which it seldom is, more easing from the ECB should be a boost for equity sentiment.”

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