The Fed stimulus positively greets lockdown exit strategies while oil prices meet reality
ANALYSIS | Published Apr 09, 2020 22:40 (+00:00)
The dollar weakens ( MYR ?) and gold takes flight
- Stock Markets: Fresh stimulus from the Federal Reserve gave equities and credit a proper lift.
- Oil Markets A day late and a barrel short seems to be the initial verdict of the preliminary agreement reached on Thursday by the world oil producers.
- Gold Markets: The Fed stimulus provided the rocket fuel to moonshot gold higher overnight.
- Asia FX: But as significant for the MYR fortunes is the broadly weaker USD dollar as the Federal Reserve continues to hose down the soaring greenback
Fed stimulus and Exit hopes
Fresh Fed stimulus
Fresh stimulus from the Federal Reserve gave equities and credit a proper lift. The Fed, before US markets opened on Thursday, announced an additional $2.3 trillion in loans to boost local governments and small and mid-sized businesses. The expansion will include companies that became fallen angels after March 22 and, of course, sent the S&P soaring. This move allowed investors to look through the dark US claims figures and, as importantly, the decline in oil prices and the negative implication on credit markets.
It looks like the Feds are on a mission to blow holes in every dam that stops the flow of credit. And it sure sounds like they have plenty more dynamite if needed.
Corona curves flatten
Markets have been encouraged by corona curves flattening in Europe, exits from lockdowns in China, and talk of economic reopening globally. The level optimism has caught virtually everyone by surprise, none more so than big macro investors that have been forced to chase this market higher.
Some will say that it is merely overly gloomy expectations that are triggering a short-covering rally. At the same time, the real pessimists will argue that unprecedented central bank activity will not be enough to bolster the markets without credible exit strategies from epic-scale social distancing.
2002 and 2008 bear markets a faulty blueprint?
In the last two equity bear markets, the dot com bubble crash of 2002 and the GFC of 2008, volatility peaked a few months before stocks bottomed. Characteristically the start of a bear market is the most horrific part when maximum uncertainty peaks, which then gives way into a grinding series of economic disappointments after that. The pure analog of the past bear market cycle would then suggest the stock market crash of 2020 would hit the lows of June or July.
What’s different this time around, however, is the incomprehensibly-large global stimulus. Not only will this deluge find its way into every liquid asset imaginable, but it will be sufficient to bridge the covid19 lockdown gap for Main street. So, when the economy returns to pre-pandemic all systems go, the world will face the enormous wave of asset price inflation.
Social distancing works
Social distancing works. This is the one uncontested positive of the last couple of weeks and is the one practice that flattens the curve faster than most investors initially understood. New case curves have flattened the most where lockdowns have been most aggressive, including notably in Italy and Spain. This has given investors the confidence to believe that cataclysmic social and political scenarios will be avoided in developed economies. And as such, risk assets will rally on greater perceived certainty around the global economy opening up.
The China roadmap
China’s experience has bolstered hopes of post-corona recovery. Car sales, for example, seem to be rebounding, while Starbucks is expecting its Chinese business to ‘fully recover over the next two quarters.’ Luxury traded well in Asia in Thursday’s session on the narrative that China is reopening.
Will Europe and the US be able to replicate the successful aspects of Asian crisis management? For various social, cultural, and political reasons, it is not clear.
From an economic perspective to a degree, it remains challenging to envision a V-shaped rebound in discretionary spending with the fear of a secondary cluster outbreak still lingering in the air. But more worrisome for the real economy is the press is full of stories around rent defaults across the globe, and this is symptomatic of the real-world cash flow shortfalls that will exist near term.
Medium- and Long-term FX market impacts
For the foreign exchange markets, the first question of order might be which countries’ best-organized virus containment efforts to see the virus pass quicker, which will initially make their stock market and currencies that more appealing.
But ultimately, this will give way to which can afford the massive financial cost of backstopping their economies and prevent lasting structural damage. The US and core European countries should ultimately score well. Emerging markets, however, will be much more vulnerable due to their external debt burned. At some point down the road, everyone will need to pay the piper.
A day late and a barrel short seems to be the initial verdict of the preliminary agreement reached on Thursday by the world oil producers.
It won’t be enough to balance the market, but the deal was never about pushing WTI in the $ 30s, although that would have been a welcomed relief. Instead, it was about preventing oil prices from collapsing into single digits. So, in that regard, the deal should be sufficient enough to handle the oversupply with the available storage capacity around the world. Even more so if G-20 effectively begins the once unthinkable process of oil market QE by merely filling up storage facilities around the world
US Energy Secretary Dan Brouillette is due to take part in a conference of oil ministers from the Group of 20 major economies Friday, which should cement the guarantee of broader cuts. Though in free-market economics, such as in the US and Canada, there is little that policymakers can do to drive down production quickly, so cuts will likely be organic.
Over the past week, the broader markets have been extremely encouraged by the pace of the corona curves flatting. So, if you take 10 million barrels out of the daily equation, China’s industrial engines start to gear up, European office lights turn on, and then the US shifts out of lockdowns, oil supply could tighten pretty fast. Regardless, over the next few months, production will decline organically as a result of the lower oil price so ether the way the natural declines will happen.
Of course, oil traders are a bit disappointed that OPEC + fell short of their bullish expectations, but it’s not the worst-case scenario where the meeting ended in chaos. Given the improving risk tone everywhere as coronavirus cases are plateauing, which is driving hopes that social distancing measures will be lifted soon in parts of the world. Oil prices could come back bid next week, provided the curve flattening data remains consistent through the Easter Break.
The Fed stimulus provided the rocket fuel to moonshot gold higher overnight. When the Fed super dove is combined with a US fiscal torrent, it’s safe to assume the US dollar will weaken, and gold will sprout a second set of golden wings and take flight.
Although oil prices are lower today, I think the production cut will eventually prove to be bullish for oil, especially in light of the definite covid19 curve flattening data, which suggests lockdowns will end quicker than expected. But as significant for the MYR fortunes is the broadly weaker USD dollar as the Federal Reserve continues to hose down the soaring greenback by adding more money to US credit and debt markets. And with China’s economy turning healthy, regional trading partners like Malaysia will benefit greatly once the MCO is lifted while riding the significant tailwind from the government stimulus efforts.
The streets bearish equity view was wrong and has hit the stop loss this week. So, going into this weekend with so many events (OPEC, Eurogroup G-20 & Powell), I suspect many traders who deal on a five-day horizon feel it prudent to go into the weekend flat and start fresh next week. Sometimes it’s nice to reset and come back new attitude, as such Happy Easter, Passover, and long weekend.
Source from https://www.fxstreet.com/analysis/the-fed-stimulus-positively-greets-lockdown-exit-strategies-while-oil-prices-meet-reality-202004092240