Asia open: Investors hover over buy button on signs of curve flattening

Market throws its weight behind the COVID-19 flattening curve 

It doesn't take much effort to find bearish sentiment about stocks or the economy right now. All bear markets throw up things that are "different this time," and some that make investors linger over the buy button. In this environment, the COVID-19 curve flattening scenario is one of these critical signals the keeps investors not only hovering but pressing the buy button continuously. 

Indeed, the market appears to be putting its weight behind comments from the Governor of New York State, Andrew Cuomo, who suggested that the number of daily deaths in NY from the virus had been "effectively flat" for the past two days. 

The dichotomy of market sentiment is that while the majority of investors are bearish, there’s still a loud and boisterous perma bull contingent that views the market through a 10-20 year crystal ball horizon, ready to buy at the slightest hint that the virus is peaking.

So, if “stay at home" ultimately proves to be the COVID-19 cure-all, bridging the gap for a medical or therapeutic breakthrough and people return to work quickly, forget a 10-year horizon as, in less than one year, the world will face the most massive wave of asset price inflation in recorded history. Once the economy starts to show signs of returning to pre-pandemic form, then it's all systems go; the unfathomably massive global stimulus will find its way into every nook and cranny of virtually every asset class. 

Here we can most certainly draw parallels to 2008/09 where, due to the wave of government and central bank interventions, we did get a massive lift-off despite failed bounce and numerous wobbles. 

The market is looking for a lockdown exit strategy, and with some signs of life emerging Austria has become the market poster boy as the first country to lay out its plans to start reopening the economy. Two points will be crucial: firstly, can it keep new cases under control, and secondly, how quickly can things return to something approaching normality?

According to its timetable, small shops will be permitted to open again from April 14, as well as large DIY stores and garden centers. Other businesses deemed slightly higher risk, such as hair salons, will begin from May 1. The government said there were possibilities restaurants and cafés would be allowed to start operating again in mid-May, but declined to give an exact date. Public events will not be permitted to take place until July. No date has been set for schools to reopen.

It’s a welcome light at the end of the tunnel. 

 

Oil markets

Crude futures toppled overnight after traders took a peek into the future devoid of a swift and immediate production compromise. Genscape Inc reported a 5.8million barrel rise in oil inventories in the Cushing Oklahoma storage complex, the WTI primary storage facility. But, of course, this build should act as a stark reminder to producers that a voluntary production cut should be the order of the day.

Oil prices fell 8% on Monday's doubts around the Russia/Saudi deal as oil traders were initially unable to sniff out any hint of an agreement; instead, all they could sense was bad blood and animosity.

However, losses were pared later in the US session after the US energy secretary indicated that Saudi Arabia was attempting to set a G20 meeting for Friday to discuss production cuts. 

And prices are getting a further lift from buoyant risk sentiment being bolstered by the flattening of the COVID-19 curve, which is also economically favorable for oil prices as it suggests people could start driving to work sooner than expected. 

Put prices could remain capped until a deal is done, with its already formidable nature – given the problematic material arrangement and the re-emerging of disputes between Saudi Arabia and Russia around responsibility for the first breakdown of OPEC+ – making the route towards securing and delivering this deal very fragile. Insert US producers into the debate and the discussions become flat out unwieldy. 

Ultimately there’s hope that cooler heads will prevail and producers will reconcile and formulate a response that puts a floor under oil as the recent prices in the $20s reflect the dual demand and supply shock and is not sustainable for any of the primary producers. Still, the challenge remains the extent to which producers are willing to cut as 2Q looks over-supplied by 20mb/d on a 17.5mb/d demand decline, and filling storage in 2Q remains likely.

 

Gold markets

Gold put in an impressive shift, especially in light of recent gains. rallying USD90/oz in five trading days. Gold investors are reveling in the level of central bank stimulus and fiscal spending, especially when it raises government debt levels.

There were steady buyers of gold throughout Monday. The level of inflows into the ETF was stunning, with another 500k on Friday, while COTR reporting showed a 10% reduction in longs. But it was the EFP that was a driver again out of the gates at yesterday's London bullion market open as banks continued to cover shorts. Implied EFP hit 65 this morning, up from 20/30 yesterday, despite three refiners coming back online today, although they may only be operating at 25% compacity meaning physical remains scarce.

But, with lights turning back on in the refineries, EFP premium could burn out as the day wears on. 

 

Currency markets

The Aussie dollar is off to the races this morning as risk sentiment bolsters globally as COVID-19 case count curves flatten while catching an updraft from China's economy, which is expected to emerge from the COVID-19 coshes much quicker than most of the western world. 

When it comes to the COVID-19 case count for Australia and New Zealand, as of April , Australia's daily growth rate of new confirmed infections had fallen below 2% and New Zealand’s below 5%. By contrast, daily case growth in confirmed infections in the US stood at a little over 12% on April 6. Evidence continues to show that aggressive lockdown measures, imposed by AUS and NZ earlier on the epidemic curve than elsewhere, appear to be working – at least for now.

So as opposed to focussing on the yield curve flatting, FX traders are focusing on the COVID-19 divergence trade and possibly buying into currencies of countries that are expected to see the virus pass quicker. 

 

The Ringgit 

We should see the dollar trading softer against the Ringgit today on the improving global risk sentiment – even more so as oil prices are showing signs of stabilizing ahead of the OPEC+ meeting. But all eyes and ears are trained on this week's OPEC meeting.