Asia Open: Is it time to sell the dollar?

Markets

US equities closed higher Friday, the S&P 500 up 1.4% following an afternoon rally. Equities were weaker through Europe, the Stoxx600 down 1.1% and most of Asia posting losses as well.

Oil prices lifted again – the WTI up 1.8% – while US 10Y treasury yields were unchanged at 0.6%. President Trump signed the $484bn small business support package into law on Friday. At a news conference Saturday, NY Governor Cuomo said the number of people hospitalized in the state had fallen to a level last seen 21 days ago, with a decline also in the number of people in intensive care. Still, the number of virus-related deaths in the US has now surpassed 50,000.

It might be another volatile but range-bound week for the S&P 500 as investors continue to focus on the next round of fiscal support and the path toward economic normalization. At the same time, the debate ebbs on whether a handful of mega-cap stocks supporting the market will catch down to their laggard peers, or if the inverse plays out.

It’s looking well short of a grand reopening in the US, but the fact that some folks are returning to work seems to have piqued the fancy of investors. However, with month-end approaching, this week's risk appetite could be light. But on a positive note, it’s nearing time to sell the USD as US rates are at the bottom of the range and the yield curve is flatting. But currencies are so fickle it still feels too early to move all in.

Many of the recent outperformers were market darlings before the corona crisis. Still, one worrying concern is investor crowding as the tech giants' recent gains have led to a surge in already-elevated market accumulations. 

At the beginning of 2020, the five most prominent S&P 500 stocks accounted for 18% of the index market cap, matching the share at the peak of the Tech Bubble in March 2000. Since then, those stocks (MSFT, AAPL, AMZN, GOOGL, FB) have risen to constitute 20% of the market cap. 

In a world without sports, shopping malls and enforced stay at home mandates, it’s not that much of a surprise why the heavyweight tech giant continues to flourish. And despite some of the "pros" saying exit, "Main Street’s" backseat investors so far seem little concerned about sitting on top of a so-called "house of cards", supported by a handful of market leaders.

While Friday’s bounce provided excellent optics, under the hood activity remains super thin, with most sectors’ trading volume down 35% versus average with the buying splurge dominated by perma bids in the macro community. 

It’s hardly a resounding vote of confidence with the stocks rallying on the narrow market breadth, weak participation and less than encouraging – although arguably better than expected – Q1 earnings reports so far. Which, on the surface, suggests if you’re buying and holding stocks at the current levels you’ll probably need to have the patience of Jobe to see this one through. 

Oil markets

Oil prices are holding this morning, supported by the steep fall in the US rig counts and the speed of production curtailment around the globe. Otherwise, news flow is beginning to optimistically build around producers preparing for the 1 May production cuts while the market also focuses on the (more important at this stage) preparations for major oil demand economies to begin the arduous process of coming out of lockdown.

Gold market

Two critical technical supports were breached last week – $1600 XAUEUR and $1725 XAUUSD – as the current leg higher came on the back of the gloomy EU and US data, which is bound to get worse. And the bounce was exacerbated by the situation in Europe; the talk of potential further government spending under an EU budget seems to be driving XAUEUR back to the all-time highs. Although the rebound in the Euro and the narrowing of EU peripheral bond yields after Italy's debt rating was reaffirmed stymied that cross-currency demand appeal, XAUUSD demand was then partially dented due to light news flow, with no significant surprises to direct prices.

As far as the primary benchmark XAUUSD, all the bullish reasons to stay long gold in the medium term still apply – notably the considerable amount of money being printed by central banks and fiscal spending by governments to offset the economic impact of the coronavirus outbreak. Temporary deflationary concerns like the one triggered by the selloff in oil are one of the few things to worry about apart from the massive positioning as the market is going merrily along the way to $1800 on a path paved with gold bricks. Indeed, gold continues to benefit from the vast mix of stimulus from all over the world.

The market is close to the high for the year so far (USD1,746/oz) but things will likely get difficult up here as it often is when trying to paint fresh high watermarks, so I look for some consolidation and profit-taking before the market takes the next lurch higher.

LIBOR is falling, signaling USD funding pressure is dropping, so is it time for the dollar to finally give way?

Currency markets

LIBOR cratering suggests dollar weakness awaits. 

The US dollar carry had been a critical reason for persistent inflows into US markets. Still, without a pickup in global growth, particularly in the Eurozone, the short dollar trade at a current level might give some periods of trepidation presented by the constant EU council squabbling and the depressing PMIs.

One of the biggest pushbacks against a negative dollar view is the risk of Eurozone breakup. However, Italy's debt rating reprieve dodging a debt rating silver bullet triggered a remarkable recovery in BTPs (and SPGBs as well) from the risk-off lows post a disappointing EU Summit.

EURUSD 

Events are mostly out of the way, and they were not Euro-supportive. Yet EURUSD is holding in very well.

Fast money is short Euros, and despite a pretty juicy squeeze Friday (1.0756 to1.0846) we could get one more lurch at the 200-hour at 1.0860, If nothing out of the ordinary comes down the tap, the S&P stays calm and peripheral spreads continues to tighten, we could see a push higher.

USDJPY 

Japan's globalization is thrown into reverse by new incentives to bring high value-added manufacturing back home. GPIF has finished their bond-buying spree and real yield differentials are pointing lower. As Libor eases, the market could start positioning for an extended down on USDJPY, suggesting rallyies back towards 108 could look attractive selling levels for long term traders. During March, outbound equity flows from Japan likely supported USDJPY as Japanese funds were a big buyer of the SPX dip. But April dynamics, particularly in the last couple of weeks, have seen JPY outperform even as equities recovered some ground and will like some attention also.  

AUDUSD 

Aussie currency has been on something of a tear recently, coming at the top end of the G-10 spectrum. 

There are a few things at work here; with evidence that China is bottoming out, it would be reasonable to expect AUD to be one of the biggest beneficiaries, and the meek level of iron ore inventories at Chinese ports has raised some hope that China might soon start re-stocking.

Meanwhile, in Australia, recent changes to government rules allow workers to take funds out of their pension pots. There might, therefore, soon be something of repatriation of overseas cash into AUD.

USDMYR

Given the Ringgit’s relatively strong correlation with oil and global risk sentiment and despite the adverse short-term effects from the extended MCO order, the Ringgit should continue to find more sound footing thanks to the becalming effects of stable oil prices.