Asia Open: Stocks rise and oil climbs as market optimism returns

Forget the VIX – the COVID-19 curve is the new risk barometer

CONTENTS

• Stock Markets: Relaxing social distancing matters for stocks in a big way

• Oil Markets: The most critical outcome from meetings will be signaling constructive supply-side behavior

• Gold Markets: All commodity traders’ eyes and ears are trained on the OPEC+ meeting

• G10 FX: Holding the EURUSD back is a 14-hour meeting between Europen ministers that ended without an agreement on Wednesday, and for the AUDUSD there are tentative signs of a relatively quick return to activity in China

• Asia FX: The RMB has outperformed many of its peers since the outbreak of COVID-19 and with MYR’s recent correlation to oil prices and global risk sentiment, the Riggint should have a favorable day given the current relationship to oil prices and global risk sentiment

• OPEC Meeting Primer: OPEC + response and Non-OPEC response?

Stock Markets

US stocks rose Wednesday, scaling into bullish territory, as investors bet their bottom dollar that the US will dial in another round of fiscal stimulus. But, most importantly, the spread of the coronavirus is stabilizing in hard-hit locations as investors hope this COVID-19 curve-flatting singal will lead to a faster relaxing of social distancing rules. 

At the same time, oil prices gushed during the NY afternoon session, rounding out a flat out excellent trading session for US risk markets. Things are starting to light up again, not only in offices around the world but in the market as well. 

US virus cases increased 8.1 percent on Tuesday, marking a fifth straight day of slower growth. COVID-19 curve watchers thought the forecast as far back as mid-March was that cases in the US were set to peak in mid to end April; the faster the curve flattens, the quicker the market tuns on.

Signs that the number of new daily coronavirus cases is plateauing is driving expectations that social distancing measures will be lifted soon in parts of the world, a thought encouraged by the governments of Austria and Denmark. And China lifted the 76-day lockdown on Wuhan overnight, with the city reemerging from the coronavirus crisis. Indeed, relaxing social distancing in the new "risk-on" barometer.  

Sentiment in markets continues to shift like a yo yo, but signs that the Coronavirus curve continues to flatten in the worst affected countries are very positive; pretty much everywhere you look in financial markets there‘s renewed optimism. Equities continue to rally and with a lot of cash on the sidelines, provided the COVID-19 data proves reliable, this move can have legs – even more so if OPEC and friends formulate a credible response that puts a floor under the oil price. 

Oil Markets

Oil climbed the ladder into the NYMEX close after Russia signaled its readiness to cut production. So, without stating the obvious, there’s a considerable risk surrounding OPEC and production cuts.

Massive tail risk stems from the absolute effectiveness of a 10-15mb/d being discussed at the moment that falls well short of the 20-30mb/d needed to balance the market in Q2, and that a formal production cut backed collectively by US producers or mandated by the Federal government seems highly unlikely. Several significant producers (Exxon, Occidental) have already made public their opposition to mandated cuts and the sheer number of companies involved means a US agreement would be difficult to coordinate and enforce.

But the market appears to be running on the view that OPEC is willing to give the US a pass as members have come to the realization the risk of credibility loss outweighs any semblance of saving face at this point.

However, the more important outcome from these meetings will be signalling constructive supply-side behavior as the global economy and oil demand recover from the pandemic. A reliable agreement would imply front-loading cuts and an orderly ramp-up over 2H20 when the virus passes. In contrast, another collapse would signal prolonged chaos for both the oil market and broader capital markets. Even more so given the fragile state of the global economy – a point Washington correctly continues to drill home. 

As a reminder: the fall in oil prices is mainly attributable to demand devastation as a result of the virus; for prices to shift back towards $WTI 40, there’ll need to be a global relaxation on social distancing behavior. But an OPEC supply deal will go a long way to shoring up the organization’s credibility and that in itself could be a significant win for the oil industry as a whole.

For more, see the OPEC Primer at the bottom of this report.

Gold Markets 

Gold has been steady, but volumes have tapered off over the past 24 hours as risk sentiment has stabilized and started to improve. But with the dollar showing signs of weakness, this will continue to support gold prices. However, with all commodity traders’ eyes and ears trained on the OPEC+ meeting it will likely take some type of unexpected market shock to wake gold traders from the 24 hour doldrums. 

Currency Markets 

G-10 

The Euro 

Holding the EURUSD back was a 14-hour meeting on Wednesday between Europen ministers that ended without an agreement. But media reports suggest that both Germany and France will put political pressure on The Hague to find common ground before the Eurogroup resumes.

While the Eurogroup was debating a fiscal package yesterday, the ECB announced new, more straightforward collateral rules. The most headline-grabbing is a waiver to accept Greek debt as collateral; this is good for the Euro. 

I remain confident some semblance of the Eurogroup deal will be reached today. It may be necessary for EU leaders to step in and agree on the most challenging points and gloss over some of the more sticker ones, but ultimately these debt burdens will become anvils around the neck of Italy which will eventually require mutualization of the crisis price tag – and that can't be done over a couple of Skyped in conference calls. So while the Eurogroup failing to reach a deal is Euro negative in the short-term, an agreement is still very much possible. 

The Australian Dollar

If you follow my blog, the long Aussie dollar has been my primary crisis reversion current trade. Credit downgrade means nothing, especially when one considers the ECB is buying Greek debt. The Aussie dollar will ride China's "lights on" bullish trade higher. 

Less reason to sell the Australian dollar 

There are tentative signs of a relatively quick return to activity in China which could, in turn, bode well for Australia. On Tuesday, Bloomberg reported that Rio Tinto Group's iron ore business is seeing pretty normal demand levels. Iron ore unit chief executive officer Chris Salisbury told 6PR radio that Rio Tinto is "pleased China has come back so fast" – the mining giant sells more than 70% of its iron products to China. Meanwhile, there’s an evident recovery in copper prices, which also supports AUD. 

The critical takeaway this week 

The critical takeaway this week is that US dollar safe-haven characteristics are evident.

When risk turns on the USD flat and then and the opposite holds true as the US still remains the ultimate market haven. But knowing that not only are funding costs back to normal but key correlations are too, traders can sell the USD more confidently when risk turns on.

Asia FX 

The Yuan 

The RMB has outperformed many of its peers since the outbreak of COVID-19. For many, this is reminiscent of China's "crisis mode" FX policy as during the 2008 Global Financial Crisis, as the RMB was basically pegged to the secure USD.

However, policymakers are far more currency conscious today and are trying to strike a harmonious balance between stability and flexibility. The PBoC recently emphasized that USD-RMB will oscillate around 7.00 with two-way fluctuations within a reasonable range (Xinhua, 23 March 2020). This suggests we could move towards a 6.95 -7.05 trading range as the US dollar magnetism weakens globally. 

The Ringgit 

Given the MYR’s recent correlation to oil prices and global risk sentiment, the Riggint should have a favorable day. But with investors awaiting the results of a high stakes OPEC + meeting, if anything, the Ringgit may trade with more a more guarded optimistic tone today.

OPEC Meeting Primer

OPEC response 

OPEC+ is holding its virtual meeting to set a response to the plunge in oil demand. Given the scale of the task, invitations have been extended to several other producing countries.

This meeting will be followed on Friday by a virtual meeting of G-20 energy ministers, hosted by Saudi Arabia. Keeping in mind the fall in oil prices is primarily attributable to demand devastation (18 mbpd), the collapse in OPEC+ consensus in early March has not helped the balance or the credibility of the producer group. 

Non-OPEC response 

Media reporting in the run-up suggests that OPEC+ is persuing augmentation from other countries as a condition for a new deal. The focus has been on a ~10Mbd OPEC+ cut and an additional 5Mbd from others which, intrinsically, generates more complexity and risk.

There may be some direct contributions from additional producers, but the market senses that the bulk of the cuts will come by adding in enforced production cuts that emerge either as a result of logistics or reduced investment, which is especially the case for the US where they are legally and philosophically against enforced cuts (mostly).

Whether this is acceptable to OPEC+ or whether the sums add up is yet to be determined.