Waking up and smelling the coffee

Investors in Asia are certainly waking on Friday and smelling the coffee after a tumultuous overnight session, which alternated between a good hard dose of economic reality, the challenges of the international community working together for the greater good, and yet another Muddy Waters China shortcoming to fruition.

US Initial Jobless Claims delivered an eye-watering increase of 6.6 million new claims for unemployment benefits – blowing last week’s 3.3 million increase out of the water. Nearly 10 million Americans have effectively lost their jobs in the past two weeks delivering a harsh insight into the scale of the economic wreckage that the COVID-19 pandemic will foist on the developed world. The efficiency of the Federal bureaucracy in providing the cheques from the first $1.2 trillion stimulus programme to the man on the street will now be crucial. The scale of the job losses means that more follow-on work from Washington DC will need to be enacted, and quickly.

The news wasn’t all bad though, with Presidentempl Trump tweeting that a production cut agreement between Saudi Arabia and Russia totalling some 10 million barrels per day, is on the cards. The gulf between the reality of the Presidential optimism and real life is well documented, of course. But even this seed of hope was enough to propel oil to record gains overnight, with Brent crude rising 35% intra-day at one stage. The Canadians signalled that they were prepared to join any cuts, but the sticking point will, of course, be the US oil industry.

Although both Texas and Oklahoma’s regulators have some flexibility in the law to reduce production, the reality is that American participation under the law is challenging. Big oil itself, appears to be reluctant as well to cap output, showing just how disconnected they are from the requirement of the world to work together for the greater good during the COVID-19 pandemic shock. The Whiting Petroleum debacle is highlighting the mentality pervading the US oil industry. We can though, expect some serious arm twisting behind the scenes from the White House, with President Trump “picking volunteers” from the US side.

With a demand shock estimated at 10/15 million barrels per day, and storage above ground, and on the water, running out globally, the need for action has reached critical levels. OPEC+ though will be in no mood for any compromise unless US producers “volunteer” to cut production as well. That said, I remain confident that the seeds of a new deal have been sown, and that we have seen the lows in oil prices for the time being.

Finally, China’s answer to Starbuck, Lukin Coffee Inc delivered a most unwelcome scalding triple-shot of coffee into the laps of its hapless, and mostly American, investors. Lukin Coffee’s ADR shares plunged by 80% overnight as the company announced potential financial miscreance from its COO and his staff. That had been telegraphed by a Muddy Waters report earlier this year highlighting, and of course denied, allegations of the fabrication of sales revenue. The fact that the announcement was made overnight by the Chairman and CEO and the Board of Directors, on whose watch it all happened, and all of whom appear to have their jobs still, highlights the challenges of corporate governance that pervade American boardrooms still. Did I mention Whiting Petroleum?

Another waft of coffee blew across Asia this morning, to awake investors from their slumber. Australian, Hong Kong and Singapore PMI’s for the most part, disappointed, taking the edge of a modestly positive week for the region. China continues to provide the ray of hope though, Caixin Services and Composite PMI’s printing at 43.0 and 46.7, respectively. Although below 50.0, both nearly doubled from last month’s prints, hinting that an incipient recovery in China remains on course.

Tonight’s data highlight will be the US Non-Farm Payrolls data. However, with the disaster of the US Initial Jobless Claims overnight, all bets are off as to where the Non-Farms will print. Market guesstimates of a 100,000 drop in payrolls may well prove to be just that, guesstimates. I would hazard that the headline number will be much worse than that and will also be reflected in an unemployment rate much higher than the 3.80% forecast. Even with President Trump’s oil plan, US equities are most likely being set up for a weak finish to the week. The sad reality is that the world will get much worse before it gets better, as COVID-19 wrecks carnage on employment and economic activity. Much of the world will and must remain on fiscal life support from national governments for some months to come.

Equities

Wall Street seized on President Trump’s potential oil deal overnight, ignoring the disaster of the Initial Jobless Claims. One can’t really blame them for that though, markets preferring to predict the future and not the here and now. The S&P 500 rose 2.28%, the NASDAQ rose 1.72%, and the Dow Jones rose 2.23%., as the giant rallies in oil lifted sentiment.

With after-hours US futures falling 0.70%, Asia is having an altogether more modest day, perhaps also reflecting that fact that the world’s largest oil importers are all in this region. The Nikkei 225 is up 0.60% while both the Shanghai Composite and CSI 300 are flat on the day. The announcement of new social gathering restrictions by Hong Kong has seen the Hang Seng ease by 0.50% with the Straits Times also lower by 0.70%.

The rise in oil prices overnight has seen Jakarta outperform, rising 1.50% today in a welcome respite for both stocks and the currency. Somewhat surprisingly, the resource-heavy Australian indices are flat on the day.

Overall, Asia has a cautious look about it today with a potential oil production deal being offset by weaker data in Asia and most especially the US. The COVID-19 case numbers crossing the 1 million mark may also be dampening sentiment. Asia will remain in a wait and see mode for the rest of the session as the world awaits the Non-Farm Payroll data from the US this evening.

Currencies

The primary movers have been Petro-currencies overnight as oil prices recorded their largest one-day gains ever. The Norwegian krona, Russian Ruble and Canadian Dollar all outperformed overnight. Against the other majors, though, the US Dollar continued to outperform despite the appalling data emerging from the US.

The US Dollar continues to benefit from haven status and the shortage of Dollar funding internationally, with the Dollar Index breaking through 100.00 overnight to 100.15. The chief loser was the Euro with EUR/USD falling 1.0% through 1.0900 to 1.0850. It is hard to see any material recovery in the single currency occurring until material progress is observed in the continents COVID-19 battle.

The USD/CNY remains a bastion of stability, content to trade each side of the 7.1000 mark, with the stronger dollar being offset by weaker components in other parts of the basket.

Oil

Oil had a tumultuous overnight session as President Trump implied that a coordinated production cut agreement was at hand. Whether that is true or not, oil had its largest-ever one-day rally at one stage, with Brent climbing 35% intra-day. As the dust settled, Brent crude finished the session 21% higher at $29.80 a barrel and WTI rising 22% to finish around $ 25.00 a barrel.

After such huge gains overnight, it is no surprise that some profit-taking has occurred in Asia to pare those increases. Brent crude has fallen 3.0% to $28.00 a barrel, and WTI has eased 4.0% to $24.25 a barrel.

From here, we can expect intra-day price moves to be entirely dictated by OPEC+ headlines. These will render any technical levels irrelevant as the street plays headline ping-pong. What does seem clear though, is that there is a willingness by the significant players to engineer some sort of mutually agreeable production cut deal. Something that can and must happen. For that reason, it is likely that we have now seen the lows of oil for the foreseeable future unless the momentum witnessed so far collapses in disagreement.

Gold

The Initial Jobless Claims frightened gold market participants and gold saw a rush of haven driven buying overnight. Gold rose 1.35% to $1613.00 an ounce.

Gold is unchanged in Asia today but for now, looks like it will be well supported on any dips towards $1600.00 an ounce. Overall, gold remains anchored within a wide, but real, $1550.00 to $1650.00 an ounce range. More bad news from tonight’s US Non-Farm Payrolls will likely give gold another shot of upward momentum and leave it poised to test the upper limits of its recent range early next week.