All currencies are recovering against the US dollar and yen as indices rally world-wide on broadening signs of leveling off in the numbers of new cases and deaths from Coronavirus in some global epicentres. Even GBP is regaining some ground, after having been dragged across the board last night on news of PM Boris Johnson's admission to hospital with coronavirus. Today the PM is said to be in goood spirits. Gold and silver are at the top, while JPY is the weakest. (more on gold and silver below). CFTC positioning showed an increasingly-crowded euro trade.
The action in metals is far quieter than in energy, but shows a steady run-up in gold and silver on a combination of putting money back to work and reduced margin-selling.
The other major weekend developments were at OPEC, where Monday's planned meeting was pushed back to Thursday. After the close on Friday Trump said the free market could sort it out in a strong hint that the US won't participate. Brent and WTI both opened down around 10% but the drama is likely to continue for a few days. Several OPEC members have hinted at cooperation and some countries outside of OPEC are sending positive signs.
One compelling argument to cut is that even with 10 mbpd less oil on the world market, the COVID-infected world is still vastly oversupplied. Even without US participation there is a compelling argument to cut because it might mean $30-$40 oil instead of $20. For US rivals, they can still bankrupt shale at those levels while cushioning the self-inflicted blow.
As we saw last week, it will be a headline-driven market and that's a constant pitfall.
Cable fell 40 pips at the open to 1.2230 on news that Johnson was in hospital after 10 days of persistent symptoms. A statement said the move was for precautionary reasons but he will spend at least one night in hospital. There are all kinds of rumors about his health. There are multiple reports from other government officials that he has been working lately but the virus can worsen quickly. We prefer not to speculate on anyone's health but given the agonizing infighting among Conservatives, a prolonged absence would hurt the pound.
As GOLD and SILVER regain their ascent, Ashraf urges you to watch his recent video (formerly for Premium susbcibers) on the signals he's watching in gold, silver and SPX to gain confidence for the next level high.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +76K vs +61K prior GBP +5K vs +11K prior JPY +18K vs +24K prior CHF +5K vs +5K prior CAD -22K vs -29K prior AUD -31K vs -25K prior NZD -16K vs -16K prior
Euro longs are now at the highest levels since June 2018. Underscoring the shift, as recently as Feb 25, shorts were at -114K. The appetite to bet on the euro now that carry trades have unwound is a bit of a puzzle. Otherwise, positioning is about what you would expect.
US employment fell by 4x expectations, showing a 701K decline in March, but this was not the story of the day. A 40% intraday rally in oil following a series of Trump remarks helped the loonie and prevented further. A new Premium Insights' trade was issued for Premium subscribers after the US jobs, which will remain into the weekend.
US Crude shot up nearly 40% above $30 from an 2-decade low after Donald Trump managed to intervene verbally in oil by claiming producers will step up with massive output cuts. Traders (and us) remain in doubt as to whether a global deal can really be done.
The US President's infatuation with exaggeration and half-truth struck the oil market Thursday. After tipping off CNBC, he tweeted that he expected Russian and Saudi Arabia to cut oil production 10-15 mbpd.
Even with all of OPEC included, a 10-15 mbpd cut was an enormous sacrifice. Soon after Russia revealed it hadn't even spoken to Saudi Arabia. Crude fell back to $24 but rose again when the Saudis called an emergency OPEC+ meeting.
Yet, the statement from Saudi Arabia hinted at the truth: The plan was to call for all oil producing countries to work together to cut 10-15 mbpd. That is a monumental task that's a longshot at best and crude fell to $23.50. Still, the market held out hope when Texas, Mexico and Alberta officials hinted that they were interested in cooperating.
Later, Exxon said it wasn't interested in cooperating with anyone. They've avoiding shale for years and have the balance sheet to withstand this slowdown. No doubt they want to buy assets later for pennies on the dollar. Their stance makes it highly unlikely the US will cooperate.
The hard reality is that it might not even matter if they do. Trafigura estimates that coronavirus has cut global oil demand by 35 million barrels per day. Low estimates are at 20 mbpd.
Oil is unlike other commodities because it's difficult and costly to store. Every country has some reserves but 1 million barrels are tough to store. 35 million barrels per day is an impossible glut. A look back at the major inflection points in crude shows that a 1-2% over or undersupply can dislocate the market over time. Current oversupply is 30%.
There are two solutions: Solve the virus or let the market sort it out. This rally could extend to $36-37 on further optimism or OPEC+ jawboning but it's ultimately doomed.
US nonfarm payrolls collapsed by 701K, the biggest 1-month drop since the financial crisis, while jumped to 4.4% from 3.8%, posting the biggest monthly rise since 1975. Most crucially, the jobs figures were based on the survey week of March 12th, meaning it missed the bulk of job losses and the subsequent two months will be markedly worse.
The only real change in fundamentals Tuesday was the turn of the calendar, but that was sufficient to spark further risk-off trades. The yen was the top performer while the Canadian dollar lagged. Today, gold, silver and GBP are at the lead. US weekly jobless claims numbers are up next (more below). The Premium Insights' short in #DOW30 opened on Tuesday was closed yesterday at 21360 for 1070-pt gain, with suggestions on what/where to keep position posted & sent.
Talk of month-end rebalancing and quarter-end flows completely captivated markets in the waning days of March and the turn in the calendar was the signal to sell. It was a classic and much more orderly risk-off day as USD/JPY fell to a three-week low, yield fell and stocks declined.
It's a signal we're entering the second-phase of coronavirus. The Fed stopped it from being a financial crisis and that was some reason for temporary cheer but we're now in the heart of the biological crisis with the economic crisis still to come.
Even in Italy where the crisis has clearly hit some kind of plateau, there's no visibility towards a return to 'normal' and reopening of the economy. In China, a region of 600,000 people was locked down on a sign of the virus' return.
Back in the US, the Fed announced it will allow US banks to use more leverage in order to contain the sharp drop in Treasuries liquidity and escalating deposits amid the coronavirus pandemic.
Looking ahead, the market will once again focus on weekly US initial jobless claims. The consensus is 3.5m up from 3.28m last week but estimates are extremely wide from 1.5m to 6.5m. At this point, the survey is probably overrated and won't be a lasting market mover. We would love to know true measures of job losses but this survey is more of a test of the processing ability of US employment claims than a true measure.
For reference, Canada now says it has processed 2.1m jobless claims benefits in the past two weeks. That's a full 10% of the workforce and would correspond to 21 million job losses in the US in the same period. Is that magnitude priced into US assets? It should be but probably isn't. Frequently during this crisis we see markets reluctant to fully accept the dark reality of this crisis until it's delivered by official sources. With non-farm payrolls also surveyed before March 12, we may have to continue to wait.
The Fed took further steps to relieve the US dollar crunch on Tuesday and we look at what is happening and why. USD strength is resurfacing today, but gold, silver and GBP remain higher against the greenback. The US ADP employment survey for March dropped to -27K, the lowest since 2017, but economists indicate the worst from Coronavirus hit was far from captured in the report. Meanwhile, the US March ISM manufacturing index fell to 49.1 vs 45.0 expected, from 50.1. Tuesday's Premium short in the DOW30 is currently +1000 pts in the green. Below is today's weekly Premium video for English speakers, focusing on indices, sectors and gold.
The Fed added to its USD-swap program on Tuesday, adding swaps for every country that has holdings at the New York Fed. Dollar liquidity is less severe than two weeks about but continued whippy moves in FX suggest that trouble-spots remain.
It's important to remember that the US is a major net debtor with inbound investment exceeding outbound. Lately, foreign firms, governments and central banks need to dollars. Normally they can borrow in USD but those markets have closed so their next option is to sell USD-denominated assets, like Treasuries.
The emerging thinking suggests that any renewed decline in indices may not trigger the same level of USD buying/Gold selling as was seen 2-3 weeks ago due to the highly targeted Fed effors to relieve stress in USD funding.
The Fed doesn't want that so they're stepping up to lend against those assets via swap lines in the hopes that markets will calm and assets won't need to be sold. It appears to be working but it's important to remember that it's not a long-term fix. Unless foreign economies find a footing in the weeks ahead, that selling pressure will resume. Of course, the Fed is buying what they're selling but many of those dollars will be converted to domestic currencies and that will put downward pressure on USD.
Initial jobless claims remains the best real-time look at employment but there are widespread reports of people unable to file because of the huge backlog, especially in hard-hit states.