Equities in Asia mostly turned negative after European and US markets made a mixed start to the week amid rising concerns regarding what could go wrong as businesses reopen gradually across the globe. Gains in technology and healthcare stocks were offset by losses elsewhere. In the coming days, we could expect a deteriorating risk appetite as investors move from pricing the revival of the economic activity to the evaluation of risks as the businesses get back to work. These risks include a renewed pickup in new coronavirus cases, the possibility of another halt in activity and a slower than expected recovery.
Airline companies remain unloved, producer of health and hygiene products continue their rise as energy and commodity stocks are hesitant.
Hang Seng (-1.78%) led losses in Asia as a renewed coronavirus panic would mean a longer period of grounded planes and less retail activity in the city, as the housing bubble starts to burst. Nikkei (-0.09%) traded flat-to-negative, Shanghai’s Composite retreated 0.59% and ASX 200 fell 1.46%.
Activity in FTSE (-0.19%) and DAX (-0.34%) futures hint at a negative start. But energy companies could recover as oil has a firm grip near the $25 per barrel.
In a surprise decision, Saudi decided to trim its daily oil production by 1 million barrels. Slower buildup in US stockpiles and lower production elsewhere should throw a floor to the falling oil prices as investors await the oil demand to pickup in the coming months. The end of June contract will be a good test for the oil recovery, as speculative long positions will likely walk away with the approach of the rollover date. The size of another potential dip in prices will give a clear opinion on the health and sustainability of the actual recovery in oil. Support within the $10/15 pb area could be a sign of a medium-term positive correction.
Demand in the US dollar and US government bonds remain firm as the US treasury will be issuing $96 billion debt from this week to finance the huge government spending to combat the virus-led economic damages in the US.
Gold finds buyers below the $1700 per oz, but the US treasury demand - despite low yields, should limit the safety inflows to the yellow metal as risk-averse investors remain skeptical regarding the gold’s capacity to hedge a sharp risk sell-off at the current levels.
The USDJPY is offered into the 108 mark, as the Swiss franc sees limited gains on Swiss National Bank’s (SNB) increased efforts to deviate the safety inflows to fight the franc appreciation.
Cable remains under the shadow of a stronger US dollar. Buyers are touted below the 1.23 mark, but there is not much appetite before Wednesday’s growth and production figures, which will throw light on the extent of the economic damages caused by the weeks-long business shutdowns in Britain.
The euro slides in a lower-dips pattern toward the bottom of its long-term negative trend channel, 1.07, as investors evaluate the risks of a pickup in coronavirus cases, a slower recovery, combined with the possibility of a limited European Central Bank (ECB) intervention due to the German obstruction. Prospects of slower economic recovery would require a stronger monetary action. And a stronger monetary action would bring the question of ‘proportionality’ on the table. With the extension of the current PEPP at jeopardy, the euro could fall further from grace.
Data-wise, inflation in China hit a seven-month low of 3.3% in April versus 3.7% expected by analysts and 4.3% printed a month earlier. Rise in pork prices slowed. Slower inflation gives more room for further monetary stimulus in China and the People’s Bank of China (PBoC) pledged it would continue giving the necessary support to revive the economic growth. This is good news for China, but also for the rest of the world, especially for Europe where the monetary actions could remain under the shadow of political bounds in the coming months.
Due later today, the US inflation should print a 0.7% decline in March, mostly due to the heavy slump in energy prices and pull the yearly inflation to 0.4% from 1.5% printed a month earlier. The core inflation, excluding food and energy, is expected to retreat to 1.7% y-o-y rom 2.1% printed a month earlier, in line with the Federal Reserve (Fed) expectation that the rise in consumer prices we have seen at the beginning of the year was temporary. Softer inflation gives a stronger case for an expansive US monetary policy, although the Fed is already expanding its balance sheet at a solid pace. The Fed’s balance sheet hit $6.72 trillion last week and is expected to balloon up to $10 trillion by the end of this year. Investors have nothing to worry on the Fed deck, the bank has the markets’ back.