At the start of this trading week, the Asian markets have set a bullish precedent for the European session, with sharp gains across the board coming at a time when coronavirus deaths continue to fall and lockdown measures are also expected to ease in the near-future.
However, this on-going bullish theme is reliant on Governmental and Central Bank stimulus packages which have helped equity valuations, with the BoJ announcing Monday early morning that they will now buy an unlimited amount of government bonds, removing the previous 80 trillion yen per year limit.
It is a critical week ahead for Central Bankers as rate decisions from the ECB and FOMC are expected, in addition to on-going earnings from a third of the S&P 500. Earnings releases to keep an eye on would be HSBC, BP, Shell, Amazon, Alphabet and Facebook.
The US Government this week is likely to report the country’s biggest quarterly economic contraction since early 2009. The figures are probably a preview of worse to come. The tally of the first-quarter gross domestic product will cover a period mostly preceding the coronavirus-driven shutdowns.
Economists surveyed by The Wall Street Journal expect GDP to fall at a seasonally adjusted annual rate of 3.5% in the first three months of the year. That would make it the first quarterly economic contraction in six years, and the steepest rate of decline since the recession of 2007-2009.
Last week’s historic Crude oil crash is once again showing a bearish sign, as prices begin to reverse some of the gains seen in the latter part of last week. Storage remains a critical issue, and this weakness reflects the continued divide between demand and supply as we move to just 4 days from the OPEC+ expected cuts of 9.7m bpd.
The June WTI contract is starting to show stress, gapping lower at the open last night and trending lower to approach $14. Goldman Sachs estimates global storage capacity will be reached in just three weeks, which would require a cut of 20 per cent of global output. That would suggest OPEC+ cuts of 9.7m are is not nearly enough. It will make the Brent front-month contract liable to volatility, though perhaps not quite what we have seen in WTI.
On the Covid-19 front, Italy is also making progress and will relax lockdown measures from May 4th. Spain has reported its lowest daily death toll in a month. In FX, speculators are dialling up their net long bets on the euro. The Commitment of Traders report from the US Commodity Futures Trading Commission shows euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017.
Traders have turned bullish and have been adding to positions as we begin to see the Eurozone relaxing lockdown measures. Meanwhile, speculators net short bets on the USD are now at the highest in two years. Various actions taken by the Fed to improve liquidity and an easing in the market panic in March has helped, but the dollar remains the preferred safe haven in times of market stress.
Sterling is likely to struggle as UK PM announced that it may be a while before lockdown is lifted. Boris Johnson resumed his duties as UK prime minister after two weeks of recuperation from the coronavirus with the one question requiring an answer this week; when will Britain return to work?
Precious metals continue to see good safe haven inflows. Even though commodities are retreating with the correlation as a sector to oil and the easing pressures of global lockdown, they are exhibiting strength largely due to the growth in diversification and hedging amongst market participants.
In cryptocurrencies, since the 12th of March known as “Black Thursday”, BTC has appeared to move in sync with riskier assets like the equity markets, rising when they rise and falling when they fall. U.S. equities gained last week fuelled by hopes sections of the US economy may soon open. The bitcoin halving is two weeks away, investors appear to be taking positions in expectations of price to continue the recent strength and demand.
On the data front, the economic impact of the coronavirus pandemic will become a little clearer this week, with 1st quarter GDP prints due from the US and the Eurozone. The latest unemployment and inflation figures are also due from the Eurozone while manufacturing PMI reports will be eyed from the UK and US. As such, attention will continue to focus on the coronavirus pandemic, especially as lockdown measures begin to be lifted across all major economies.
The FOMC are likely to leave rates unchanged but may expand some on the lending programmes that have been announced recently. Finally, the ECB is struggling to deal with the turmoil in the financial markets due to the corona crisis. The bank has changed some rules in order to maintain banks’ access to its ultra-cheap liquidity. The ECB will also publish fresh forecasts for growth and inflation and may downgrade some of the data points.