Overview: In the war against the novel coronavirus, humans are striking back, and appear to be gradually getting the upper end, especially in place in Europe, and possibly the US, which has been particularly hard hit. Risk appetites are surging. Nearly all the equity markets are higher today, with India playing catch-up after yesterday's holiday to lead the way with gains in excess of 8%. Most of the major bourses in the Asia Pacific region gained around 2%. Europe's Dow Jones Stoxx 600 initially rose more than 3% in the European morning, led by consumer discretionary, industrials, and financials, before running out of steam. The S&P 500 gapped higher yesterday, leaving a bullish three-day island in its wake, and is set to gap higher again today. The 2800 area corresponds with about the halfway mark of the sharp decline since late February's record high. Safe-haven flows into fixed income are unwinding with benchmark 10-year yields up mostly 3-5 bp, thought the US 10-year yield is up 7 bp to almost 0.75%. The US dollar is falling against most of the world's currencies.
Among the majors, the Norwegian krone and Australian dollar that have been hit the hardest since the beginning of last month, are leading the way higher. Emerging market currencies are also mostly higher, led by the Hungarian forint and Czech koruna. Gold initially extended its gains to almost $1680 in Asia before retreating. It is slightly lower on the day near $1650. May WTI is consolidating in yesterday's range, which was in the previous session's range as the market awaits OPEC+ talks later this week.
Asia Pacific
More details of Japan's large fiscal stimulus have been announced. Although the package seems to include some spending that had already been announced, the overall cost is estimated to be nearly 20% of GDP (~JPY108 trillion). Cash payments to households and tax deferrals seem to be the initial focus with aid to business coming later. Separately, Prime Minister Abe has declared a state of emergency in Tokyo and six other prefectures for the next months.
With the cash target rate at the zero-bound (25 bp), an asset purchase program already launched, and a yield curve control introduced to cap the three-year yield at 25 bp, expectations for the RBA meeting were low, and it did not disappoint. Australia is being hit by a terms of trade shock. The price of its leading exports has plummeted--iron ore, coal, and liquified natural gas. Australia is the world's largest exporter of LNG, which tracks oil pricing. The price of LNG fell by roughly 2/3 in Q1.
For the first time since the pandemic crisis broke, China reported no new fatalities. Separately, China reported its foreign exchange reserves fell by $46 bln in March to $3.06 trillion. It is the largest decline since Q4 2016 when in a three-month period, the reserves fell about $155 bln. The other reserve currencies outside the dollar, like the euro and yen, were little changed in March, though sterling fell almost 4%. The reserves are thought to be held mostly in government bonds, and fixed income rallied strongly last month. Valuation does not appear to explain the decline in the value of China's reserves, which suggests intervention to support the yuan. The US dollar met strong resistance around CNY7.12....
It appears the US indifference curve to the oil cartel shifts around $20 a barrel. Russia has accused Saudi Arabia of ramping up production to punish US shale producers, and Saudi Arabia accuses Russia of the same thing. Ironically, they are both right. The rise of China was a powerful disruptive force in the manufacture of goods. The emergence of the US as not just an oil producer, but the largest oil producer is also extremely disruptive. Of course, Russia and Saudi Arabia want the US to participate in any production cuts, but it difficult to envision. Nevertheless, drills are being abandoned.
....MUCH MOREThe Baker Hughes drill count is off 17% since mid-March to 664. The decline is beginning from half the last cyclical peak, which bottomed in 2016 near 400 when the price of WTI was around $33.50. Shifting the forum at which the US makes a concession from OPEC+ to the G20 does not make up for the practical difficulty. Much of the US shale production is in private hands in a fragmented industry. The industry seemed ripe for rationalization, with mergers and acquisitions, and larger producers moving in. The low prices and rising storage costs are exerting their own discipline production, and this, in turn, may help the industry mature. But squeezing out the marginal producer with lower prices is not a sustainable strategy, even if it buys time. Without participating in some sort of extra-market agreement, the marginal producer will return as quickly as prices allow....
