12-Jun-2020

1) Oil Faces Headwinds
2) Sharp fall in UK GDP Unlikely to Be Regained Quickly
3) USD Profit From Risk-Off But For How Long?
4) Australian Dollar Plunges Lower As Uncertainty Floods Markets

1) Oil Faces Headwinds

Oil prices have been running higher over the last few weeks on production cuts, hopes of economies running again and the latest OPEC+ production cut extension. However, most recently with the Fed holding back from Yield Curve Control and the risks of COVID-19 second waves returning to the forefront of people’s minds the case for global demand rising any time soon seems pretty unlikely. There are also some further reasons for oil to face pressure to the downside from Bloomberg this week:

The latest fuel stockpiles in Singapore last week were greater than 56 million barrels. This is the highest level in four years. The stockpiles here raise questions about the effectiveness of the OPEC+ extended cuts.

Sinopec, which is China’s top exporting oil company, has reduced exports for June by 50% from May’s level. This lack of demand signals that many economies are unable to imitate China’s economic recovery after re-opening.

Finally, China’s net exports of refined oils marked up its first deficit since 2015. This, combined with all of the above, suggests oil recovery will be a bumpy road at least.

Furthermore, Goldman Sachs has warned about an unsustainable rally across commodities in recent weeks. The combined picture is likely to keep oil prices capped for the future. Here are some of the key technical areas for sellers.

Expect sellers, if the situation remains the same for oil, from the 200EMA.

Another key place where we can expect sellers is on a re-test of the 4hr trend line below which broke out yesterday. A retest of this level should find sellers on the first test.

2) Sharp fall in UK GDP Unlikely to Be Regained Quickly

Social distancing constraints, consumer and business caution, as well as Brexit, all pose challenges to the UK economic recovery. This is set to keep the pressure on the Bank of England to continue expanding its balance sheet, and we expect a further increase in its quantitative easing program next week.

The UK economy shrank by a little over 20% in April, according to the latest monthly GDP estimates, and this follows an initial 5.8% decline back in March.

Today’s data won’t necessarily come as much of as a surprise to markets – it shows the damage was a little greater than expected, but the reality is that markets have become fairly desensitized to big numbers over recent weeks. We know too that April was the first month to be fully encompassed by the lockdown. But these figures are nevertheless shocking, and it goes without saying that this kind of fall in activity is virtually unprecedented, either in scale or speed.

The UK economy shrank by a little over 20% in April, according to the latest monthly GDP estimates

So what next? Well, April was undoubtedly the low point in activity, although it doesn’t appear to have been a substantial rebound so far. Using Google’s Mobility data, which has proven to be a reasonable proxy of output levels so far, overall travel to places of economic relevance only modestly recovered through May – potentially pointing to a small growth rebound somewhere between 3-5% across the month.

Mobility levels are still down quite a bit relative to other parts of Europe, including the likes of France, Spain and Italy. That’s perhaps not surprising given that Britain has so far allowed fewer sectors to reopen, but it does mean when it comes to second-quarter GDP, we’re like to see a sharper overall decline in the UK.

Mobility index is an average of Retail and Recreation, Grocery and Pharmacy, and Workplaces, from Google’s Mobility Report. Baseline is the median value for the corresponding day of the week between 3 Jan-5 Feb. Figures are a three-day moving-average

We’ll probably see a more pronounced rebound during the third quarter as a broader range of businesses are expected to reopen. But even then, the economy will remain well below its pre-virus size, and we don’t think it will be until late 2022 or 2023 until it has returned to those levels.

Brexit also looks set to pose a serious challenge later this year, with supply chains likely to see some initial disruption when the transition period ends

A key reason for this is that social distancing constraints are here to stay. While this is essential to help prevent a second wave of the virus – and avoid an economically-damaging return to stricter lockdowns, it nevertheless means many firms will be operating below normal operation levels for the foreseeable future. This could be a particular challenge for parts of the hospitality and retail sectors, where many businesses rely on a high volume, low margin model. At the same time, we suspect consumers and businesses will maintain higher levels of savings/adopt a more cautious approach to spending until the risk of a second wave has gone.

Brexit also looks set to pose a serious challenge later this year, with supply chains likely to see some initial disruption when the transition period ends. Importantly that applies even if there is a free-trade agreement, where the main story remains that the UK economy will be leaving the customs union and single market.

All-in-all then, there are few bright spots in the UK outlook at the moment, and we currently estimate that 2020 growth will come in just shy of -9%. All of this means the onus on the Bank of England is to continue with its large stimulus package.

Importantly the Bank will soon be nearing the limits of its current £200bn QE package. That suggests an expansion is on the cards at next week’s meeting, and we wouldn’t be surprised to see an expansion in the region of £125-150bn.

3) USD Profit From Risk-Off But For How Long?

Yesterday’s global trading finally resulted in an outright risk-off session. A series of negative assessments on the global economy (OECD) and the fear for a new wave of coronavirus in the US triggered an aggressive equity correction. Initially, the risk-off hardly helped the dollar. EUR/USD hovered in the upper half of 1.13. Even headlines on French president Macron considering snap presidential elections at first didn’t hurt the euro. Mounting losses on US equities (5-7%) finally caused a safe haven run on the dollar. EUR/USD longs threw in the towel. The pair closed at 1.1299. The yen (slightly) outperformed (USD/JPY close at 106.87). Smaller less, less liquidate currency also fell prey to profit recent rally.

This morning, Asian markets feel the heat of the WS sell-off, but losses are more contained and regional indices regain ground as the session develops. The nature of this ‘rebound’ is uncertain. Even so, USD/JPY already succeeded a nice intraday up-tick (currently 107.20). The Aussie dollar was hit hard yesterday, but tries to build a bottom in the 0.6800 area (0.6850 area). The corona virus is eliminated in several parts of the country, paving the way for a further reopening of the economy.

Today’s US Michigan consumer confidence is interesting given current fear of a new wave of the virus. Even so, global sentiment will be the main driver after yesterday’s sharp equity sell-off. Headlines on the development of corona in the US might still sent shivers through markets but we expect the intensity of the sell-off to ease rather soon. If so, yesterday’s EUR/USD sell-off might slow, looking for a bottom. Earlier this week, the recent impressive EUR/USD rally finally showed signs of fatigue and yesterday’s risk-off was a good reason for profit taking. On the euro side of the story, quite some good news is probably discounted. However, we expect the trend of underlying USD softness to persist. A first support comes in at EUR/USD 1.1240/60. A return below 1.1157 (38% retr) would question the EUR/USD uptrend, but we don’t expect that to happen.

Sterling suffered of the overall risk-off yesterday with EUR/GBP retesting the 0.90 area. However, some headlines on tentative goodwill in the UK-EU negotiations eased sterling selling. Today’s UK April production data will be poor. In a risk-on context EUR/BGP might return lower in the 0.8860/0.90 range, but the downside remains tough.

4) Australian Dollar Plunges Lower As Uncertainty Floods Markets

The Australian dollar plunged through trade on Thursday as investors appetite for risk soured, prompting a flight to haven assets. Having touched early morning highs just shy of 0.70 US cents the AUD came under sustained selling pressure throughout the day as investor optimism surrounding the likelihood of a H2 economic rebound faltered, following a sobering assessment of economic conditions from the Federal Reserve. The Fed reiterated its concerns surrounding the Coronavirus and its impact on the broader US economy. The number of cases within the US alone surpassed 2 million on Thursday, evidence the country remains the global epicentre for the disease. With new hot spots appearing across the country, there is a sense the US will be embroiled in a battle against COVID-19 well into 2020 and most likely 2021 as appetite for social distancing and economic lockdown restrictions falter.

Equity markets plunged as investors looked to withdraw profits, cashing in on the recent upturn. The S&P 500 fell over 5% while the Eurostoxx 600 fell 4.1% as risk assets and commodity currencies were dumped. The AUD was the worst performer on the day falling 2% and slipping below 0.6850. The question now is, was this merely a short-term correction following the upturn of the last fortnight or the beginnings of a broader shift in risk sentiment.

Watch support at 0.6830 and 0.6780 as initial markers on any continued risk-off move.

Safe haven currencies led majors higher through trade on Thursday with the CHF, JPY and USD all benefiting from the shift in risk sentiment. Having lost nearly 5% through the last month the US dollar index jumped sharply, gaining 1% on the day as the AUD, NZD and CAD led commodity currencies lower while the Euro and GBP both suffered modest corrections. As equity markets plunged, investors looked to haven assets as demand for risk soured amid a shift in optimism surrounding the speed of an economic rebound. The Federal Reserve reiterated its concerns surrounding the impacts of the coronavirus as the number of cases in the US surpasses 2 million. The US now accounts for 27% of the world’s cases with new hotspots emerging across the country, suggesting a second wave of infections is imminent. With the States still in the throes of the deadly disease a full economic recovery is unlikely in 2020.

Sterling fell 1% as reports it will engage in intensified free trade discussions with the EU, reminded investors Brexit still looms larger and the likelihood of a hard break increase as we move closer to the official divorce date.