30-Apr-2020

1) ECB’s Turn – More Money For Markets?
2) Crude Oil Inspires Markets
3) GBP/USD: Boris May Bring It Down After Failing to Fly With the Fed

1) ECB’s Turn – More Money For Markets?

It’s been a quiet consolidative session in Asian and early European trade with little follow-through after yesterday’s massive risk-on rally in North American trade.

The Fed provided the proper monetary guidance yesterday essentially reaffirming that it stood ready to support the credit markets with unlimited funds and the supportive backdrop was enhanced by much better than expected results from tech heavyweights Microsoft and Facebook which reported little damage to their business despite the global lockdowns.

Today all eyes will be on Amazon which reports after the close and all expectations are that the company should outperform given the massive demand for delivery services in much of the advanced industrialized world. All of this positive news on high tech companies that profit from bits rather than atoms has made Nasdaq the strongest performer in overnight trade and the index is likely to show relative strength as the day proceeds.

In FX, the combination of the end of month flows and ECB meeting has proved mildly supportive for the EURUSD which look ready to push towards the 1.0900 figure as the day proceeds. Although the ECB is expected to maintain its accommodative stance its is not anticipated to offer any new expansionary policy initiatives so the dilutive pressure on the currency is likely to be minimal.

The data from the region is as horrid as you would expect given the near full suppression of both demand and supply during the lockdown with French consumer spending dropping by -17% and Geman unemployment quadrupling to 373K but the markets are clearly looking past that as most of the governments in the region make plans for a slow re-opening of their economies. It will be interesting to see if the European model of economic relief which focused on preserving 80% of workers’ salaries versus the US model which mostly focused on business loans and grants will prove to be more supportive coming out of the lockdowns.

For now, investors are simply relieved that the COVID infection rates have flattened, that G-3 central banks are in a near-universal stance of unlimited accommodation and that at least the high tech sector has managed to weather the storm, so the immediate impulse remains pro-risk.

2) Crude Oil Inspires Markets

Oil shows double-digit growth rates in the morning, reaching $26.90 (+10.5%) per barrel of Brent in the spot market. The U.S. WTI reached $19.6 earlier today, adding over 50% against Tuesday’s lows when it was down to $13. Several factors support the recovery of prices – from growing investor optimism to signs of the balance recovery beginning. In the case of the United States, we see signs of progress towards the balance both on the supply and demand sides.

Firstly, the change of sentiment on the Oil took place against the stabilization of the world financial markets. The news about the success of testing the Remdesivir became a fresh driver. Besides, countries report about the gradual easing of restrictions and hope that demand will start to recover further.

Weekly data showed an increase in commercial stocks in the U.S. by 9 million, less than expected 11.2 million, and markedly below the growth of 15 million and 19.2 million in the previous two weeks.

Interestingly, production has been declining very slowly. Last week’s average daily production was 12.1 mln, i.e. -0.1 mln against previous week and -1 mln against historical peak levels in mid-March. Other weekly data from Baker Hughes show an extremely sharp decline in drilling activity. However, these figures may be 6-9 months ahead of production as an indicator of sentiment for next year.

In our view, it is worth noting an increase of 1mln barrels in U.S. strategic storage (SPR). This is a small, but very symbolic increase, because before that the volume of Oil in SPR had been gradually declining for three years.

Apart from this, OPEC countries and some other major producers announce their production cuts. Previously agreed cut by about 20% from OPEC+ comes into effect in early May. Additionally, Norway promises to reduce its production and suspend work on new projects until the end of the year.

All this is not so much a goodwill gesture and a desire to save the Oil from decline, but rather an economically logical step to secure the status quo in the share of production and at the same time to support prices.

In any case, the positive dynamics of Oil is an additional stabilizer of market sentiment, bringing back interest in buying risky assets and allowing hope that the worst moment has already passed.

3) GBP/USD: Boris May Bring It Down After Failing to Fly With the Fed

Cable cannot climb – the pound has failed to take advantage of dollar weakness – stemming from various factors – and could be ready to fall.

The UK is set to extend its lockdown which currently runs through May 7. Foreign Secretary Dominic Raab – who was in charge for a few weeks – hinted that the shuttering will continue amid fears of a second wave. He cited Germany’s rise in the infection rate which may force that country to reimpose restrictions.

The mood is gloomy after the government succumbed to pressure and included COVID-19 deaths outside hospitals in its official count, bringing the total to above 26,000. The ball is now in Prime Minister Boris Johnson’s court.

The PM returned to Downing Street on Monday after recovering from the disease but was off on Wednesday to attend the birth of his new baby boy. He will now lead the daily coronavirus briefing and may shed more light on the next moves. Criticism about the government’s late response to the crisis, its mismanagement of medical equipment – and Johnson’s near-death experience – may cause him to err on the side of caution.

GBP/USD edged up on Wednesday but was unable to benefit from the greenback giving ground. The Federal Reserve left its policies unchanged yet made an unequivocal pledge to do whatever is necessary, weighing on the safe-haven dollar.

The Fed said it would leave rates at the bottom until the economy returns back to the track and would also buy bonds “at the amount needed.” Jerome Powell, Chairman of the Federal Reserve, said he is ready to more and called the government to expand its fiscal stimulus.

The bank’s decision came in the wake of devastating growth figures. Gross Domestic Product plunged by 4.8% annualized, worse than expected – and things will certainly get worse in the second quarter. Weekly jobless claims are due out on Thursday, and while they may fall for the fourth consecutive week, the total number of job losses may exceed 30 million since mid-March.

The market mood was generally upbeat and the greenback under pressure also beforehand, amid promising results for a drug that with curing COVID-19. Gilead’s Remdesivir lowered the mortality rate and aided the recovery of sick patients. White House officials expressed optimism, yet the full study is yet to be published. Th White House is also working to accelerate the production of vaccines, once one is found.

US President Donald Trump harshly criticized China and blamed it for doing anything to jeopardize his reelection chances and not implementing the trade deal. His words somewhat dampened the mood and helped the dollar recover. However, GBP/USD remains locked.