A sense of caution has taken hold across markets. Shares, riskier currencies, and oil are pointed lower. There’s a reassessment of the likely timeline for economic reopening. Our sense is markets juiced up by higher liquidity may have gotten ahead of themselves.
News
Anthony Fauci, a senior member of Trump’s ‘coronavirus taskforce’ has warned that reopening too soon will lead to unnecessary “suffering and death”. US President Trump has ordered the main Federal Pension fund not to invest in Chinese companies, citing a risk of future sanctions over China’s handling of coronavirus pandemic. UK GDP just saw its biggest monthly decline on record of -5.8% in March. Fed Chair Jerome Powell gives a speech later today and OPEC releases its monthly oil market report.
Reopening too soon
The warning from Dr Fauci suggests to us that the probable outcome has skewed a bit more negative. We picture three simplistic scenarios
1. State governors heed Fauci’s advice and reopen later
2. He’s ignored and there’s a second wave
3. Fauci’s calculations are wrong and states reopen without a problem.
We’d assume the scientific advice is followed, meaning for now markets should readjust to a slower reopening, rather than a second wave.
Shares: Sage
The S&P 500 snapped 6th day of gains and that set up a lower open in Europe.
The FTSE 100 is stalling at the 6000 level with Sage shares giving up a kneejerk reaction higher to earnings. Sage reported solid numbers for its first half of the year but future uncertainty weighed. Sage reported new customer acquisitions falling by half since April. Software companies, where the deployment of the product is impervious to the pandemic, still need healthy customers and people out on the ground making sales to grow.
Forex: Record UK GDP decline
UK GDP fell -2% q/q in Q1 and -5.8% m/m in March. The figures are dire but the British pound had been trading heavily into this report so now it’s out there is light relief it wasn’t even worse. The current quarter is where the real concern lies. Confusion over the UK’s exit from lockdown matters more than a record contraction in March.
The New Zealand dollar dropped after the RBNZ boosted its asset purchases and left the door open to negative interest rates. It’s a surprising contrast from Australia where the RBA has been winding down asset purchases and dismissed prospects for a NIRP.
Commodities: OPEC Report
Oil prices have slipped from the highest level since early April ahead of OPEC’s monthly oil market report. Oil prices had been on the rise amid hopes that the OPEC+ group of oil producers would extend and possibly deepen existing supply cuts at their meeting in June. Saudi Arabia said it could reduce output by a further 1 million barrels per day, or down 40% from its April peak in production. We expect the OPEC report to show the demand is just not there to justify current production and that opens the door to more supply cuts in June.
Opening calls
Dow Jones to open 100 points lower at 23,664
S&P 500 to open 15 points lower at 2,855
Chart: New Zealand dollar (2-months)
The New Zealand dollar is testing the key 0.60 level as support and the bottom of its rising 6-week old price channel.
Kind Regards.
