Best rally for the S&P in last 14 months was propelled on high hopes that financial markets were headed for another cycle of easing. Today, we did not get a full package announced, just another reiteration the world’s largest central banks will use all appropriate policy tools to mitigate the economic impact of the coronavirus. Global equities were disappointed with the 175-word statement of G7 finance ministers and central bank governors. The “buy the rumor, sell the news” reaction was mitigated as an earlier draft statement in Asia indicated traders should not expect a coordinated rate cut or fiscal spending announcement.
Overnight both the RBA and BNM cut interest rates. The RBA signaled that they expect easing the rest of the world to deliver easing and that their domestic economy could see fiscal support soon. Malaysia’s central bank delivered a back-to-back rate cut as their domestic outlook remains fragile due to the coronavirus crisis.
Wall Street’s patience will be tested as downward pressures grow for signs of a fiscal response. Rate cut bets remain firmly in place across the major central banks, but unless government start to unveil what stimulus measures are to be expected, we could see some of yesterday’s rally unwound.
The battle for the Democratic nomination has been a rollercoaster ride for former-VP Joe Biden. But many Democrats are saying thankful he is back. Like Daniel Day-Lewis in last of the Mohicans. He will find the nomination.
Biden is riding a wave of massive endorsements from Beto O’Rourke, Amy Klobuchar, and Pete Buttigieg. It seems expectations are high for the rest of the moderates to join Biden's camp. While Bernie’s base is solid, he will come up short in reaching the 1,991 pledged delegates required for the nomination. Wall Street will breathe a sigh of relief if Biden has a good Super Tuesday and right now it seems he has all the momentum.
Oil’s bullish momentum from both the Russian capitulation to move forward with the OPEC + deeper than expected cuts and hopes for massive global emergency measures and economic packages, is running out of steam. Oil’s price action is following the general risk-on trade. Energy markets are convinced the bottom is in place and that global policy makers will not disappoint and that OPEC + will at the very least deliver an additional 1 million bpd cut at this week’s meeting in Vienna.
Oil’s next big move could be determined by the size of OPEC + new curbs. If we see 1.2 to 1.5 million in additional cuts, that could be enough to drive Brent tentatively back above the $55 a barrel level, with WTI crude testing the $50 handle. Anything below a million could trigger significant selling that could wash away at least half of this week’s gains.
The gold trade is back and its better than ever. Global policy makers will be the primary driver for higher gold prices in the short-term. A wave of global monetary easing is upon financial markets and gold will be one of the biggest beneficiaries. Gold is back above the $1,600 an ounce level and could be poised for another run towards the $1,700 level once governments announce the details to the major fiscal stimulus response. The Treasury is about to be exhausted and gold holdings will become a key component for many portfolios.
The Mexican peso was one of the hardest hit currencies last week. The coronavirus pandemic fears led to a massive EM rout that saw the peso, one of the favorite LATAM trades lose almost 4%. The peso has a very attractive interest rate differential and appears ready to resume its climb higher now that worst week since 2016 US Presidential election is over.
Brazil was supposed to be showing signs that the economy was strengthening at the end of last year. The Brazilian Central Bank (Selic) appears poised to cut interest rates to fresh record lows as coronavirus economic impact to the outlook will call for ambitious easing. Brazil’s government will likely need to lower the 2020 growth forecast and President Bolsonaro may struggle to follow through on the massive economic reforms he has promised.
As the rest of the emerging market space recovers, the pummeled Colombian peso is poised to have one of the stronger recoveries. Colombia still has one of the best outlooks in LATAM and should remain attractive as long the coronavirus does not see massive spreading in South America.
The EM space was disappointed with the G7 statement, so we could see more of a stabilization trade in the short-term.