Risk sentiment continued to rise as the multinational plan to restart the economy raised hopes that the economy was getting back to work, with almost every asset except the dollar rising, gold prices pushing up to $1,710 and oil prices soaring on news of an exploding oil tank in the Middle East. In the current session, the market is set for two big tests: U.S. GDP in the first quarter and the federal reserve’s decision on interest rates.
Back to work? The market is running ahead of the actual recovery…
According to statistics from real-time information and data update website worldometers, as of 08:43 Beijing time on April 29, the global total of covid-19 cases has exceeded 3.13 million, with a total of 3,136,507 cases confirmed and a total of 217,000 deaths of 217,813 cases. More than 1.03 million COVID 19 cases have been confirmed in the United States, with more than 59,000 deaths.
Investors’ hopes that the global outbreak had peaked and signs that several economies were beginning to loosen their epidemic-related lockout measures fuelled optimism.
Major U.S. stock indexes fell on Tuesday as investors sold off growth stocks that had led recent gains, but a shift in money into cyclical value stocks suggests investors are hopeful for an economic recovery as states begin to unfreeze.
U.S. stock futures continued to rebound in Asian trading on Wednesday, with s&p 500 futures up more than 1 percent and nasdaq futures up more than 1 percent.
Inverness Counsel chief investment strategist Tim Ghriskey said: “Tuesday’s move was all about money moving out of tech and into economically sensitive value stocks, which have suffered the most recently. “The sense that the states are starting to reboot, that the economy is growing again, is what’s driving this rotation.”
Ghriskey added, “as long as the economy does not restart too quickly and lead to an increase in infection rates, the outbreak appears to have peaked and may start to decline, giving hope that the consumer economy will start to function again.”
Meanwhile, the dollar fell in tandem with gold as safe-haven demand eased and investors remained cautious ahead of a major fed decision.
The dollar index on the day lost the 100 mark, at one point under pressure to 99.44 level, week sanya city continued to fall. Month-end positioning also weighed on the dollar.
Mark McCormick, global head of currency strategy at td securities, said this week’s central bank meeting and the month-end rebalancing would make it difficult to predict market movements in the coming days.
“Given the mix of policy and technical drivers, we’re not going to draw too many conclusions about what’s going to happen in the currency market over the next few sessions,” McCormick said. He also said the month-end rebalancing was negative for the dollar, which could sell off against the euro, sterling, yen and Australian dollar.
Spot gold continued to sell off in recent days, with prices falling as low as $1,690 in the session as safe-haven demand faded and investors took profits. Gold rebounded back to around $1,710 in Asian trading on Wednesday.
“I think the move is driven by investors taking profits because producers don’t have enough inventory to really stall the rally, especially with mine closures and other supply bottlenecks,” said Tai Wong, head of base and precious metals derivatives trading at mandi bank.
Avtar Sandu, senior commodities manager at Phillip Futures Pte, said the stock market rally had weighed on gold and the impact of the outbreak on demand could not be ignored. “On the other hand, volatility in financial markets remains high and precious metals, particularly gold, remain a great hedge.”
‘while the short-term macro backdrop remains positive for gold, real interest rates will also be closely watched,’ said Standard Chartered analyst Suki Cooper. It was interest rates that weighed on gold earlier this week.
Crude oil prices have been clawing back their losses, with WTI crude for June delivery extending gains to more than 12 percent, nearing $14 a barrel, in Asian trading on Wednesday. U.S. WTI crude for June delivery fell as much as 20 percent to a low of $10.07 a barrel last day, before recovering some ground on news of a Middle East oil tank explosion.
A car bomb exploded in the turkish-controlled town of Afrin in northern Syria on Monday afternoon, killing and wounding dozens of people. The Syrian state news agency reported that the attack took place in a market in the city of afrin, where a tanker truck with an explosive device detonated, killing and wounding many people.
With reports of outbreaks dominating the headlines for the past two months, the Middle East has been relatively quiet, but Tuesday’s “huge explosion” changed that, according to the zero hedge commentary, and it appears that global markets remain sensitive to major events of unrest in war-torn regions.
Heavy warning: two big tests are coming today!
- Us GDP growth in the first quarter was negative for the first time in 10 years.
At 20:30 Beijing time on Wednesday, the first estimate of real us GDP for the first quarter, the most crucial economic data of the week, is expected to show a contraction of 3.8 per cent, well below the previous estimate of 2.1 per cent. If that happens, it would be the biggest quarterly drop since 2009.
Since the financial crisis, us GDP has fallen into negative territory for only two quarters. In the first quarter of 2014, the final GDP reading was -2.9%, mainly due to a decline in net exports and health care consumption. The final GDP reading for the first quarter of 2015 was -0.7%, dragged down in part by the fall in oil prices.
Indeed, there are clear signs that the us economy is deteriorating. The escalating quarantine measures to contain the outbreak have devastated the U.S. economy and jobs.
The labor department’s nonfarm payrolls report in early April showed the U.S. lost 701,000 jobs in March, ending a streak of job gains that began in November 2010. The unemployment rate rose to 4.4 percent from a 50-year low of 3.5 percent in February, the highest since August 2017. In five weeks, the number of jobs lost has risen above 26.5 million, wiping out all the new jobs created since the great recession.
The us economy is widely expected to contract in the first quarter and the data will reflect the initial impact of the outbreak on the real economy. Analysts expect us GDP to contract 3.7 per cent, according to FactSet, but the range is wide, with the most pessimistic forecasts exceeding -10 per cent.
Michelle Meyer, head of U.S. economic research at bank of America in New York, said the U.S. turning negative in the first quarter would be a very clear sign that the business cycle began to turn at some point in the first quarter and the recession began. GDP is expected to contract at an annualized rate of 7 percent in the first quarter and 30 percent in the second quarter
Spencer hill, an economist at Goldman sachs, expects first-quarter GDP to be -4.8%, below bloomberg economists’ expectations. Nevertheless, we believe the economy is in even worse shape for the quarter, with the initial GDP Numbers often misaligned and the ‘real’ GDP decline likely to be closer to -8.25 per cent.”
For the second quarter GDP forecast, the market is significantly more pessimistic. White House economic adviser Henry hassett said the economy could shrink by 20 to 30 percent in the second quarter, the biggest contraction since the great depression, and return to positive growth in the third quarter.
He reiterated his expectation that while the economy may have contracted at depression-era levels in the second quarter, it should rebound in the third.
- The fed decision is coming
After the blockbuster data, the federal reserve will announce its decision on interest rates for April at 02:00 am Beijing time on Thursday. At 02:30, fed chairman colin Powell held a news conference.
With the fed already cut to zero by the policy rate floor and committed to unlimited quantitative easing, investors generally believe that the fed has exhausted all available policy tools, so the policy statement is unlikely to see a major change.
According to CME’s FedWatch, the market expects the fed to keep interest rates at zero for the rest of the year, with most attention focused on the fed’s assessment of policy effectiveness, economic outlook and potential policy space.
Uob says the federal reserve has said it will do everything it can to restore stability to financial markets, smooth out dollar funding conditions and protect the U.S. economy. As a result, the fed can be expected to do more, including unplanned measures, but nonetheless is not expected to go negative.
While interest rates are expected to remain unchanged, the market believes the fed is likely to adjust the ratio of excess reserves and announce a reduction in asset purchases.
Jim Caron, global head of macro strategy at Morgan Stanley investment management, expects the fed to be unlikely to raise interest rates above 0 percent until the outbreak is over. U.S. stock markets are pricing in a recovery from the third quarter, but volatility remains high and the fed still needs to provide liquidity.
‘as the fed is already actively addressing the negative economic impact of the new outbreak, we expect only a technical change in the excess reserve ratio (IOER) to 0.15% from the current 0.1%,’ abn amro said. The rate has fallen relative to the ceiling in recent years, but with the fed funds rate already close to the floor, the fed may want to move it to the middle of the 0% to 0.25% range.
The bank said the fed was likely to offer some additional guidance on asset purchases in its new policy statement as bond markets have returned to a more normal state following the fed’s announcement on March 23 of unlimited purchases of us treasuries. The fed is not expected to cut rates further to negative at this meeting, as its analysis and comments have consistently indicated that it is opposed to negative rates in the us, and that has not changed.