London traders are wasting little time donning the rally cap saying who cares about NFP

London Open

Asian equity markets tread water for most of the day. Still, risk markets are lifting as London walks in after EU traders having a night to mull the impressive ECB packages are wasting little time donning the rally cap saying who cares about NFP. 

The ECB headlines dominated global markets on Thursday, but it will be traders putting that stimulus to work that is bound to dominate the newsreels today. 

Liquidity supports risk assets as stimulus impetus becomes too hard to fight, although skepticism remains high on the critic’s list for a rapid return to economic normalcy. The words’ capitulation’ and ‘melt-up’ are appearing more frequently in the narrative, suggesting the moves are starting to cause pain.

 There is a hell of a lot more money sitting on the sideline to be invested as the rally continues and any resistance to believe and trade it otherwise is futile Fundamentals of contracting GDP or expected US unemployment to go above 19% today don’t count. Central Bank liquidity is what drives it all 

Looking at the market weekly and monthly deltas, you would think we”re in the best all-time markets not in the midst of a pandemic crisis with GDP burning and expectations of record unemployment and recession. Who cares? Markets certainly don’t, so rally on, and turn rationality off, the trend is your friend. 

Currency markets 

The more positive fundamental platform for EUR as ECB monetary policy is now finding a viable partner in fiscal policy, something that was absent during the Draghi era. This in itself with pump the Euro to no end,  but It is also altering the single currencies carry trade characteristics for EM FX l Carry trades will now look more favorable via USD shorts. So with the Euro on a bull path, it now suggests EM FX will share a high positive beta with EUR. 

Still, “Big Bold and Beautiful” for the Euro is how the market sees the ECB policy The ECB on Thursday delivered a bigger-than-expected stimulus package – an increase of PEPP by €600 bn to €1,350 bn, and an extension of the program until mid-2021 the ECB has moved well ahead of the curve absent a severe escalation of the coronacrisis

Happy oil markets make for buoyant currency markets as, indeed, the impact of higher oil prices is leaving a profound effect on commodity-producing currencies. Persistent declines in implied US equity volatility against the backdrop of stabilizing oil prices are a powerful and sturdy combination. The market lean suggests that OPEC+ will extend the existing first-stage agreement for output cuts, which should be bullish for commodity currencies. 

Also, the global investor’s insatiable chase for yield is helping Asia high yielders. USDIDR has been heading south, and downward momentum has accelerated this week with record top subscriptions to Tuesday’s bond auctions, signaling improving risk sentiment and inflows into high-yield local assets. BI’s decision to keep the target rate on hold at its last meeting is also helping the move lower in the spot. 

USDCNH finally traded lower to catch up with the broad dollar moves but is still lagging, and the CNH index has continued to weaken

 Pre OPEC Oil market view.
OPEC headlines aside, which in my view the OPEC + meeting is barely moving the needle.
In contrast, with the cross-asset markets focusing on the broad-based asset price mismatches from economic reality ahead of what could be a sobering -20 % headline print on NFP. Bullish sentiment could be giving way to the economic realities as oil traders (well at least this one) are shifting from a sentiment-driven perspective to now pouring over this week’s data before buying the dip into the weekend OPEC meeting. And if truth be told, everything is not coming up roses.
Crude stocks declined from their recent peak by 2mb w/w and have now been broadly flat for the past month (and >10% above average). However, large builds in product stocks continue, and total commercial shares were up by 19mbd last week alone. Retail inventories are now 170mb (13%) higher since March. The most significant builds are in distillates, up to 51mb (40%) since March, but gasoline stocks are up to 24mb and are (10%) above the 5-year average. So, with the demand rebound stalling for now with weakness in diesel and jet fuel, total product demand is down ~4mbd y/y. It feels like more of a flip of the coin at this stage heading into next week, hoping that next week’s inventory product data pivots lower while keeping fingers crossed that the  Baker Hughes report delivers more  US well closures. 
But with OPEC + likely to agree to terms, it probably worth dipping the toe-in as even if the worst-case scenario sets in, you might only need to keep the position in your pocket for a week as bigger US states continue to reopen.
You can Join me at 5:30 PM Bangkok on CNBC TV discussing this view.

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