Steve’s Axi Blog June 12

London Open: Frightening blow-off top as Coviid-19 is back in the spotlight

Discussing the anatomy of this frightening blow-off top will probably go on for weeks, and the blame game will extend well into next week. But you couldn’t have drawn up the chart pattern any better if you’d used a protector and compass set, let alone a CAD machine.
Explaining the unexpected makes it easier to accept the unknown. It was a classic ‘risk-off’ 24 hours that sent equities and oil sharply lower amid USD strength, which from my seat can’t be so easily explained. 

New daily Covid-19 cases in the three most populous states in the US are mixed, but that doesn’t tell the full story. So full circle back to the FOMC where worries that Fed Chair Powell was too gloomy on the economic outlook seem hard to swallow as a driver of the risk selloff. We should be thanking him for not sounding too upbeat, otherwise, he might have been accused of triggering a taper tantrum style selloff.
Franky, the messaging from this week’s mass exodus is not especially apparent, although the growing second wave of infections in Florida and other battleground US states (e.g. Arizona, Pennsylvania, Minnesota) could stage the launchpad for investors to map President Trump’s prospects of winning in November against the performance of equity markets. 
With Covid-19 back in the spotlight, it’s never too early for investor speculation on what a Democrat presidency could look like for exchanges if the voter polls continue to move in Joe Biden’s favor. Billionaire hedge fund manager Paul Tudor Jones is the latest to offer a view, seeing a tax hike of 2-3% of GDP if the Democratic candidate wins which is unequivocally bad for US stocks and, ultimately, the US dollar.
Outside that fantastical analysis, what’s probably a sure bet today is the Covid-19 Friday playbooks are getting dusted off the shelf where chapter one explicitly states: de-risk at all cost into the weekend for fearing a sizable jump in the weekend’s Covid-19 case counts. But the same will hold for those that just so happened to be short risk, and they’ll be more prone to cover for the opposite reasons.

As I alluded to this morning, the reversion guys working from home will probably spend most of the day cleaning spilled milk off their new Moroccan-style Crate and Barrel rug while avoiding dips at all costs after getting steamrolled yesterday. So, risk in general is unlikely to return to any significant degree if that view holds any water as we head into the weekend.

Asia Open | Oil: Oil markets defenseless against a major uptick in US Covid-19 infections

Scraping the Barrel

Despite what was said to be a solid OPEC+ meeting, and with oil markets for the most part content looking through the recent inventory builds – mostly a result of significant Saudi import volumes which are somewhat backward-looking – oil markets turned unreservedly defenseless to a post-lockdown uptick in Covid-19 infections in the world’s largest oil consuming economy, the humungous US markets.

Once the steamroller started moving downhill, gravity took over. Negative sentiment was then aggravated by comments from the US FED about the potential for prolonged economic damage resulting from the very same virus. 

If a widespread secondary outbreak is confirmed it will undoubtedly threaten to bring the US  economy and global markets to its knees once again. 

It’s been one-way traffic since yesterday’s Asia open, where everyone’s game plan was interrupted by 2,504 new confirmed coronavirus cases reported in Texas. Arguably that single headline was more impactful on market sentiment than anything else overnight, specifically around equity and oil markets that have been trading favorably on hopes for an economic recovery, absent a secondary outbreak of the virus. 

Gradually, bids have started to appear around the WTI $35.50- 36.00 level, due in no small measure to OPEC+ discipline. Still, the market inclination to take profits and/or sell on any hint of bearish headlines, particularly around secondary Covid-19 outbreaks, will remain in full force. 

A pullback was inevitable, given the plethora of near-term risk for oil. Given how sickly the market remained due to supply overhang and a patchy demand recovery, I was telling clients in my market note yesterday to expect WTI $35-40  for the rest of the week when oil was trading $38.50 at yesterday’s NYMEX close (a huge negative skew). But a teary-eyed – 9% one-day capitulation was unequivocally not in the cards and perfectly illustrates just how destructive a second wave of the virus could be on growth assets. 

Still, it’s only a three dollar slide. And in the context of 50 years of price turmoil, the overnight move in oil markets is well within the expectations of more prominent oil market participants. It’s certainly not time to throw away the recovery playbook just yet.

Asia Open | FX & Gold: Nothing lasts forever as the sweet flavor of “risk-on” has given way to the sour taste of “risk-off


Memories of March distressed gold sales as the equity market’s overnight plummet has likely weighed on gold fortunes. I’m always cautious about how to interpret a gold move higher on Covid-19 headlines that are arguably deflationary and, if anything, cause people to sell gold in favor of putting money under the mattress for rainy days.
Currency Markets

The FX market turned its toggle to “risk-off” mode over the past 24 hours with the USD more robust, and the high beta AUD, NZD, and NOK all weaker.
Numerous factors can explain the change in the mood music, but the most important one is probably positioning after the surge in risk appetite over the last two weeks had perhaps moved the needle a bit too far.
With risk sentiment in the tank, USD Asia will struggle as it’s exporter dependant, and equity inflow currencies alike will fall prey to the USD safe-haven appeal. The playbook suggests investors will seek temporary shelter under the US bond market umbrella until clarity emerges on the US Covid-19 situation to the Greenback’s benefit.
After putting on a strong performance earlier in the week, the Ringgit looks particularly susceptible to the toxic elixir of lower oil prices and struggling risk sentiment.
Misleading? Possibly. But it’s hard to ignore the numbers

Talk of a ‘second wave’ of the virus in the US is a bit misleading; it’s still the first wave, which in some US states has never been brought under control. The risk of a real second wave will be next winter, but the overnight market move is giving investors a taste of what might become the actual global market meltdown in the form of the second wave of a worldwide pandemic. And it’s not pretty. 

CNBC tweeted (shared from Early Bird Twitter): “It’s not a second wave,” former FDA commissioner Dr. Scott Gottlieb says about the new coronavirus cases in states like Arizona and Texas. “They never really got rid of the first wave,” he said. 
Perceptible shift pre-FOMC

There was a perceptible shift in sentiment early in the week foreshadowing that FX traders, in particular, were becoming more mindful of any negative news and more inclined to find the threat within breaking headlines news. Thus the initial rise in risk appetite on the Fed’s “dot” path of unchanged rates through 2022 gave way to concerns about economic blemish. 
Most FX pros had moved and advised to move the duration playbook from 3-5 days to 1-3 hours this week while playing the crosses rather than test the fickle nature of risk sentiment (see my June 10 note) when things started to look a bit ‘toppish’ with Robin Hood and his merry men “stocked” up into the FOMC.

But it was the possibility of a second wave of Covid-19 cases as economies emerge from lockdown that becomes the market focus amid recent US case count data, which has undoubtedly spooked every investor on the planet. 
Florida posted the highest number of new cases in a week, Texas posted its most significant daily change since the pandemic started, and Arizona also sees much higher case numbers. However, the number of new cases in the US as a whole is decelerating, mainly because of the improvement in New York. Also, it’s not clear whether this is a second wave or merely the geographic spread of the first wave. 
The White House Coronavirus Task Force has yet to see any relationship between reopening and increased cases of COVID-19, according to Food and Drug Administration Commissioner Stephen Hahn (Bloomberg) 

Are you looking to short the USD again?
If one is looking to engage shorting the dollar, with the rising threat of a second wave of the virus, these thoughts are probably best left until next week. 

But for the “brave of heart”, less risk-sensitive currencies may start to outperform because many have substantial current account surpluses. The Fed maintained its commitment to buy everything and the new macro bellwethers like TY, 5s30s, and gold all point to further dollar weakness. 
The preferred USD short was opening up to be the Euro,  that was until the NY session. Still, the Euro has proved resilient despite being stretched on momentum indicators and today’s equity selloff. I think the long EURUSD will evolve from a short-term positioning/technical/catalyst driven trade to a more enduring trend. 
The trade is pretty straight forward as significant asset re-allocation moves into the Eurozone, which should offer up reasonable support for the Euro over the medium term. The US dollar becomes more burdened by the Fed’s massive balance sheet expansions, compounded by the higher possibility they may need to move the rates needle lower, shift to YCC or a combination of both to stabilize the US market.

Asia Open | Stocks: The mere thought of a secondary spreader is nothing to mess with as it conjures the worst fears in traders and global investors alike

Asian stocks looked set to slump after US equities tumbled the most in 12 weeks, while worries over a jump in coronavirus cases added to concern the recent rally had gone too far. 
US equities were sharply lower Thursday, the S&P500 down a frightening 5.9% following similar losses through Europe and Asia as spikes in virus infection rates in the US spooked the pants of global investors.
While overall growth in infection rates nationwide remains steady, the FT notes seven-day average rates of new cases in California, Florida, Georgia and Texas are at or near record highs. Bloomberg reports officials in Houston are getting close to imposing a new stay-at-home order and are looking to reopen a pop-up virus hospital. 

Underpinning the risk-off tone was the Fed’s downcast economic outlook which highlighted those specific financial concerns around the virus. I don’t think you could have imagined a worse setup for risk if you drew it up in a ‘How to Trade an Overcooked Stock Market’ 101 manual.

Was it too pessimistic a view? Who knows. The employment data remains depressed and the trajectory of the data will matter. But, for years on end, the market continues to struggle with the Fed’s exercise in verbal gymnastics, much to the detriment of risk assets.
Asset bubbles and inflation are not a concern to the Fed. That was made abundantly clear, which means more is coming from the Fed and when that happens does it mean buy the dip? 
If equities like cheap money you’d think risk markets would have perhaps embraced Fed Chair Powell’s comment that the Fed “wasn’t even thinking about raising rates.” Putting aside the fact that Powell even felt he needed to make that statement, equities have decided that’s enough for now.
Robin Hood and their merry bunch of retail investors have recently dominated headlines in the financial press and, sadly, likely bore the brunt of the recent market capitulation. For the most part, at the very tail end of the equity market rebound (+3000 S&P 500), this was probably the most undescribed institutional backed rally of all time.
In options markets, traders have been piling into downside trades, especially in the US, so – possibly not today, but on Monday for sure – it will be worth watching whether they stick with these trades or opt to recoup the premium.
The stock market moves are staggering but it feels like there’s little blood on the street. Sure, there are the usual blather mouths out there telling everyone “I told you so,” but everyone knew this market was overcooked and were waiting for the ball to drop. There should be no joy and, most of all, no back-slapping when hard-working folks’ money is getting poured down the drain. I wish the new kids on the block had taken some advice from the pros not to chase this thing as the asset price disconnect to economic reality was becoming more laughable than it had become worrying in institutional circles.  
Bizarrely – and I can’t believe I’m going to type this after an eye-watering 230-point drop top to bottom on the SPX this week – at the moment, until there’s indisputable evidence of a secondary outbreak in NY, the market moves still seem more about profit-taking than a new period of risk-off. 
With that said, I’m not in the markets at all and not even entertaining the thought of reversion until next week as the secondary spreader is nothing to mess with while it conjures up the worst fears in traders and global investors alike.
And with the Bloomberg Commodity Index (BCOM) falling the most since mid-May amid broad declines in energy, metals and agriculture, and WTI crude futures plunging by the most since late April, there’s no point trying to take on the broader market as a whole until, at minimum, the BOCM pivots resoundingly higher.  
Call me a fool, but that’s how the picture looks to me right now – and that’s notwithstanding the possibility that governments will not close down vast swaths of the economy, instead deferring to handling outbreaks with proximity guidelines. 

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