The ECB
The ECB meets following a surprise move by Fitch on Tuesday to downgrade Italy by one notch to BBB- with a stable outlook. S&P had kept Italy on at BBB late last week. Fitch explained its decision in the context of the rising trajectory of Italy's debt-to-GDP ratio. Nonetheless, EUR/USD continues to trade in a very tight range.
Cuts have priced out, and the focus will be on the Pandemic Emergency Purchase Programme. Also, month-end rebalancing interest could have an impact on price action in the short-term as well, as US assets once again outperformed their European counterparts.
The market is pricing in around a 50% probability of a 10bp rate cut from the ECB by the summer. I think that way too much as the ECB might prefer to save some bullets and only cut rates if the EUR/USD moved into the 1.15-1.17 range.
Markets
European equities opened higher on Thursday, but the sentiment is wobbling early given some disappointing earnings. And guidance from Shell (LON:RDSa), which has cut its quarterly dividend by 67% to 0.16c per share from 0.47c, citing risks from prolonged economic uncertainty, weak commodity prices, and an uncertain demand outlook.
That said, the underlying bid should remain intact ahead of the ECB at 7:30 AM EST with some heightened expectations in the last few days that there may be an additional €500 bn of QE as well as discussion around buying of junk bonds. Gold has been gradually climbing a bit on this view.
But if you ask any of my colleagues who are big short SPX and damn good traders, the pain trade remains up as quant funds (CTAs.) continues to push the market higher, stopping out virtually the who's who of Wall Street.
Despite the animal spirits spurred on by incredulous policy support, it is worth noting a word of caution here as hedge funds are lining up to smack the sell in May go away trade. Assuming the standard seasonal pattern will hold that is. But if you want to stay invested, you are better off switching from long SPX (NYSE:SPXC) into long Asia FX high yield to earn some carry while we go nowhere for six months.
After two months of lockdown, if it comes down to Fishing & Golfing in Hua Hin vs. staying invested in the SPX well, that's no brainer as I rush out to by six months IDR and a maybe some short vol, so I won't miss the stock market party if it carries on the through the summer.
The FOMC
Beyond the FOMC's extraordinary policy support, greater optimism around economies reopening around the world, and positive news around experimental treatment for the coronavirus are massively supporting risk sentiment.
As expected, The Fed completely reworked its statement; But since Chair Powell pegged his press conference to a sentiment which repeatedly emphasizing how long it is likely to take to get the US economy back to where it was in February. When asked by a reporter about the potential for yield curve control, he said, "We're waiting to see more from the economy. There is a range of potential paths the economy could be on, and I think as the time approaches for, then, you know, we'll address your first question, which is about asset purchases." But it is ready and waiting and will provide a considerable backstop to greet the economy when things gradually return to normal
Venezuela gold a no go
Venezuela has asked the Bank of England to sell part of its gold for using the proceeds to help fund its virus-fighting measures, Reuters reported. The proposal is for the BoE to send the cash raised to the UN to deal with a political problem - the UK doesn't recognize the presidency of Nicolas Maduro and has refused to authorize the transfer of Venezuela's physical gold holding at the BoE back to the country. Gold may have gotten a lift from this as its unlikely Venezuela gold will see the light of day any time soon.
Oil, the bottom is in?
This is a second straight week of inventory and product demand figures suggesting a bottoming of the US market. The crude inventory build of 9.0Mb (plus SPR +1.2Mb) was bullish vs. consensus +10.6Mb and API +10Mb and smaller than the previous weeks.
Technical selling pressures are usually relatively short-lived. And on the first signs that market shorts were losing the upper hand after the colossal oil funds rolled forward, it probably signaled speculative money to move in on front end weakness,
Both WTI and Brent oil front contracts are up, but it is the fall in the contango that is far more interesting, and the fact oil prices along the curve are providing much better price discovery. And should bring investors back. Fingers crossed.
Demand has most likely troughed with several large economies now considering 'exit strategies' or 'new normal' and lifting draconian lockdown restrictions. All the while, OPEC+ quotas are due to kick in on Friday, suggesting short term supply conditions have likely peaked. There probably another 3- 5 dollars left in the June tank, which should take us to or through the 20-dollar inflection point.
China PMI
So. China's two PMIs disagree on whether the manufacturing sector had turned to expansion/normalization as NBS data showed or back to contraction as Caixin showed. Without going into the exact details describing the difference makes up of two readings, larger enterprises vs. smaller businesses.
But it's of little mater but for currency markets, as the deterioration in the Caixin was not as severe as the extreme contractions seen in other countries and as such the CNH rallies on the data despite what looks to be on the surface a glass half report.