Subdued Start to the New Week

Overview: European financial centers remain closed for the extended holiday, helping to make for a quiet start to the week. The big economic news over the weekend was the confirmation of the OPEC+ deal.  The price of crude opened higher in Asia, but ahead of the US open, May WTI is little changed from the last session on April 9 when it fell $2.3 a barrel on speculation that output would be cut by 10 mln barrels a day, less than half of the projected surplus. Asia Pacific equities are mostly lower, with the Nikkei off 2.3%, leading the way after a nearly 9.5% rally last week. US shares are trading heavily ahead of the start of the earnings season that will be kicked-off by large banks and financial institutions. The dollar has edged up against most major currencies.There are two notable exceptions: the yen, against which the dollar has dipped below JPY108 to trade at an eight-day low, and sterling, which has poked above $1.25 for the first time since March 13. The greenback is firmer against the emerging market complex, the Indonesian rupiah continued last week's 3.5% recovery, the Russian rouble is extending its recovery for the eighth consecutive session. Gold is consolidating below $1700.  

Asia Pacific

Virus infections appear on the rise in Singapore in recent days after having looked to be subdued. Similarly, the Chinese city of Harbin has had to delay some relaxation measures due to a fresh flare-up of the virus. Some observers see rolling shutdowns as the next phase in combatting Covid-19 that are more targeted than the national closures.  

Japan's budget includes JPY220 bln (~$2 bln) to help its companies move production back to Japan. Another JPY23.5 bln was to facility onshoring from other countries back home. Before the weekend, US economic adviser Kudlow expressed interest in creating new tax incentives for American businesses to do something similar. The US tariffs on the bulk of imports from China had already encouraged US companies to re-think supply chains, and anecdotal reports suggest the Covid-19 disruption is further pushing considerations in this direction. There is a countervailing force, too, that ought not to be forgotten, and it stems from the size of China's domestic market. For example, China is GM's biggest market, and Apple's second-largest. Some foreign companies are going to maintain a significant presence in China to be close to a large and still fast-growing market, even if not as fast before.

The dollar tested support near JPY107.80 after finishing last week near JPY108.50. The next support is seen near JPY107.00, the lows set at the start of the month. It is the fifth session of lower highs. The JPY108.20 area may offer initial resistance in North America. After surging to about $0.6365 on April 9, the last time the local market was open, the Australian dollar has been consolidating in a narrow range. Although $0.6400 may offer some psychological resistance, the $0.6450 area corresponds with a (61.8%) retracement of this year's decline. On the downside, a break of $0.6370 would undermine the constructive technical tone. The US dollar frayed the lower end of its recent range against the Chinese yuan near CNY7.05 but moved back above there today.  The PBOC fix was at CNY7.03, a little softer than the bank models suggest.  

Europe

The IMF and World Bank semi-annual meetings (now virtual) will be held at the end of the week.  Reports indicate that around half of the countries have inquired about multilateral assistance. Turkey claims not to be one of them, despite the immense pressures and limited reserves. Although its gross reserves are around $90 bln, the net reserves, or what is useable is seen as closer to $27.5 bln. Still, even this may exaggerate what is genuinely available or unencumbered. Turkey is unwilling to seek IMF assistance, but its backup plan does not seem particularly promising.  It is seeking swap lines primarily with the US. That said, it does have a swap line with Qatar and China. The swap line with Qatar was initially for $3 bln in 2018 and was increased to $5 bln last year. The swap line with China is considerably smaller, but Turkey is one of the few countries to use this facility though Beijing has many. It swapped a billion dollars worth of yuan to Turkey last year for the equivalent lira.   Turkey has about $172 bln of debt coming due over the next 12 months. The cost of insuring against a default (5-year USD CDS) has more than doubled to 550 bp since the end of January. There are a handful of countries where insurance is more expensive. These include Ukraine, Ecuador, Argentina, Costa Rica, Nigeria, and Egypt. 

In the UK, 100,000 small companies have drawn around GBP1 bln, according to the Local Government Association. The small business program grants eligible businesses up to GBP10k, while companies in the retail and hospitality sectors can take up to GBP25k. There has been criticism in numerous countries, including the UK, Germany, and the US, for a slow start, confusing instructions, and overwhelmed computer systems.  Now that many countries have announced various support programs, the distribution of the aid is the challenge, and the enormity of the effort makes for likely bottlenecks. It will be addressed in the period ahead.  

The euro is consolidating between roughly $1.0920 and $1.0960. It did marginally extend last week's 1.25% advance to almost $1.0970, its best level since April 1. This area corresponds to the (50%) retracement of the decline from the March 30 high near $1.1165 to the $1.0770 low on April 3 and April 6.  The next retracement (61.8%) is found around $1.1010. Sterling has been knocking on the $1.25 area for the better part of two and a half weeks, and although it pushed above there today, it needs to be confirmed.  The break took place in rather thin activity, and the move a little past $1.2535 appeared to have been flattered by stops being triggered. Note that the $1.2515 area corresponds to a (61.8%) retracement of sterling's decline from the March 9 high near $1.3200 to the March 20 low close to $1.1415.  If the breakout is confirmed, the next target is seen by the 200-day moving around $1.2655.   

America

OPEC+ confirmed the new deal a few hours before the markets opened. Mexico's balk means the output cut is for about 9.7 mln barrels starting in May and June, and then 8 mln in H2 and 6 mln barrels in 2021 until April 2022. The significant change over the past month is that Russia, which rejected cuts before, has now capitulated as the consequences of the collapse in oil prices adds to the punishment of the Russian economy. The Saudis also got other OPEC producers to participate in cuts. Although without much detail, Trump reported offered to make up most of the cut OPEC was asking of Mexico. Still, US Energy Secretary Brouillette suggested that US output will fall by at least 2 mln barrels per day by the end of the year and probably closer to 3 mln, which is more than the EIA projected. Separately, Aramco set its official selling price after a few day delay. Despite the agreement, Aramco will cut prices to Asia next month by $2.95-$5.50 a barrel and raise them between $2.50 and $4.20 for US shipments. The price for Europe will be left unchanged. 

Ahead of the weekend, the US Justice Department requested that the FCC terminate China Telecom's authorization to operate in the US, citing "national security risks." China Telecom is state-owned. Last year, the US banned China Mobile, which does not appear to be state-owned. Separately, there are numerous requests for waivers for tariffs the US has on a range of China-made medical supplies, including hand sanitizers and disinfectants.

Just because the Federal Reserve has taken incredible actions to ensure different segments for the capital markets function, it does not mean that consumers will be given much of a break. Credit card interest rates have not been reduced, and banks may still tighten their lending standards. JP Morgan, for example, ahead of the weekend, announced higher standards for new mortgages starting tomorrow. Borrowers will need a credit score of at least 700 and make a 20% downpayment.

We suggested that three deals were pending on April 9: OPEC+, Eurogroup, and US Congress.  The first two have been achieved, even if under-whelming. The third remains incomplete. The White House and the Senate want Congress to authorize another $250 bln for its small business program.  Recall that in the $2.2 trillion packaged nearly $350 bln was earmarked for forgivable loans to small businesses who maintained their employee headcount or rehired employees. Reports indicated that about half the fund has been committed in nearly 590k applications through 4100 lending institutions. The Democrats are seeking to double the size of the Senate's bill to include another $100 bln for hospitals and $150 bln for state and local governments. Congress is on a two-week spring recess, and if a unanimous agreement is not struck, funding will likely be delayed.  

The US dollar is trading at the lower end of where it has been against the Canadian dollar in almost a month around CAD1.3920. In the last couple of weeks, the Canadian dollar seems most sensitive to the general risk appetites (proxy: S&P 500), rather than commodities (proxy: oil). Early equity losses suggest the likelihood of greenback upticks. Initial resistance is seen near CAD1.40 and then CAD1.4080. Mexico President AMLO succeeded in resisting pressure for larger cuts in oil output, but it has done the peso little good. The US dollar fell every day last week against the peso for a cumulative 6.8% decline (after having appreciated by nearly 7.2% in the previous week). It dipped below MXN23.25 initially today but will begin the North American session around MXN23.45. The band of nearby resistance extends to MXN23.60.  

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