With the Trump administration seemingly too preoccupied with nationwide demonstrations and the president’s slipping poll numbers to worry about further escalations with China, risk assets had carte blanche to push higher this week.
Airlines, automakers and hotels paced gains in Europe Friday, in a continuation of a pro-cyclical bent in markets, where investors are becoming more comfortable with the notion that reopenings across economies will be successful and that trillions in fiscal and monetary stimulus isn’t something it’s advisable to bet against.
Market sentiment was buoyant headed into Friday’s US jobs report which, against all odds, showed a remarkable rebound. Emerging market equities were on track for a sixth day of gains, a run which propelled MSCI’s gauge to its best week in more than nine years.
The ECB topped up its bond-buying on Thursday and Germany is aggressively moving ahead with plans to boost the world’s fourth largest economy.
Meanwhile, OPEC+ settled a dispute with Iraq and now appears poised to extend the production curbs which have helped stabilize the market after an existential brush with negative prices in April.
To be sure, global demand for crude is still depressed, but much as the scope of the crisis lit a fire under long-dormant fiscal policy, the astounding collapse in oil prices was enough to force the Russians and the Saudis to end a short-lived price war and get serious about supporting the market. WTI is poised for a sixth weekly gain.
The outlook, though, is uncertain. The game has changed, something PVM’s Stephen Brennock underscores in a Friday note. To wit:
Pockets of unknowns can also be found on the supply front. A case in point is the long-term outlook for OPEC+ production. The group’s leadership favour a one-month extension of existing cuts into July. This underlines a new month-by-month approach to monitoring the health of the oil market and therefore supply strategy. Simply put, it has become harder to forecast when OPEC+ will start loosening the leash on production. Another supply wildcard is the evolving fortunes of US shale. Production has taken a dive as producers responded to the coronavirus-induced slump in demand. Now, though, several shale operators have brought some shuttered oil production back online as prices recover from April’s nadir. Parsley Energy announced this week that it is restoring the “vast majority” of the 400 wells it shut in March. In a similar vein, EOG resources, one of the largest US shale producers, said it would reopen wells and add new ones in the second half of the year.
Helping all of this along is a dollar that is squarely on the back foot. I’ve made this a kind of running background theme this week and it’s crucial.
The Bloomberg dollar index is on the verge of logging its worst two-week decline since early 2012, and that is most assuredly underpinning risk assets.
“Yen, Swiss franc and US dollar are the laggards among major currencies [and] the mood remains ‘risk on'”, SocGen’s Kit Juckes said Friday. “That’s helping the euro to an incredible rally, and if I thought it was going too fast yesterday, that’s not changed this morning”.
All of this is set against an ostensibly brutal economic backdrop.
“How does one even begin to describe the most important data series in the world for markets recording a drop of 7.5 million in May according to consensus estimates on the back of a 20.5 million job loss for April?”, Rabobank’s Michael Every wondered, ahead of NFP. “Even if 80% of these jobs bounce back quickly as the economy reopens, we still face an appalling labor market future”.
Maybe. But Friday’s jobs blowout changes the narrative in a big way.