Markets Outlook: All eyes on US Non-Farm Payrolls

All eyes on the granddaddy of them all: US Non-Farm Payrolls 

Week Ahead 

With the coronavirus pandemic continuing to dominate market attention, investor attention over the week ahead will turn to April's US jobs report where the unemployment rate is widely expected to reach multi-decade highs.

Central banks will also capture investor interest, with monetary policy decisions expected from the UK, Australia and Norway. Meanwhile, earnings season continues apace and after Friday’s "new normal" reality check when one of the market darlings, Amazon, highlighted that top-line growth is not translating into profit growth. Investors are bound to be nervous with sell in May and go away in everyone's minds. 

The primary data release for markets next week will be Friday’s US jobs report for April, with the figures expected to set records in terms of the speed and scale of the rise in unemployment.

The other data that will gain various levels of attention next week are the PMI releases from around the world. The flash readings we saw earlier in April showed the numbers falling to historic lows – even below those seen in March – and the releases this week are also expected to fit into that pattern.

Oil markets

The new OPEC+ production cut agreement went into effect on Friday, though several countries began to cut early. Oil prices have rebounded rapidly from last month's lows, with Brent now trading just under $27/b after a dip into the high teens in mid-April.

The news this week that Norway will contribute to the OPEC+ agreement with production cuts lasting through 2020 was positive for sentiment, as was the announcement of significant curtailments (net 230kb/d in May and 420kb/d in June) from ConocoPhillips.

Something to keep an eye on this week is that other major industry producers could also start to cut output. With supply moving in the right direction and major economies reopening around the world, it suggests we could rapidly be nearing that WTI $20.27 inflection point as the market might gravitate to a baseline equilibrium at higher levels.  

Stock markets

Stocks have been struggling for traction since the opening of Asia and it will be absorbing to see next week, after Amazon and Apple earnings this morning, whether the rotation out of growth stocks resumes. Global markets continue to languish in what Amazon highlighted is top-line growth not translating into profit growth. This is due to higher costs of business in the 'new normal' as both employee and customer health and safety now become huge cash drains. But with so much money sitting on the sidelines, investors may view dips as value with economies reopening around the world. 

Markets have begun to look 'past the peak' of the pandemic, and towards a time when economic functioning can normalize. Readers of my blog know that the more headroom we put above 2900 the more nervous I’ve become about the outlook, but the more risk rallied this week (it’s a headscratcher).

While I didn’t dare take on the Fed since March, perhaps I’m just predisposed to looking for bad news as we start reopening and the economic hard data reality check awaits. And judging by the conversations I had with colleagues, everyone’s feeling the same way and this rally in stocks must be one of the most hated of recent times.

Despite the animal spirits spurred on by incredulous policy support, it’s worth noting a word of caution here as hedge funds are lining up to smack the sell in May go away trade – that is, assuming the standard seasonal pattern will hold. But if you want to stay invested, you’re better off switching from long SPX into long Asia FX high yield to earn some carry while we go nowhere for six months and short VIX to make sure you don't miss the next stop on the rally bus if STONKS move higher over the summer.

I love that view for no reason than herd immunity remaining elusive. And even with a therapeutic regime looking more probable, it’s not going to be made available to the masses until January or possibly longer, despite the White House putting as many resources to work as they did on the Manhattan Project.

But so far the market has been able to avoid the pain trade as shorts abound, but with cash 38% of the market cap there’s the potential purchasing power of $2 trillion sitting sidelined. If CTAs take another run at 3000, it could be lights out for the hoards of Wall Street bears.

So, my view still cuts two ways as the cone of uncertainty clouds the outlook above SPX 2900.

Currency Markets

While the ECB offered no surprises last week, the USD came under pressure towards the week’s end on likely month-end rebalancing flows. 

Peripheral spreads widened as the ECB announced no additional PEPP, disappointing some. EUR came under pressure before strengthening on what looked like month-end rebalancing flows. The lack of retracement of the up move in the new month might indicate that the market was caught wrong-footed on bearish EUR positions.

In light of the price action in other asset classes over the last 48 hours, particularly sagging stock markets, one might see EURUSD running out of steam this week.

Was the fix in?

That was a gnarly London fix yesterday, even by this full-blown dollar bear’s standard. But is it the new direction of travel for the USD or merely a blip on the radar?

As consistent as I’ve been of late, the Dollar-supportive factors are fading as the focus shifts from coronavirus containment to economic reopening. The effects of surplus USD liquidity are also set to take hold and yields no longer favor the greenback.

My view on the FOMC this week was that it was all about setting the table while providing an unambiguous signal that extraordinary policy settings will remain in place, leading to the big kahuna Yield Curve Control in June. Presumably, the Fed’s extraordinary policy efforts will then stay in place until an economic recovery is well in train, all of which is providing an abundance of support for equity markets, broader risk sentiment and, mercifully, weakening the dollar.

I’m a complete and utter dollar bear and for only the second time in the past three years, on my first pivot to the dollar dark side, I ended up getting buried under Covid-19 demand. 

But it’s arguably far too early to back up the truck on the bearish dollar trade as the full-blown dollar capitulation might only happen when other economies start to fire up their motors and the data turns positive.

The Eurozone and UK economies are barely sputtering, which is hardly a term of endearment for either Cable or the Euro. So, I don’t think the bearish US view paints a complete picture.

Perhaps the main reason for the unstable "Betty Grable" was the 4 PM London Fix last week when the USD capitulated due to hedging protocols. Some managers hedge actively through the month, but many hedges at month-end to stay on the benchmark.

This month's portfolio rebalancing currency moves were particularly potent given liquidity is low and CTAs have been reducing USD long position. And the surprising steps higher in the SPX last month suggest foreign owners of US equities needed to sell dollar to cut FX hedges. 

People often choose GBPUSD for month-end because it’s frequently faithful to the month-end signal. This is probably because of its volume vs. liquidity function; there’s a lot of volume but not much liquidity compared to EURUSD or USDJPY.

But keep in mind this quote from one of the best FX traders on the planet:

"Trading the month-end signal is a good strategy over time but can be highly unprofitable on any given month-end. It is always a crowded and well-known trade, so those with the most exceptional combination of intestinal fortitude and ninja-like swiftness emerge victoriously." 

Then again, "It’s always nice to have an execution algorithm do it for you, and you merely have to tell it what to do."

That last one is according to me…

Gold markets 

Month-end dynamics were at work again in the gold market as miners took the opportunity to hedge forward production at elevated cross-currency level (ZAR/GOLD). And there was more chatter that the Bank of England may cede to Venezuela’s request to release 1 million ounces of gold for immediate sale. But with volumes in London averaging around 20-25 million ounces per day, that would likely have only a temporary negative effect.

China is no bed of roses 

It’s not a bed of roses in China as trade war clouds once again loom ominously on the horizon as the hawks in the US administration put China in the crosshairs accusing the Wuhan lab of spreading the virus while threatening trade retaliation. 

Traders are factoring in a less globalized world during the initial phase of the post-pandemic recovery as economies internalize, but rekindling a dormant US-China trade war will have negative consequences for Asia exporters. As such, the USDCNH jumped from 7.08-7.13 on Friday, reminiscent of the trade war days. While still in the “where there’s smoke there’s fire” category, it’s something to keep an eye on.