- Cautious optimism on virus watch.
- Commodity troubles run deep.
- CAD overlooks employment on oil risks.
Background conversations
There's little doubt risk appetite remains cautiously robust following last week's readiness by markets to put near-term concerns of the Coronavirus on hold. The stress of nCoV is, of course, still apparent across commodity markets. But global equity benchmarks have returned to all-time highs since.
While
S&P 500 and
Nasdaq faces an uncertain short-term pathway with the economic impacts (let's be clear) very much, in our view, unknown and significant; we could probably bet on the fact that they'll re-test all-time highs once again at some point in the month as positive momentum continues to refresh at substantial rates - algo driven buying.
Therefore, I wouldn't be inclined to chase any rally, but would seriously consider adding risk on virus concern sell offs. Especially with central bank liquidity injections, as noted in our
2020 outlook, humming away in the background.
Commodity concerns
It's difficult to shy away from the constant barrage of soundbites hitting the wires, relaying the expected degradation of commodity demand in H1 2020. This has had a material impact on commodity prices in none other than crude oil. Evidently,
Brent Crude has been unhinged, a shadow of its former self after topping out at $72/bbl post US/Iran crisis fears.
The test will now be whether the commodity known as black gold can hold it's nerve at current levels, some $54/bbl. A meaningful break would suggest little support down into ~$50/bbl - Q4 2018 lows.
Brent Crude Futures (daily bar).
Source: RTRS
Canada bound by oil
Staying on the topic of oil, USDCAD faces a crossroad decision of sorts this week. Either break November highs or keep below 1.33 levels.
It's been a tough month for the currency giving up some 230pips in the process as a result of oil's decline and a dovish shift in BoC language. But last Friday's payrolls, which came out exceptionally strong and was driven by full-time employment gains, may nudge traders to marginally add to depleted short USDCAD positions on expectations of retracement. Mix in a Governor Wilkins speech that was also marginally hawkish, and suddenly, it might not be outrageous that some stabilisation in the near-term looks possible.
Though, much will also depend on oil and whether oil levels can hold.
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