Coronavirus outbreaks leave stocks stuck in their ranges

Morning Note

Virus outbreaks in the US continue to weigh on the mood, as it suggests the run-up in stocks on hopes of a V-shaped economic recovery may be overly optimistic. Several states, mainly in the south, have been forced to re-impose lockdown restrictions after being the first to reopen. Dr Fauci described it as a ‘serious problem’. The dangers of reopening too quickly seem all too apparent, but investors are also keeping an eye on outbreaks in Tokyo, Australia and China.

European equities were a touch softer but trading near the flatline on Monday morning, with a general lack of direction about today’s trade. Major indices tracking around the middle of their June ranges after Asian equities fell. US equities were lower Friday and finished down for the week but, as the month ends, stocks have enjoyed a very strong quarter.

The FTSE 100 is up over 8% quarter-to-date, while the S&P 500 has rallied over 16% in Q2 and the DAX has surged 21%. Valuations remain the concern as we head into earnings season with the S&P 500 still trading at more than 22x on a forward basis.

Coming up this week – Powell testimony, US nonfarm payrolls

Of course stocks haven’t only rallied because of reopening economies – enormous liquidity thanks to the coordinated action of central banks has been key. Central bankers have been striking similar notes in terms of the response to the crisis and Jerome Powell, the Federal Reserve chairman, will testify in Congress again this week. The Fed’s rather downbeat assessment of the economic recovery helped to stop the rally in its tracks and since then indices have been trading ranges.

The US jobs report – on Thursday this week due to the July 4th holiday – will provide an important view on the pace of recovery, but we should note that the weekly unemployment claims numbers are proving a more sensitive and up-to-date barometer, not least since there are problems with the data gathering for the monthly nonfarms report.

Facebook shares tumble on ad boycott, but how long can brands stay away?

Facebook shares tumbled more than 8% on Friday as a growing number of companies join a boycott of the platform over hate speech. We saw how a boycott of Facebook by users failed to move the needle on earnings, but this time it’s different – it’s the big brands that pay the big bucks and the loss of Unilever, Starbucks, Coca-Cola, Levi’s and Diageo among others will create a headwind to revenue growth in the coming quarter.

I would think Facebook can and will do a lot more and will be able to take steps to assuage brands’ concerns, allowing the stock to recover. Moreover, will brands be able to avoid Facebook for very long? Virtue signalling is one thing, but they also need to shift product.

Crude oil was steady with WTI (Aug) around $38 after rallying off the medium-term support around $37.50. OPEC+ compliance in June is expected to be higher than in May, mainly because Saudi Arabia, Oman, Kuwait and the UAE are cutting above their quotas. In FX, cable continues to track its channel lower with a new low put in at 1.2315, with the previous support in the 1.2390 region now acting as resistance.

Equities in retreat as Covid-19 cases advance, oil drops

Morning Note

Equity markets have come under pressure again as a spike in new Covid cases across the US has investors worried, whilst the IMF drastically cut its growth forecasts for the year. Major equity indices have retreated towards the lower end of the range traded in June but have yet to make fresh lows for the month – when they do it will get very interesting and could call for another leg lower.

Stocks in Europe were down 3% on Wednesday, whilst Wall Street dropped 2.6%. European markets opened lower again Thursday, with a risk-off trade seeing all sectors in the red and telcos, healthcare and utilities declining the least.

Investors are pulling their heads in a little as the surge in cases raises concerns about how quickly the US economy can emerge from the ashes. There are also clusters in Germany of course but the focus is on the divergence between the European and US experience.  The FTSE 100 retreated close to 6,000 round number but found support around the 23.6% retracement at 6,066.

The S&P 500 closed at 3,050, on the 38.2% retracement. With softness on the open in Europe and futures indicating a lower open, we may see SPX test its 23.6% level on the 3,000 round number. A retest of the June lows looks increasingly likely.

IMF cuts global outlook, US-EU trade tensions simmer

Meanwhile the IMF lowered its 2020 outlook, warning the global economy would shrink a lot more this year than it had forecast in April. Global output is forecast at –4.9%, vs –3% in April. The UK and EU will decline 10%, whilst the US economy will shrink 8%. Tellingly, the IMF also lowered its 2021 bounce-back forecast – growth globally is expected to rally 5.4%, vs the 5.8% forecast in April.

In other words, the decline will be deeper and the recovery slower; that is, no V-shaped recovery. We can also add US-EU trade tensions into the mix hitting stock market sentiment, as the White House has threatened fresh tariffs. I’d also suggest that the closer we get to the election and the more polls show Biden leading Trump, the greater the risk of a Democrat clean sweep, which will need to be priced into equity markets.

Improved virus response, central bank stimulus lowers risk to equities

Although we see clear headline risk around spikes in Covid cases for equity markets, any second wave is not going to result in the same level of lockdown restrictions endured in the first wave: it’s just too costly economically and because we have learned a lot in how to cope with this virus, both in terms of treatment and prevention. This means any further pullback we see, whilst potentially quite sharp, is unlikely to see a retest of the lows in March.

Meanwhile central bank stimulus is still strong. The Fed has shifted materially – it now has a $7tn balance sheet, setting a floor under the bond market that pushes up equities. The risk to equities comes later in the year when we get a real insight into both the pace of economic recovery and, by extension, corporate earnings – does the S&P 500 still justify x23 forward PE, or should it start to trade at more like x19? The current forward PE of around x23 suggests hope of a bounce back in earnings next year that may not come to fruition.

US weekly jobless claims in focus

On the pace of economic recovery, today’s weekly jobless claims report will be of great significance. Last week’s underwhelmed. Following the surprisingly strong nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m. The slowing in the rate of change was the main concern – hiring not really outpacing firing at a fast-enough pace to be confident of a decent recovery. I would like to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

Gold eases back as dollar recovers

Gold eased back off 8-year highs as the US dollar gained on the risk-off trade, but at $1765 in early European trade had bounced off lows around $1753 struck overnight. Short-term we see a stronger dollar exerting some pressure on gold prices; longer term the focus is on US real rates, which have just risen a touch off the lows. 10yr Treasury Inflation Protected Securities (TIPS) eased away from 7-year lows at –0.66 to –0.64, providing another little headwind to gold prices in the near term. 

Oil slides on rising stockpiles

Crude oil declined with the broader risk-off trade. Rising US stockpiles – which hit a record high for the straight week – have also started to spook traders. Crude inventories climbed 1.44m barrels in the week to June 19th, to 540.7 million barrels. Gasoline stocks were down 1.7m barrels, giving encouraging signals about driving demand. US crude oil refinery inputs rose 239,000 bpd to 13.8m bpd. Total US production rose 500,000 bpd to 11m bpd due to the return of Gulf of Mexico output following Tropical Storm Cristobal. 

WTI (Aug) retreated off the $40 level to trade just above $37 – as suggested whilst the fundamentals have started to build in favour of stronger pricing, the market will not be immune to a technical pullback on overbought conditions and/or a decline in sentiment among traders due to rising US cases. The emerging double top is less nascent than it was and increasingly calls for the $35 neckline to be touched. A breach here calls for $31.50, the swing lows touched in the second half of May.

In FX, we can see a downwards channel for GBPUSD. The cross has pulled back to 1.24 as the dollar found bid, before paring losses a little this morning. Bulls need to clear the swing high at 1.2540 to break the downtrend, but trend resistance appears around 1.25 first. Bears can eye a pullback to under the Jun 21st low around 1.2334, with the channel suggesting we may see a 1.22 handle should the bulls fail to break 1.25 next.

Stocks, shopping and borrowing all rise

Morning Note

Stocks are firmer on Friday though major indices continue to show indecision as they rotate around the 50-60% retracement of the recent pullback through the second week of June. Economic data remains challenging and in the US at least there are fears about rising case numbers.

US jobless claims were disappointingly high, missing expectations for both initial and continuing claims. Following the surprisingly good nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m.

The slowing in the rate of change is a concern – hiring is not really outpacing firing at a fast-enough pace to be confident of a decent recovery. You would prefer to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

US Covid-19 cases climb, UK retail sales jump in May

Worries about the spread of the disease persist, though second wave fears are not exerting too much pressure as investors start to get used to rising case numbers – remember it’s not cases that count, it’s the lockdown and people’s fear of going out that hurts the economy and corporate earnings. California and Florida both registered their biggest one-day rise in cases. As previously stated, I don’t believe there is the will to enforce blanket lockdowns again.

UK retail sales rose 12% in May, bouncing back from the 18% decline in April as we rushed to DIY stores but are still 13% down on February levels before the pandemic struck these shores.  Australia also posted a strong bounce in retail sales of more than 16%.

Will US quadruple witching boost volatility for range bound stocks?

Stocks were broadly weaker yesterday in Europe and the US. Shares across Europe have opened higher on Friday and remain set to end the week up. As per yesterday’s note, the major indices remain in consolidation mode around the middle of the range from the Jun 8/9th peaks to the Jun 15th lows. The S&P 500 finished at 3115, on the 61.8% retracement of the move.

Trading around the 6240 level this morning the FTSE 100 is similarly placed but also flirting with the 50% retracement of the Jan-Mar drawdown. Remember it’s quadruple witching in US when options and futures on indices and equities expire, so there can be a lot more volume and volatility.

UK public debt is now higher than GDP, official data this morning shows. That’s not happened since the 1960s as the nation recovered from the second world war and highlights the damage being wrought on the public finances by the pandemic response. Picking up from the Bank of England yesterday, which increased QE by £100bn, the amount of issuance may require additional asset purchases from the central bank.

Sterling bears eye 1.22 in the wake of BoE decision

Sterling broke to almost three-week lows yesterday, with GBPUSD testing the 1.24 round number support in the wake of the BoE decision. This morning the 50-day simple moving average at 1.2430 is acting as support but having already broken down through the key support levels the path to 1.22 is open again. The euro was also making fresh lows for June, with the 1.12 round number holding for the time being after a breach of the 1.1230 area at the 23.6% of the 2014-2017 top-to-bottom move.

OPEC compliance promises lift oil

Oil is higher, with WTI (Aug) progressing back towards the top of the recent consolidation range close to the $40 level, which may act as an important psychological level. Iraq and Kazakhstan have set out how they will not only comply with OPEC cuts but also compensate for overproduction in May. Other ‘underperforming participants’ have until Jun 22nd to outline how they will compensate for overproduction following Thursday’s Joint Ministerial Monitoring Committee (JMMC). OPEC conformity stood at 87% in May and the JMMC did not recommend extending the maximum level of cuts into August.

Hopes that non-compliant nations will make up for cuts helped raise sentiment around crude and sent Brent into backwardation for the first time since the beginning of March, with August now trading a few cents above September and October contracts.

BoE: for illustrative purposes only

Morning Note

The Bank of England left rates at 0.1% and, to the surprise of some, did not increase the size of its asset purchase programme. Sterling bounced back a bit after a week of losses following the decision. GBPUSD tested support at 1.23 overnight but spiked north of 1.2380 on the Bank of England’s announcement.

The assessment of the economy from the Bank is grim. The BoE said indicators of UK demand have generally stabilised at “very low levels” with a reduction in the level of household consumption of around 30%.  “Consumer confidence has declined markedly, and housing market activity has practically ceased,” the MPC statement noted. Company sales are seen –45% in Q2, with business investment –50%.

In a ‘plausible illustrative economic scenario’, the BoE forecasts a fall in UK-weighted world growth from 2% in 2019 to -13% in 2020, before bouncing back 14% in 2021 and 4% in 2022. Andrew Bailey, the new governor, said there will be some long-term damage to the capacity of the economy, but in the illustrative scenario, these are judged to be relatively small. The Bank seems to be in the –V-shaped reovery camp.

Two things stand out, Firstly, more QE is coming, even if it’s not today. Two members of the MPC voted to increase the stock of asset purchases by £100bn at this meeting.

Secondly, the Bank’s assumptions on economic recovery seem rather optimistic – let’s hope the plausible scenario is right. I have a nasty feeling it won’t be as there will be deep and lasting changes to the way people shop, work, travel and simply move around. The deep central bank and government support, especially furlough schemes, will make a huge difference, but things won’t be the same. IAG today says the level of demand in 2019 won’t recover properly until 2023.

After a decent start to the trading session yesterday the S&P 500 failed to break above 2890 again and bears took hold later to drive the index down 20pts. Europe was dragged lower into the close with the DAX finishing down 1%. European markets rallied a bit at the open on Thursday but the move lacks much conviction – the US will be the driver today and there futures indicate a bounce.

US 10-year bond yields rose to their highest in three weeks, pressuring gold, which has relinquished the $1700 handle to test the $1682 support area. US real yields rose to –0.38% from –0.44% as 10yr Treasuries drove to 0.7%.

Oil is in a holding pattern after the EIA said crude inventories rose less than expected. Crude oil stocks rose 4.6m barrels in the week to May 1st, whilst gasoline inventories fell on a pick-up in driving as states reopen. Domestic oil output in the US fell 200k bpd to 11.9m bpd. Inventories at Cushing, Oklahoma rose a little over 2m barrels, the smallest increase since late March. Having rallied to $26, WTI retreated but has found near-term support at $23 and is bound by resistance at $24.50. The Brent futures curve indicates a narrowing in contango spreads that indicates markets are less fearful of oversupply in the physical market.

European stocks mixed, oil rally runs out of gas

Morning Note

Germany’s top court laid down a challenge to the European Union: who is the final arbiter in European law? Apparently, they don’t think it is the ECJ. German judges think the ECB needs to show buying bonds under QE was proportionate – by what yardstick? They have 3 months to comply or the Bundesbank won’t be allowed to play.

The ECB is clearly not amused. In a very brief update, the central bank said it ‘takes note’ of the judgement by the German Federal Constitutional Court but remains ‘fully committed’ to its price stability mandate.

Finally, it added simple: “The Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate.” Quite clearly the German court cannot overrule the ECJ – that’s the whole point, it’s why we wanted out. Italy’s PM Conte agrees, noting that ECB independence is at the heart of European treaties.

The euro has held onto losses to test the 1.0820 level this morning, as German factory orders declined 15.6%, more than the 10% expected. As I noted yesterday, anything that casts doubt on the ability of the ECB to provide the backstop to the bond market is a concern and is euro-negative.

It also seems this decision will likely kill of any hope of collective debt issuance to tackle the current crisis. And a challenge to the PEPP bond buying by the ECB from the same German actors looks likely. There is yet a tail risk that the Bundesbank is forced not to take part in ECB bond buying in three months’ time – this would cause chaos.

The S&P 500 rose yesterday but closed where it opened at 2868, some 30 points off the highs of the day. The lack of any real conviction has led to a mixed start to trading for European markets, where Monday’s rebound looks to be under threat.

Oil rallied strongly but pulled back from the highs as traders realised once again that storage is still a problem. Whilst clearly there are signs of supply and demand rebalancing because lockdown measures are being lifted, but it’s going to be a slow process and it’s hard to see it righting itself before the Jun WTI contract is up.

Crude oil inventories rose 8.4m barrels, according to data from the American Petroleum Institute (API) late on Tuesday. The more closely watched EIA inventory data is released at 15:30 London time and is forecast showing a similar kind of build around 8m barrels. Front month WTI bounced off resistance at $26 to pull back to under $24.50 in early European trade.

Today’s ADP payrolls print will be an amuse-bouche for the weekly jobless claims starter on Thursday followed by Friday’s nonfarm payrolls main course.

Euro wobbles ahead of German court ruling, risk appetite improves

Morning Note

Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes.

 

It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low.  The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.

 

EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling. 

 

European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb. 

 

The Reserve Bank of Australia left rates on hold at the record low 0.25% and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks. 

 

Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6% and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97% to just 4,000 vehicles.

API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.

Chart: EURUSD wobbles

Upbeat start for European equities

Morning Note

No Monday morning blues for equities after the Bank of Japan announced more stimulus and we’ve some good news from Italy at last and even Deutsche Bank has reported a profit.

The BOJ laid down the gauntlet to the Federal Reserve and European Central Bank, who both meet later this week, by raising its package of support. The BOJ will now buy unlimited government bonds (JGBs), catching up with market expectations, and is increasing how much corporate and commercial paper it buys.

The moved gave an upbeat tone to trading in Asia. Tokyo rose 2.7% whilst Hong Kong rose 2%. European shares followed suit with the FTSE 100 opening above 5800 and the DAX reclaiming 10,500. Indices remain in consolidation phase and risk rolling over as momentum fades, but the news today is quite positive. US futures are positive after closing higher on Friday but falling over the course of the week.

Italian and German yield spreads came in after S&P didn’t downgrade Italian debt. This is good news for the ECB, which may well increase its pandemic asset purchase programme by €500bn this week.

On the Covid-19 front, Italy is also making progress and will relax lockdown measures from May 4th. Spain has reported its lowest daily death toll in a month. Boris Johnson is back to work.

Meanwhile Deutsche Bank reported exceeded expectations on profits and revenues in the first quarter but warned on loan defaults as a result of Covid-19. Investors shrugged off the warning and shares rose 7%, sending European banking stocks higher by around 3%. It’s a very big week for earnings releases – HSBC, BP, Shell, Amazon, Alphabet, Facebook and the rest.

Oil has taken a turn lower as fears of approaching ‘tank tops’ imminently. The June WTI contract is starting to show stress, gapping lower at the open last night and trending lower to approach $14. Brent is –5% or so at $23.50. Goldman Sachs estimates global storage capacity will be reached in just three weeks, which would require a shut-in of 20% of global output. That would chime with what we’ve been tracking and suggests OPEC+ cuts of 9.7m are – as anticipated – not nearly enough. It will make the Brent front-month contract liable to volatility, though perhaps not quite what we have seen in WTI. Baker Hughes says oil rigs in the US were down 60 in the week to Apr 24th to 378, the fewest active since 2016 and well under half the number this time a year ago.

In FX, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission shows euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since. The last time a move like this occurred in EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Meanwhile, speculators net short bets on the USD are now at the highest in two years as traders call the top in the dollar. Traders habitually call the top in the dollar and get it wrong. Various actions taken by the Fed to improve liquidity and an easing in the market panic we saw in March has helped, but the dollar remains the preferred safe harbour in times of market stress.

EURUSD – the last time specs turned this long was in May 2017.

DAX – rangebound, approaching top Bollinger band.

ExxonMobil (XOM) dividends at risk as oil futures crash?

Equities

US oil stocks are slumping in premarket trading today, as the continuing chaos for crude oil futures hammers the outlook for the world’s major energy companies. ExxonMobil (XOM) has dropped 3%, while Chevron (CVX) has slid 4%. Across the pond, FTSE-listed BP is down 4%, while Royal Dutch Shell is off 4.7%.

ExxonMobil, the largest publicly-traded US oil company, has already made some sweeping adjustments to its operations in order to cope with the turbulent market conditions as COVID-19 shutters businesses across the globe and slams the brakes on the world economy.

The company recently announced that it would cut its capital expenditure target for 2020 by 30% – equivalent to $10 billion – to $23 billion. It’s the company’s lowest capex budget for four years. On April 13th the company took advantage of improving sentiment in the debt market and raised $9.5 billion by selling bonds dated between five and 31 years at lower yields than when it tapped the debt markets three weeks prior.

But these were moves designed to help the company weather the impact of crashing oil prices before the huge dislocation in the futures market this week. With the company’s earnings due for release on May 1st and an announcement over dividends expected a few days prior, investors are questioning whether ExxonMobil can still afford to make its payouts.

ExxonMobil to cut dividends for first time in 37 years?

ExxonMobil is one of the S&P 500’s ‘Dividend Aristocrats’ – companies who have raised their dividends for at least the past 25 years. In fact, Exxon has hiked the dividend for 37 years straight, even though its organic cash flows do not cover the payments. Last year the company had $3 billion in free cash flow, while paying $14.7 billion in dividends.

JPMorgan recently estimated that Exxon would need Brent to be trading at $81 per barrel in order to be able to organically cover its dividend costs. Brent is currently trading at a quarter of that level. Its major competitors require Brent at $63 a barrel to meet their current dividend commitments.

XOM currently has a dividend yield of 8.25%. CEO Darren Woods stated at the beginning of April that he was committed to maintaining the dividend, but crude oil is now trading around $9 lower than when he made those comments.

Exxon borrowed money to finance its dividend payments last year, but this isn’t a sustainable plan in the long-term. The company’s credit rating has been cut by Moody’s and S&P in the past few weeks. The problem is, until recently analysts were talking about financing the dividend through borrowing and asset sales as being unstainable over a period of years, but current conditions have made these much more pressing questions.

XOM analyst ratings and price targets

XOM, Analyst Recommendations, Marketsx – 12.30 UTC, April 21st, 2020

XOM currently has a “Neutral” rating, according to our Analyst Recommendations tool, which shows that the majority of analysts rate the stock a “Hold”. The price target of $50 represents an upside of 21% from yesterday’s closing pricing (April 20th).

XOM, Hedge Fund Confidence, Marketsx – 12.35 UTC, April 21st, 2020

Meanwhile, hedge funds are bearish on the stock, having sold 31 million shares during the previous quarter.

Stocks rally on drug hopes, oil legs it lower

Morning Note

V is for vaccine: stocks have taken a bit of good news and are running with it for better or worse, whilst figures showing the economic wreckage can be discounted, by and large.

A lot of the chatter this morning centres on Gilead Sciences, whose shares leapt 16% in extended trading last night after reports that its antiviral drug Remdesivir was delivering positive results in treating Covid-19 in a University of Chicago trial. It’s not actually a vaccine, but anything that can help end lockdowns and get economies moving quickly is a huge positive. As risk appetite has improved stocks have firmed and US yields came back bit with 2s up at 0.216% after hitting an 8-year low of 0.195%, while 10s are trading at 0.645%.

Gilead remains pretty circumspect on the tests – there are obvious risks in getting carried away at times like these when people will cling to anything offering hope. On the other hand, there are a lot of companies working on cures and vaccines right now – human ingenuity will win in the end. 

Asian markets firmed up despite data showing China’s economy shrank in the first quarter, the first such decline since at least 1992 when records began, or more likely since 1976. Tokyo rallied 3%, with Hong Kong up more than 1% even as data showed Chinese GDP declined 6.8% in Q1, while fixed asset investment was 16% lower. Retail sales were down 15.8% in March, but industrial production only declined 1.1% vs expectations for a 7% drop. It wasn’t all bad news from Asia overnight; Singapore’s non-oil exports jumped 12.8% in March. 

Broadly, though, we continue to see the damage. US jobless claims surged again by more than 5.2m in a single week. New car sales in Europe have fallen off a cliff, particularly in Italy. On the virus, the UK is extending the lockdown by at least three weeks, while Donald Trump has set out a three-stage plan for exiting lockdown. 

European markets tracked the rally in Asia and US futures with ~3% gains at the open on Friday. The FTSE 100 added 150+ points in early trade. 5800 is again the target before a push to the week highs at 5900. Travel & Leisure leading the way indicates a risk on rally as investors lap up the Gilead news. 

Wall St was higher a touch yesterday, with the S&P 500 rising half of one percent to rest a whisker away from 2800. News of the treatment drug spurred futures on and can now look to close the March 9th gap. If this gap gets closed today by stumps, then the bulls have done some important work. The cash close at 2,973 on March 6th is the target but first there is key resistance at 2885. If the bulls can hold the break above the 50-day simple moving average it may start to act as support.

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USA 500 Cash, 1-Day Chart, Marketsx – 08.02 UTC, April 17th, 2020

In FX, the US dollar is squeezing peers again with the dollar index holding the 100 handle. GBPUSD has failed to recover the 1.25 and the near-term bias looks to the downside with the 1-hr chart showing lower lows and lower highs being made. The 50-hour moving average, which has been a solid support rung, has turned into resistance.

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GBP/USD, 1-Hour Chart, Marketsx – 08.12 UTC, April 17th, 2020

Crude oil futures have taken another leg lower ahead of the May expiry, with WTI sinking to new 18-year lows at $18.44. This opens up the way to the mid-teens. The OPEC deal is clearly failing to boost sentiment. We are in new territory so it all depends on the mood in the market – there is not a heck of support in the way to $10. 

With US yields higher Gold is trying to hold a break under $1700 but has rejected the 50-period SMA on the 4-hr chart at $1685. Next support lies on the 23.6% retracement at $1678.

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Gold, 4-Hour Chart, Marketsx – 08.15 UTC, April 17th, 2020

 

Stocks stage mild comeback after tough day, US jobless claims in focus

Morning Note

Stocks suffered yesterday as bulls hopes ran up against a wall of bad economic data, another drop in oil prices and banks’ earnings reports, but have recovered some composure in early trade today.

Wall Street fell about 2%, with the S&P 500 back under 2800 after a couple of shocking economic data releases ratcheted up the pressure on the bulls to find reasons to sustain the rally. US retail sales were sharply lower, falling around 8.7% month on month, the sharpest fall since it was first tracked in 1992. Britain followed suit, with UK retails down 4.3% in March from the same month a year ago, marking the steepest decline since records began in 1995.

Meanwhile the Empire State Manufacturing Index, a gauge of factory activity in New York state recorded its steepest ever fall to hit –78.2, far worse than the –32 expected. April will be even worse for these data sets, as much of the US was not shut down for the entirety of the survey period.

Today’s focus will be the US weekly initial jobless claims, expected to show again that more than 5m Americans claiming unemployment insurance last week. US 2yr yields sank to an 8-yr low on the news to 0.195% whilst stocks fell across the board amid a very weak day for risk.

The FTSE 100 broke down through the rising trend support line to close under 5600. In early trade Thursday the index was up 1%. Travel & leisure at the top indicated a better day for risk, but there is a caution about the move. I think we are back to looking for more good news on the virus now.

We’ve also had a bunch of bank earnings out that weighed on sentiment. With the largest US banks pretty well done with earnings, what is obvious is that the single biggest take-home is the extent of the increase in loss reserves. It’s a funny situation where the main thing we’ve learned also leaves with the biggest unanswered question – will these loan loss provisions be enough?

At Bank of America, credit loss provisions rose $3.8bn, from $1bn in the first quarter of 2019 to $4.8bn today. Citigroup hiked its provisions to $7bn from $2bn, a much bigger hike than others likely down to exposure to credit card debt, which is going to be probably the nastiest area of credit. Wells Fargo raised its reserves by $3.1bn and took a $950 impairment charge. JPMorgan provisions for losses jumped to $8.3bn.

Trading revenues were strong across the board after the massive dislocation in markets, huge volatility and widening of spreads. The strength there makes it a good time to be setting aside cash for loan loss provisions.

Couple of points to make:

1) The big banks are all to slightly varying degrees taking big upfront provisions for expected losses. This looks prudent – better to front load the bad news now so they can over deliver later down the line. If you’ve had a good quarter in trading – which they have – it’s sensible to effectively take those profits and put to one side now. Good news today won’t mean much, better to hold it back.

2) It’s guesswork. We still don’t know what kind of damage the economy will suffer, and we don’t know how quickly it can bounce back. That is to say; we don’t know the extent or duration of economic recession. Banks have been keen to stress the provisions for loan losses could well increase. JPM says it could be worth $45bn this year, implying a significant upward revision of loan losses in the worst-case scenario.

On the coronavirus outbreak itself, UK health secretary Matt Hancock says this morning that the country is reaching its peak but lifting the lockdown now would be premature. Some good news, but there is no time for celebration.

On the shape of the recovery, the W-shape is gaining more credence. The Economist Intelligence Unit is warning of a recession to be followed by a ‘possibly much worse’ downturn sparked by a sovereign debt crisis among highly indebted countries. Helen Thomas of BlondeMoney and a regular contributor to XRay, thinks a U shape is most likely. “The economic outlook is grim, with a double dip recession or even absolute stagnation the most likely outcome,” she says.

Oil took another dive yesterday as the International Energy Agency (IEA) warned that demand in 2020 would crumble, whilst US inventory data showed more massive builds of crude. The IEA said demand would fall by 29m bpd in April, around 30% of global demand, and by 9.3m bpd across the whole of 2020. The Energy Information Administration in the US said crude oil inventories rose 19.248m barrels vs 12.7 million barrels expected, the largest stockpile build on record. WTI plunged as low as $19.20, marking a fresh 18-year low.

In FX, the US dollar is staging a fightback as the dire economic outlook again makes it look like the least ugly sister. GBPUSD broke down through the 1.25 level and EURUSD has retreated below 1.09. For GBP we are monitoring the events around Brexit – the UK is keen to get on with it, whilst the EU and IMF would prefer to wait. Expect this to lead to fresh jitters around GBP once the coronavirus news starts to drop down the running order.

Equities

EasyJet shares jumped 8% expected to lose as much as £380m in the first half and has no idea when flights will resume but added that it can survive an extended grounding with a notional cash balance to last 9 months. That would be an absolute worst-case scenario and would burn through about £3bn – slightly more than £1bn for every quarter of grounding is expected. Management say they have already raised £1bn to cover 3 months initially. Investors are relieved for now and will be hopeful that once the lockdown ends people start booking up flights again.

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