Energy collapse, earnings and consumer credit cracks

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  The energy sector has lost extraordinarily $1.15trn in market value this year as oil prices have plunged to almost unimaginable levels. In this equity update we provide investors with different ways to play the havoc in the energy sector. We also take a look at earnings this week with especially Carnival earnings being the most interesting to watch as the cruise industry is in a severe crisis due to COVID-19. Lastly, we focus on consumer credit and the apparent weakness observed in China and how that could be a forewarning of what to come in the US and Europe. As a result we recommend investors to add Mastercard and American Express to their watchlists.


The global energy sector has been punched in the gut by first a slowing economy last year and then this year by an oil price war between Russia and Saudi Arabia. Making things worst the sector is now experiencing an abrupt 20% oil demand reduction equivalent to 20mn barrels a day or the entire consumption of the US. The oil futures curve is in steep contango as the active contract in Brent today went below $23/brl and stories have recently surfaced that physical oil is being transacted at $8/brl and oil storage is running out of capacity. As we talked about on our Market Call this morning the constraint on physical storage and ongoing demand destruction could push the front-end of oil futures down even further.

Source: Saxo Group

The current oil price creates extreme shareholder destruction with the MSCI World Energy Index losing $1.15trn in market value this year. High yield bonds in the energy sector have seen their option adjusted yield spread to Treasuries widen to the highest levels on record and implied default probabilities are rising fast. But how should investors play the energy sector from here? One way is to buy call options on ETFs tracking the US or European oil and gas industry preferably with expiry during the second half. Another option is to get long-term exposure through single stock but here we recommend opting for only the highest quality names (see table below). The most risky strategy is to buy into those names that have the highest bankruptcy risk when the market rebounds, but here we recommend traders to apply some short-term filter (moving average or the like) to get confirmation during the rebound phase.

This week many Chinese companies will report earnings such as Geely Automobile and Air China, but also outside China interesting names such as Dollarama, Carnival, Walgreens Boots Alliance, CarMax, H&M and Constellation Brands will report earnings hopefully providing a picture of the demand situation in the US and Europe as these geographies are impacted by strict lockdowns due to COVID-19. With Carnival shares down 75% from this year’s peak in January and the trouble regarding many cruises during the last two months related to infected passengers with COVID-19 there will be a lot of focus on Carnival’s earnings. The main question is whether the cruise industry can stage a comeback and survive this serious threat to the industry.

Source: Saxo Group

In past couple of weeks we have highlighted many times on our Market Call podcast that investors and traders should watch oil, USD and VIX for guidance on market temperature. We have had focus on credit as well but with central banks stepping in the bleeding has stopped for now, but in other parts of the credit market outside corporate bonds there are now cracks happening. Especially consumer credit in China is weaker as the weaker employment is spilling into repayment ability and is likely an indicator of what is coming for the US and Europe. So we recommend investors to put Mastercard and American Express on their watchlists. In China loans to households have risen by 22% annualised and our worry is that at some point this credit expansion will lead to an abrupt halt like we saw in 2008 in the developed world.

Source: Bloomberg
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.