Market Quick Take - April 15, 2020
Chief Economist & CIO
Summary: US equities rallied in nearly vertical fashion yesterday, tacking on over four percent of gains and taking the major tech stock index, for example, all the way to it late December levels. Clearly, the mantra of Never fight the Fed is afoot. But we note financials and small caps have badly underperformed, a sign of a Wall Street versus Main Street narrative in this Covid19 crisis.
Main street versus Wall Street, that is the narrative here after the incredible rally extension for the big name tech stocks, and risky, highly levered companies like Tesla over the last couple of sessions, all seeming to enjoy the “Don’t fight the Fed” mantra. Meanwhile, banks are underperforming and small caps with less access to the Fed’s liquidity H-bombs have retraced only some 35% of the losses from 2020 highs.
What is our trading focus?
- 10YBTPJun20 – the Italian 10-year sovereign bond future – the yield spread between Italy and Germany has widened again in the wake of the Eurogroup deal to fund the Covid19 emergency as the market apparently doesn’t see this as providing enough solidarity – this presents further downside risk for BTP futures if the Italian position on the viability of its EU membership sours further.
- US100.I (NASDAQ 100 Index) and US500.I (US S&P500 Index) – the NASDAQ 100 has rallied all the way through its 61.8% retracement, leaving the 9000 area as the last resistance before the all-time highs of 9780; NASDAQ 100 is now only down 1% YTD and trades at 42% valuation premium to global equities (MSCI World). The broader US S&P 500, on the other hand has so far topped out well short of its 61.8% retracement (2930) and small caps have not even achieved. We continue to watch market breadth as a key indicator.
- US financials (XLF:arcx) and European banks (BNK:xpar) – financials in focus today as JPMorgan and Wells Fargo Q1 results showed big jump in provisions for credit losses with most notably jump in consumer credit card segment and energy loans. The outlook presented by management was very uncertainty and investors were left blind on guidance post Q2.
- OILUKJUN20 (Brent crude) and OILUSMAY20 (WTI crude) – Crude oil’s failure to rally following the historic OPEC++ production cut agreement highlights the continued downside risks. At best the deal may help stabilize the market until lockdowns are being lifted and demand returns. Focus today on EIA weekly stock report, IEA’s Monthly Oil Market Report and Texas oil regulators.
- AUDUSD and AUDJPY – as yesterday, we note that AUDUSD (and arguably AUDJPY) is an excellent proxy for risk sentiment in the G10 FX space and the price action yesterday took AUDUSD even closer to the ultimate 61.8% retracement level of 0.6450 we have mentioned prominently – a level that has held well. We suspect AUDJPY could provide similar price action as long as it remains below the 70 area. Both are pairs traders can trade on the short side if they believe the global sentiment bounce has been to robust.
- Tesla (TSLA:xnas) – up 100% from March lows yesterday in a stunning comeback and testimony to money chasing hot NASDAQ stocks. Meanwhile the US car market is collapsing and cheap gasoline makes ICE vs EV fundamentals better. Who switches to new and more expensive technology during an economic recession?
What is going on?
Dash for trash? – it should be noted that many of the US equities rising the most in this latest short squeeze or rally, depending on your point of view, were high risk names like AMD and Tesla, Inc. This could be a sign of heavy small trader involvement in this rally, a contrarian signal.
Covid19 – some European car manufacturers have declared plans to open factories across Europe in coming weeks. Us President Trump withdrew funding from the World Health Organization, saying that is failed its basic duty and is too reliant on China. In the USA, the US saw its single deadliest day of Covid19 deaths, with over 2,400. There, US President Trump maintains the opinion that the Federal government can declare when the US should re-open for business, but the governor of the US’ most populous state, California, declared a cautious agenda of steps, like testing and contact tracting, that must be followed if activity is to normalize in there.
Australia April Consumer Confidence – dropped to the worst reading ever at 75.6 and thus below the worst level of the financial crisis of 79.1.
What we are watching next?
The mood in Europe – as we note above, the Italy-Germany yield spread widened badly yesterday (by over 20 bps to 216 bps total) in the first trading day in Europe after the Eurogroup deal was agreed late last Thursday. Italy’s premier Conte spoke out against the deal agreed by his own finance minister and claims that the country will never accept funds from the ESM, the main portion of the agree package. An EU existential crisis is simmering until proven otherwise.
The crude oil market remains under some considerable pressure as recent supply cuts have done little to off-set the historic slump. Focus today the weekly stock report from the EIA, Monthly Oil Market Report from the IEA and whether Texas oil regulators will order a 20% cut in shale oil production.
US Retail Sales today and US earnings report and how the market treats specific news a well as the “Don’t fight the Fed” narrative.
Economic Calendar (times GMT)
- 0730 – Sweden Mar. CPI – The market (SEK traders) concerned that Sweden’s Riksbank gets very reactive to weak inflation readings.
- 1230 – US Mar. Retail Sales – expectations are for -8% month-on-month headline
- 1230 – US Mar. Industrial Production
- 1400 – Bank of Canada meeting - Canada’s economy at even greater risk than US, given private leverage and scale of oil industry – USDCAD a focus here if Bank of Canada adds further measures.
- 1430 – EIA’s weekly stock and production estimate report
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