Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Officer
Summary: The May US crude oil future plunged into unprecedented and deeply negative territory below negative 35 dollars per barrel briefly before rising back above zero as it is set to expire today. Elsewhere, it appears markets are rolling over into a more defensive stance and we continue to watch Europe and the euro ahead of a critical EU council meeting on Thursday.
Markets are in a defensive stance, spooked by the historic pre-expiry squeeze on longs in the front-month WTI crude oil contract to almost negative 40 dollars per barrel and at the margin on news that North Korean leader Kim Jong Un is in fragile medical condition after an operation.
What is our trading focus?
What is going on?
In an unprecedented pre-expiry squeeze, front-month US WTI futures went negative: The May WTI US crude oil contract expires today and is trading above one dollar per barrel after sliding deep into negative territory and as low as -37 dollars per barrel yesterday. The most liquid June contract trades around 21.50 per barrel this morning and the curve remains in steep contango - for perspective, the September contract trades over 30 dollars per barrel and is some five dollars above the contract low.
German Chancellor Merkel spoke yesterday in favour of a new type of EU debt instrument issued by the European Commission and guaranteed by future EU budgets as a rout to funding greater measures to fund crisis spending beyond what was agreed in a recent Eurogroup meeting. She spoke in favour of solidarity during the crisis and suggested other new EU debt instruments might be possible, but this would require a change of treaties. However, in a CDU leadership meeting, Merkel spoke against mutual bonds, according to participants cited by Reuters.
North Korea inspired flurry of overnight volatility: North Korean dictator Kim Jung Un is said to be in fragile condition after heart surgery and this news inspired a sell-off overnight in global equities. The South Korean Kospi index was down -3% at one point but had recovered somewhat as of this writing.
The US Chicago Fed National Activity Index, a broad measure of overall US economic activity, dropped to -4.19 in March, that largest single month drop (from +0.06 in Feb) ever. Only two months of the financial crisis in 2008-09 posted worse levels.
What we are watching next?
Signals from EU leaders all week and into critical Thursday EU council meeting – the stakes for Europe could not be higher and watching all indicators for how seriously the market is treating the risk of a new EU existential crisis will be critical all week, especially on the other side of a EU Council meeting Thursday.
Q1 earnings season: The earnings season kicks into gear this week with many interesting companies reporting such as Netflix (Tue), Chubb (Tue), Biogen (Wed), Delta Airlines (Wed), Intel (Thu), Credit Suisse (Thu) , American Express (Fri), Boeing (Fri). Next week the big focus will be on technology companies with our focus on Facebook and Google as we believe the market is not adequately pricing in the sharp decline in online advertising that has taken place. As of today 10% of the S&P 500 companies have reported Q1 earnings and EPS is down 30% y/y and revenue is up 2% y/y.
Economic Calendar (times GMT)
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