Market Quick Take - April 23, 2020

Macro 3 minutes to read

Steen Jakobsen

Chief Economist & CIO

Summary:  After new lows for the cycle in crude oil yesterday, prices have rebounded sharply and this recovery may have been behind a snapback rally in equities from the sharp sell-off the prior day. Today we look ahead to a critical day for the EU and whether existential cracks widen as the EU Council is set to meet on the size and source of funding for a pan-EU rescue package.


Markets rose persistently all day yesterday in the US before dipping slightly into the close, perhaps driven by a strong bounce in oil prices from fresh lows. Today is all about Europe and the EU council meeting, though we may not hear much during the day as these meetings can often drag on into late hours this evening.

What is our trading focus?

  • 10YBTPJun20 – the Italian June, 10-year sovereign bond (BTP) future: the Italian BTPs found support yesterday after posting new lows and after the Germany-Italy 10-year yield spread exceeded 265 basis points, but these will bear watching today as we await the outcome of the EU council meeting, and in particularly tomorrow if the meeting goes beyond market opening times.
  • OILUSJUN20 (WTI crude) and OILUKJUN20 (Brent crude): rallied yesterday in response to fading default risks on the USO oil ETFs after the fund reduced exposure in CLM0 to just 20% from 80% on Monday. The main reason however was a tweet from President Trump in which he threatened to shoot down Iranian gunboats if they continued to harass US ships in the region. The weekly US inventory report showed no improvement in demand while Brent cargoes continue to trade some $5 below the futures price. A relief rally for now but probably not yet the turning point.
  • BNK:xpar (European banks): European banks will be the most sensitive segment to the EU Council meeting later today as any bad news will hit sentiment for the real economy sitting on the banks’ balance sheets.
  • EURJPY (and EURUSD) – the euro is under more pressure after yesterday’s session and looks rather heavy ahead of the big 1.0800 area in EURUSD and 116.00-25 in EURJPY. If the market feels that today’s EU council isn’t sufficiently putting to rest the fears that the EU is heading towards an existential showdown, then the euro may come under further pressure and these are the key technical trigger areas.
  • Nasdaq100 – the big US tech index rebounded strongly yesterday and we continue to watch this leading index ahead of the major sub-9000 resistance at the recent highs, a major chart point. Yesterday’s rally was again driven by technology stocks and especially the mega caps showing how narrow this rally is.
  • USO:arcx (United States Oil Fund) – The world’s largest oil ETF remains troubled by its recent success in attracting flows from investors looking for a recovery in oil prices. We cannot reiterate enough how difficult and potential costly it can be to try to bottom fish “cheap” oil when the fundamentals are this poor as reflected through a very steep contango negative crude oil prices seen this week. Yesterday the fund price closed down 10% while crude oil rallied by 20% after its premium over the net asset value dropped from 36% on Tuesday to 10% yesterday.
  • Gold Spot USD (XAUUSD)  has recovered strongly after correcting 50% of the April rally. The rally above $1700 partly driven by raised geo-political tensions in the Middle East. The prospect for more stimulus for virus-hit economies from government and central banks are likely to keep the market supported despite weak physical demand from key buyers in China and India.

What is going on?

The ECB says it will accept some junk debt as collateral: This would only affect collateral that has been down-graded after the crisis began and it is clear that the chief reference is too Italian sovereign debt, which S&P ratings, for example, has currently at two notches above junk status. 

Japan’s preliminary Apr. Services PMI dropped to 22.8 amidst a nationwide state of emergency, while the preliminary Apr. Manufacturing PMI managed a small drop to 43.7 from 44.8. Australia’s flash April Services PMI registered a 19.6 vs. 38.5 in March, while the flash April manufacturing PMI dropped to 45.6 from 49.7

Turkey’s central bank cut its policy rate 100 basis points, twice the size of the cut expected, to 875 basis points. The TRY has lost a carry-adjusted more than 10% versus the US dollar this year and the scale of EM rate cuts has rather surprised given pressure on their currencies.

Roche’s CEO Schwan warns on vaccine optimism, saying it usually takes several years to develop a vaccine and build up the manufacturing capacity especially for a global vaccine, so 12-18 months which is the market’s current expectation looks very ambitious.

 


What we are watching next?

Signals from EU leaders and the nature of the agreement at today’s EU council meeting – there are a number of proposed, highly technical solutions for how the EU will approach funding the massive need for supporting southern EU countries countries during this process. Our chief focus will be on the mood and signaling among leader more than the package itself and whether the meeting allays the markets’ pricing of existential concerns (spreads on EU debt, etc.).

EM currencies – signs of strain are showing up in the EM space yesterday (HUF, BRL in particular), with many currencies suffering weakness even on a day with nominally strong risk appetite elsewhere yesterday.

Q1 earnings season: earnings left to watch this week are 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 Highlights (times GMT)

  • 0715-0800 – EU Flash Apr. PMIs ­– The market not likely to react much to these, as we all know that most countries across the EU remain in lockdown and will do through early May.
  • 1230 –  US Weekly Initial Jobless claims – these are likely to deserve increasing focus from here as we watch for the shape of the US recovery as some regions in the US try to reopen.
  • 1345 – US Flash Apr. Manufacturing and Services PMI – again, not terribly interesting given known scale of US shutdowns.
  • 1430 – US Weekly Natural Gas Storage

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