Chief Investment Officer
Summary: An odd day yesterday on a very quiet day for global equities while oil markets saw intense volatility after US President Trump touted an expectation that Russia and Saudi would reduce oil production. Today features important US economic data, though the market seems unimpressed with historic bad data.
What is our trading focus?
What is going on?
US jobless claims reached 6.6 million over the last week – double last week’s new all-time record and supposedly million north of expectations. The 10 million lost jobs over just the last two weeks points us down a path in which the US will be recording its highest unemployment rate since the Great Depression (10.8% in 1982) already in April (if the US statistics agencies can catch up with the reality on the ground). But the lack of market reaction tells us that these numbers are largely meaningless for now as the market looks forward to credit event risks, the shape of any recovery beyond this crisis moment, etc.
US President Trump said he expected Russia and Saudi Arabia to reduce oil production “by ten million barrels” – a claim that later proved to be nothing more than a hope and one that would involve other producers. But his comment set of the wildest intraday gyrations in oil markets and an initial spike of as much as 30% in prices that was more than cut in half by this morning.
LK:xnas (Luckin Coffee) – ADR shares down 75% yesterday as the board revealed a probe into fabricated sales after increasing coffee stores from zero to around 4,000 in two years. The company now says that some of 2019 account is no longer reliable. This could increase valuation discount on Chinese ADRs in general so watch those ADRs as well.
What we are watching next?
April 7 Eurogroup meeting – next week could prove one of the most critical weeks in EU history after the disastrous summit meeting last week that produced bitter disagreement on “coronabonds” (bonds issued on the EU level that all EMU members would be mutually liable for repaying) and southern EU countries refusing to sign the communique. A summit next Tuesday April 7 between EU finance ministers is the next crucial meeting for establishing whether we continue to risk an existential political EU crisis, even as the ECB has kept conditions in sovereign bond markets across the EU orderly.
Credit events – the Fed and other central banks can provide all of the liquidity they want, but won’t necessarily prevent insolvencies and credit events, particularly in the energy space and among the weakest, high yield. Classically, specific credit events or the threat thereof have marked intense phases of past crises (examples are Bear Stearns and then Lehman in the GFC, for example, and Creditanstalt and Swedish Match in the Depression era).
EM stress – we are seeing signs of more severe strain in EM, with default risk for South Africa rising rapidly, for example, and forward implied yield for the Turkish lira spiking in recent sessions. A larger EM requesting a debt rescheduling is a prominent risk and could see widespread fallout.
Oil – the demand shortfall in the near term is so profound – possibly beyond 30% of global production, that it is difficult for producers to shutdown on a sufficient scale to support near term prices, not to mention that some oil operations can’t be shut easily and then reopened later. A further sustaining of these low – or lower – prices continues to wear on credit.
US data – mostly the ISM Non-manufacturing survey – yes, it is US Nonfarm Payrolls change day, but that specific data point is released based on a number of assumptions because not all data has been compiled for the most recent month – therefore, even if the number is likely to be quite bad, it won’t reflect the cold reality seen in the weekly initial jobless claims data series of the last two weeks. The ISM Non-manufacturing survey, on the other hand, will benchmark the velocity of the services sector decline and reveal the shape of the eventually recovery in coming months.
The unfolding shape of the Covid19 crisis and perhaps more importantly, the shape of the recovery. The path through and beyond the exogenous shock of the Covid19 is the chief thing haunting this market and medium to longer term expectations, more so than the astoundingly bad numbers in the here and now.
Calendar today (times GMT)
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