Market Quick Take - April 16, 2020
Chief Economist & CIO
Summary: US equities retraced a good deal of their gains yesterday, with the big tech names still rather resilient relative to particularly weak financials and the median stock, especially in small caps, which were in full retreat. Today we watch for whether risk sentiment has peaked and continue to track the EU existential strains and the Main Street versus Wall Street narrative.
We continue to see a “Main Street vs. Wall Street” narrative, as today’s latest US jobless claims in the millions will contrast with the Amazon all-time highs and traders making free arbitrage money, for example from the mismatch in corporate bond prices versus the underlying bonds on the Fed’s moves support the corporate bond market directly and via ETFs.
We are also closely watching the EU existential risks as well as US President Trump’s plans for opening up the US economy and the response from both local authorities and at the popular level.
What is our trading focus?
- 10YBTPJun20 – the Italian 10-year sovereign bond future – the last two days of heavy selling of Italian BTPs and the widening of the Italy-Germany yield spread despite the ECB’s likely heavy hand in keeping a bid under Italian debt show that the market is taking the threat of an Italian exit from the EU increasingly seriously after the Eurogroup rescue deal agreed by Italy’s own finance minister has caused a firestorm of criticism from Italy’s politicians.
- US500.I (US S&P500 Index) – the technical action in the S&P 500 interesting over the last couple of sessions as the rally came up just short of the 50-day moving average (currently around 2860) and yesterday’s session saw an engulfing rejection of the prior day’s solid rally, setting up recent highs at 2845 as an important line in the sand. 2785 cash level still the on/off risk level (We need two days close above to confirm further upside from technical point of view (We had one, then yay failed)
- US financials (XLF:arcx) and European banks (BNK:xpar) – we maintain our focus on financials with US banks trading again yesterday as results from Citigroup and Bank of America weighed down on the outlook. Also financials lagged utilities again showing the market continues to pricing in deteriorating conditions for ‘Main Street’ which sits on the banks’ balance sheets.
- OILUKJUN20 (Brent crude) and OILUSMAY20 (WTI crude) – A double dose of bad news from IEA and EIA keeping oil markets under pressure. IEA forecast demand drops of 29m b/d in April followed by 26m b/d in May. EIA’s weekly stock report showed record levels of gasoline while fuel demand dropped to a record low. Focus on the steep contango with back months potentially offering better selling opportunities. December Brent crude oil (LCOZ0) trades $10/b (35%) higher than the June contract.
- AUDUSD and EURUSD – we continue to watch AUDUSD as the risk sentiment proxy in G10 currencies as the JPY has been inconsistent in showing safe haven credibility, and we add EURUSD to our list of chief FX pairs to focus on due to the existential angle noted in the Italian BTP focus noted above and after the technical action and yesterday’s sharp sell-off, which points lower, particularly if the downside continues through 1.0800.
- Abbott Laboratories (ABT:xnys) – flirted with all-time highs yesterday as investors continue to bet on Abbott’s new 5-min test for COVID-19. The company reports Q1 earnings before the US equity markets open.
- Tesla (TSLA:xnas) – shares were up 3% again yesterday as a new sell-side report suggesting EVs are competitive against ICEs at current gasoline levels measured on cost of ownership. The company is now valued on EV/Sales at 5.9x which makes it valued like a software company. We continue to maintain the view that the car industry will under pressure for the foreseeable future and shorts will re-enter with only 13.5% of float shorted.
What is going on?
Covid19 – While EU case counts and especially death counts are clearly rounding the corner and EU nations will begin opening up their economy, most starting in early May, the death toll has continued to rise in the US, with yesterday’s the worst for the cycle with nearly 2,500. The world’s largest pork producer, US Smithfield foods, is closing 2 more processing plants and warned of bottlenecks in the US food supply chain.
US Secretary of State Pompeo demands China come with more Covid19 origin information – and referenced the Wuhan virology lab near the origin of the outbreak. A fresh worsening in US-China relations would add to the risks for the global outlook.
Australia March Jobs Report – This data not particularly useful as the sampling takes place early in the month, as the Australia Bureau of Statistics reported a 0.1% rise in the unemployment rate to 5.2% and a small nominal rise in payrolls in March for a country that was in a total lockdown by month-end. The market clearly ignored the numbers and the AUDUSD sold off back toward the session lows. The Australian Treasury projects 10% unemployment for Q2.
What we are watching next?
The mood in Europe – The Italy-Germany yield spread rose further yesterday to close at 235 basis points – we will continue to watch this spread, the EURUSD exchange rate and any political signaling out of Europe on the prospects for “coronabonds” or other moves toward mutualization or the opposite as we head toward the next absolutely critical date for the EU – the April 23 video summit of the European council (the heads of state across the EU).
XAUUSD drifting lower. A stronger dollar weighing together with emerging disappointment from recently established longs that the response to the latest Fed action has not been stronger. Long term investors meanwhile using exchange-traded funds have continued to accumulate gold with total holdings at a record 2922 tons. Risk of another mini correction on a break below $1700/oz, the recent high and uptrend support from the March 16 low.
US President Trump to announce plans for reopening the US economy today and interesting to watch how this is received locally, as states have argued they have the constitutional right to supersede the Federal authority in dealing with the outbreak. In Michigan, thousands of protestors drove around the Michigan Capitol in protest of the lockdown orders.
US jobless claims – while the market is trading on the heavy hand of the Fed in supporting asset prices, it is critical to note the damage being done to main street during this outbreak – we watch today’s US weekly claims as the totals so far suggest that the US unemployment rate is already at its worst levels since the Great Depression.
Economic Calendar (times GMT)
- 1230 – US Weekly Initial Jobless Claims – expected to show another 5.5 million increase after a total of over 17 million for the prior three weeks.
- 1230 – US Mar. Housing Starts and Building Permits – US housing market activity in freefall according to yesterday’s NAHB survey
- 1800 – US Fed’s Williams (Voter) to Speak - the New York Fed head chief is the most powerful in terms of actual purchase operations the Fed is carrying out.
- 0200 – China Q1 GDP and March Industrial Production, Retail Sales and other numbers
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