Market Quick Take - April 24, 2020
Chief Economist & CIO
Summary: The EU Council meeting was a missed opportunity for European leaders to show more solidarity, as it failed to even agree on the nature for funding a recovery fund to be established by the EU Commission. We watch for worsening EU existential concerns in the trading sessions ahead as this looks like a worse failure than the immediate reaction showed.
The EU Council has kicked the can down the road once again, asking the EU Commission to create a recovery fund, but with differences remaining on whether the possibly more than EUR 1 trillion fund will be in the form of loans or grants, with German Chancellor Merkel specifically saying that “grants are not in the category of what I can agree”. All things EU existential are foremost on our radar today.
What is our trading focus?
- 10YBTPJun20 – the Italian June, 10-year sovereign bond (BTP) future: from all appearances, the core/periphery divide remains as noted in the intro above and BTPs are the best proxy for measuring EU existential strain. The recent low for the June contract is 132.61, the lowest close was 130.73 back in the March panic and the lowest intraday level was below 125.
- OILUSJUL20 (WTI crude) and OILUKJUN20 (Brent crude): The rally in WTI from Tuesday’s panic low below $10/b has been driven by four major events: CME rising margins, now up to $10,000 per contract from tonight, trading restrictions by banks and brokers (close only on CLM0), USO rolling most of its exposure away from CLM0 thereby reducing default risks, and finally Trump threatening Iran. The fundamental outlook meanwhile has not changed and it leaves the potential for further price gains limited at this stage. Should global storage reach full capacity over the coming weeks, only the amount of oil that is demanded can be produced. An event that could force major shut-ins from oil producers around the world.
- Google (GOOGL:xnas), Boeing (BA:xnys) and American Express (AXP:xnys): An internal memo from Alphabet (Google’s parent) was leaked stating that the group will cut marketing expenses for second half. This is what we flagged as a key risk to the technology segment as the current economic shock has most likely hit Google and Facebook harder than perceived in the market. Boeing reports Q1 earnings and the market will be focusing on the liquidity and balance sheet situation given the halted production of 737 MAX and the general slowdown due to COVID-19. American Express is the most interesting earnings release today as it will provide a deeper insight into consumer credit deterioration and hopefully some guidance on Q2.
- EURJPY (and EURUSD) – the euro is below support in these two key pairs and we are concerned that the EU council outcome will see further erosion in confidence in the economic bloc – with new lows in EURUSD below the cycle low of 1.0636 possibly ushering in a move to the 2017 lows below 1.0350 or even parity. EURJPY has no real chart support until down into the 110.00 area lows of 2016.
- DAX Index (GER30.I): We watch European stocks in general after yesterday’s disappointing EU council meeting, and the German DAX has been coiling around in a constricted range between 10,250 and 10, 820 – with the 10,000 area the clear downside pivot area after that area provided resistance on the way up.
- Intel (INTC:xnas) and Citrix (CTXS:xnas): Intel shares declined 7% in aft-mkt trading on its Q1 earnings as second half guidance was pulled and sounded very uncertain on earnings. The market was not prepared for that. Citrix shares were also down 7% as the company reported Q1 net revenue of $861mn up 20% y/y but guided a disappointing Q2 revenue of $760-770mn.
- NASDAQ100 (USNAS100.I): the largest chip company Intel down badly in after-hours trading after results and Google to slash its marketing budget. Yesterday’s session rolled over badly after a strong rally and closed with a bearish shooting star candlestick. Next chart points on the downside the low this week of 8342 and then the 200-day moving average, currently 8278.
What is going on?
The EU Council claimed to agree on significant measures in yesterday’s meeting, but no specific size for the package was agreed, with the group asking the EU commission to establish a EUR 1 trillion recovery fund that would be worked into the EU’s 7-year multiannual financial framework, or MFF. Clear differences on the source of funding remained, with EU Commission president Ursula von der Leyen claiming there could be a mix of grants and loans, while Germany’s Merkel did admit that its contributions to the EU budget would have to rise significantly, even if she spoke specifically against grants. The EU council will meet again soon, possibly on May 6.
Gilead Sciences supposedly promising virus drug Remdesivir was not successful in trials held in China, according to draft documents accidentally published by the WHO. Gilead stock (GILD:xnys) fell over four percent in yesterday’s session. Gilead publicly stated after the news that it didn’t find the study to be conclusive and would still investigate the drug as a potential treatment for COVID-19.
US House passed a $484 billion additional package for aiding small businesses, hospitals, and expansion of test, with most of the funding aimed at increasing existing programs. The Senate signed the bill the previous day and President Trump is expected to sign it today.
US Weekly Initial Jobless Claims were out yesterday showing another 4.4 million claims and the continuing claims data rose to just short of 16 million, or some 10% of the entire US labour force and that compares with the approximate 6.5 million worst levels of the 2008-09 financial crisis.
What we are watching next?
The unfolding reaction to the EU council meeting – both in terms of Italian BTPs, but also for sovereign debt spreads across Europe, the euro itself (having broken support in both EURUSD and EURJPY, see above), EU bank stocks and EU stocks in general.
Russia central bank – another central bank in EM looking to cut rates – for Russia this time 50 basis points to 5.50% even after significant pressure on the currency.
Q1 earnings season: today’s most important earnings are Boeing and American Express with the latter being particularly important given the provisions for loan losses published by banks last week in their credit card segments.
Economic Calendar Highlights (times GMT)
- 0800 – Germany Apr. IFO Business Survey – Little information value in these surveys as we all know the profound levels of shutdown – more interesting in months ahead.
- 1030 – Russian Central Bank Rate Announcement – another rate cut expected – how low can the major EM’s go with their rates?
- 1230 – US Mar. Flash Durable Goods Orders – expected own some -6.5% month-on-month ex Transportation
- 1400 – US Final Apr. University of Michigan Sentiment – somehow, this survey is far from the lows of the financial crisis (prelim Apr. was 71 and expected revision down to 68). Sentiment is most closely associated with the jobs market – and low in 2008-09 was 55.
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