Market Quick Take - April 3, 2020

What is our trading focus?

• OILUKJUN20 (Brent crude) and OILUSMAY20 (WTI crude) – A strong day for crude oil ended in turmoil after Trump in a Tweet said that he “expect & hope” to see Saudi Arabia and Russia cut production by 10m barrels or more. This news sent the algos chasing the market with Brent hitting a peak at $36/b before ending the day below $30/b. A cut of this magnitude would equate to both countries cutting production by close to 50%. Another volatile day ahead as Trump meets US oil executives and we await official responses from Russia and Saudi Arabia.
• SWE30.I (Sweden) – yesterday COVID-19 daily deaths rose to 69 which means that Sweden is now tracking the Italian death curve in per capita terms. OMX futures are down 25% since 19 Feb compared to 34% for Italian equities which means that there could a negative surprise in Swedish equities and especially if the country admits that the current strategy is wrong and moves the country into a strict lockdown.
• XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – With the current oversupply and subsequent very elevated contango – a major headwind for long positions in pure oil futures, CFD’s and ETF’s - we continue potential buyers to look at strong energy companies or ETF’s tracking a basket of oil and gas related stocks.
• US100.I (NASDAQ 100) – the higher beta US index to trade after it recently managed new local highs that were strongly rejected at mid-week, keeping the bears in control as long as 7760 holds as resistance (61.8% resistance of initial sell-off wave) with the next swing level for testing full extent of cycle lows down near 7150.
• EURJPY – we continue to see risks of safe haven seeking and the JPY possibly set to gain the most from any existential concerns centering on the EU’s inability to come up with a unified fiscal response to the Covid19 crisis. Watching the 116.00-25 area closely for a risk of a breakdown.
• USDCAD – despite yesterday’s oil volatility, USDCAD largely unchanged and many Canadian crude grades trading at a fraction of the US futures prices – if this latest gambit to get oil prices higher fails, the pressure on CAD mounts further. Volatility high, but looking for a close north of 1.4300 to signal risk of new test of the 1.4600+ highs and beyond.
• HMB:xome (H&M) – reports Q1 this morning showing pre-tax profit of SEK 2.5bn vs est. SEK 1.5bn, but the company is forecasting a net income loss in Q2 due to COVID-19. Online sales in March up 17%.

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)

• 0715-0800 – EU Mar. Final Services PMI
• 0800 – Norway Mar. Unemployment Rate
• 0830 – UK Mar. Services PMI
• 1230 – US Mar. Change in Nonfarm Payrolls (Consensus expectations are running at -100k, a testament to the irrelevance of this number, given the latest weekly claims of -6.6m out of work)
• 1230 – US Mar. Unemployment Rate, Average Hourly Earnings
• 1400 – US Mar. ISM Non-manufacturing – likely a somewhat better indicator of the sudden stop in the US economy, though many US shutdown measures didn’t occur until toward mid-month.

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