March 22 Market Update | Technical, Fundamental, News
Description:
An analysis for the week ahead.
Points of Interest:
50 week moving average (which sits on a 50% retracement level); 3-day balance and 2440 level; 2015 and 2016 distribution area; cycle analysis.
Technical:
On Monday, /ES dropped to a 61.80% retracement and balanced around that level until Friday news was followed by a move to prior day excess lows. Important to note -- on a multi-intraday basis -- price broke an uptrending line (i.e., a weak reference) that started Wednesday afternoon, but Wed, Thur, Fri value areas still overlapping.
Sunday’s open and Monday trading will determine if there is a break out of balance, accepting Friday’s end-of-day liquidation and prior day spikes. If that trend continues, immediate targets include 2200 and 1900. Cycle low at 3/18-3/23. If /ES stays in rotation and cannot get above 2400, then there is no meaningful trend change to take note of.
Index Analysis:
$SPX:
SPX
$RUT:
RUT
$NDX:
NDQ
$DJI:
NYA
$NYA:
NYA
$UKX:
UKX
$NI225:
NI225
$HSI:
HSI
Futures Analysis:
/GC:
/CL:
/NG:
/ZB:
Fundamental:
‘There’s A Sale At Penny’s’: Target fed funds rate has been slashed to 0-0.25%. This came alongside a 150 bp slash in the discount, “thereby narrowing the spread between the federal funds rate and discount rate to the top of the new federal funds target range.” Additionally, QE returned; the Fed will “begin the purchase of $500 billion of Treasury bonds across the curve beginning March 16 and it will also buy $200 billion of mortgage backed securities as a means to support the housing market.” This version of QE will “resume reinvestment of both maturing Treasury securities and mortgaged backed securities. At the same time, the Board of Governors put out a statement that not only encouraged banks to rely upon intraday credit to support a smooth functioning payments system but also urged large bank holding companies to dip into their liquidity buffers as needed to support lending and the economy” (bit.ly/2Uub0rx).
‘99 Problems’ And Liquidity Is One: Last week investors observed disruptions in the U.S. Treasury market as shown by wide spreads and difficult transaction completion (bit.ly/3adlQZY). That said, the Federal Reserve announced its intentions to enhance liquidity swap line arrangements alongside 5 other major central banks, helping ease dollar funding stress. Adding, “'The swap lines among these central banks are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets,' the joint statement said." "Dollars have been in huge demand ... outside U.S. borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling." Read More Here: reut.rs/2xfoMXn.
‘Hot Hot Hot’: Home sales surged to a high. This came alongside a rise in homebuilding, single-family completions and inventory of homes under construction. The National Association of Realtors expects recent social distancing policies to hurt the selling season, but sees hope in Fed Stimulus (reut.rs/2J5yNJh). Note: “ortgage agreements effectively constrain ... selling properties at a loss, sellers must delay any planned sale until the economy recovers,” according to Moody's Analytics. “This all translates into a steep decline in existing home sales during recessions.” "Last month, houses for sale typically stayed on the market for 36 days, down from 43 days in January, and 44 days a year ago. 47% of homes sold in February were on the market for less than a month. First time buyers accounted for 32% of sales last month, matching January."
‘The Walls Is Gray, The Clothes Is Orange’: According to Moody’s Analytics, the recent bill to address the virus shutdown and mitigate the economic impact adds to deficit and tilts outlook down, worsened by a lack in “mandated paid sick leave and universal healthcare, which may necessitate fiscal stimulus” (t.co/oFGQRXqN1f?amp=1). Adding, if fiscal stimulus is successful, higher GDP growth would alleviate an intense “upward trajectory of the federal debt burden.” Debt would remain affordable in the face of low rates, “a key pillar of … fiscal strength.” Moody’s base case for the virus concentrates the economic disruption through Q2 2020, alongside lower realized GDP growth. Additionally, Moody’s stated that liquidity and functioning credit markets -- alone -- are insufficient in stopping bank asset declines; also, bank credit cost increases will ding profits, but equity, funding cushions are strong.
‘Work Hard Play Hard’: “Goldman Sachs predicts more than 2 million Americans will file for unemployment claims by next week, pointing to ‘an unprecedented surge’” (bit.ly/2wvkcUC). "If Goldman's economic forecasters are right, the number of Americans filing initial claims for unemployment benefits next week will more than triple the all-time high of 695,000 set in October 1982, and nearly four times the number seen at the peak of the Great Recession." This came alongside a jump in initial claims for the week ending March 14 (bit.ly/33DNvjW). "Thursday's jobless claims report is likely 'only the tip of the iceberg: These numbers do not account for the surge of new claims from overwhelmed websites from coast to coast.'" Adding, the hardest hit sectors include sports, entertainment, hotels, restaurants, transportation and retail. In the same article, Bank of America strategists said that a total of approximately 3.5 million jobs will be lost.
‘I’m Back’: After two months of viral insanity, China and other economic centers in the region are returning to work. That said, “data show the recovery might be slower than expected as people still avoid activities that risk of social contact and infection. For example, data show coal consumption for power generation remains 30% below normal levels, road congestion is still 40% below normal levels. Other more “risky” activities that require physical proximity, like riding the subway remains down even more, around 66% below normal while attendance at movies has virtually stopped. Other data shows that passenger arrivals in Hong Kong and Thailand airports are around 10% of normal levels, and that in turn affects oil demand, restaurants, hotels and tourism even in unaffected locations. Supply chains are also disrupted. Chinese ports have triple the normal number of containers waiting to be offloaded” (bit.ly/2J2arAd).
‘Big Things Poppin’: According to a Bloomberg Opinion article, “forward PE’s look attractive for a period with such low interest rates, but they aren’t even close to the levels seen during the 2008 Credit Crisis or even the Sovereign Debt Crisis, where negative earnings and corporate solvency was a problem” (bit.ly/2J2arAd).
U.S. Expansion: The New York Fed’s Empire State business conditions index fell to its lowest level since the Global Financial Crisis. “The impact of the coronavirus was still in its early stages at the time of this survey. Nonetheless, the early indications suggest that the impact was substantial” (bit.ly/33zr5k7).
‘Hello, goodbye’: Oil took a dump as Saudi Arabia escalated tensions with Russia. The intent of a heavy supply increase is to get the Russian’s negotiating. Read more about this chicken fight at reut.rs/2INzgQc. What happens to the United States? Well, according to Reuters, "'U.S. production is likely less well hedged than the market realizes,' said Michael Tran, managing director of energy strategy at RBC Capital Markets in New York” (reut.rs/2TNGCJQ). Basically, producers bought protective put spreads and collars which only hedged from normal (expected) declines. What happened wasn’t quite expected, and so, some firms, like $APA and $CLR are facing severe trouble. Here are break-even prices for oil producing countries (tmsnrt.rs/2QbTAyI). Adding to this information, if there was a supply-war truce, two things would happen; first, prices would not return to pre-OPEC levels as demand has deteriorated; second, higher prices would help backstop energy and financial markets, allowing efforts to be diverted to fighting a global financial crisis (reut.rs/2xRjOjE).
‘Push It’: For fiscal stimulus to work, almost $4 trillion would need to be injected into the economy. “U.S. gross domestic product is $20 trillion in round numbers, of which 70%, again in round numbers, comes from consumption. That means that consumers contribute a bit less than $1.2 trillion each month. So if the nation comes to a complete halt and stays that way for three months, the implication is that it will take a bite approaching $4 trillion out of GDP. So a fiscal package of $4 trillion might be in order” (bloom.bg/2Qx68ko).
Supply Risks: Joe Brusuelas of RSM expects supply shocks to roll from Asia, to Europe and then North America, "with the worst impact for businesses to come in April and May” (bit.ly/3cV15nD). Additionally, an ISM survey indicates that the virus caused supply disruptions for 75% of U.S. companies, leading to a hit in revenues (bit.ly/2IOsp9b).
Delinquency rates move higher (bit.ly/2QhAGq6); I detailed subprime auto-loan issues in a Benzinga.com article I wrote late last year (bit.ly/2vXjFec).
Consumer confidence fell to its lowest since January 2019 (bit.ly/3bkXH3t).
Sentiment: 34.4% Bullish, 14.5% Neutral, 51.1% Bearish as of 3/21/2020. (bit.ly/330VhEp)
In The News:
Narrative Economics: “Narratives have the power to amplify and accelerate the transmission of recessionary or expansionary forces through the economy because they can become self-fulfilling” (reut.rs/33zmyOC).
“Bruno Braizinha at Bank of America had this perspective, earlier this week: When we abstract from the near-term noise and volatility and refocus on year-end scenarios we find two limiting cases: (1) a U.S. recession scenario with the pricing of the Fed to the Zero Lower Bound, which implies 20 basis points for two-year Treasuries and 50-80 basis points for 10-year Treasuries; or (2) an upswing back to trend growth as the coronavirus outbreak dissipates, which likely implies a Fed on hold after a 50 basis-point cut (two-year Treasuries around 1.1%) and 10-year Treasuries in the 1.5-1.7% range. A 50/50 weighting of these scenarios implies a 1-1.25% range for 10-year Treasuries at year-end. With forwards currently around 1.1%, the market seems to be assigning a marginally higher probability to the bullish rates scenario (bearish risky assets) for end-2020” (bloom.bg/2TT0JF4).
‘Roar’: According to Michael Bloomberg, restoring confidence in the months ahead -- after the hardest economic hits have taken place -- will fall on Congress passing a major infrastructure and clean energy bill before the April recess. In doing so, shovels can hit the ground when everyone is looking for signs of hope and growth (bloom.bg/3bkVuFd).
Goldman injects $1 billion into money-market portfolios after heavy withdrawals. “The recent market panic has been reminiscent of what happened in 2008, when money-market fund problems threatened to freeze up global markets” (reut.rs/3abeEx7).
Creditworthiness Took A Hit: “The share of bond issuers with the lowest investment grade rating — BBB- for S&P and Fitch or Baa3 for Moody’s — has risen to around 45% in Europe from around 14% in 2000, and to 36% in the United States from 29%, BIS analysis shows” (reut.rs/2vIKClC). A drop in ratings could lead to a mass sale in bonds.
Energy Slump: “While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time. The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude. In the short run, Russia is in a good position to withstand an oil price slump. The budget breaks even at a price of $42 a barrel and the finance ministry has squirreled away billions in a rainy-day fund. Nonetheless, the coronavirus’s impact on the global economy is still unclear and with millions more barrels poised to flood the market, Wall Street analysts are warning oil could test recent lows of $26 a barrel” (yhoo.it/39BlzPY).
Cue The Unwind: Last week I made a note about deleveraging. Brokers, including IBKR, suspended intraday margin discounts and made changes to liquidation deferrals (bit.ly/3aUq34t). Adding to the leverage discussion is Bank Of America ($BAC) claiming that the “unwind of leveraged trading strategies risk creating ‘a cascading effect whereby U.S. Treasury Yields rise sharply and force liquidations from other similar investors’” (on.wsj.com/33CcR1H). According to the Wall Street Journal article, “Thanks to the disruption of short-term funding, securities dealers could be left with $300 billion of 30-year Treasurys on their books whose ultimate sale would cause U.S. Treasury yields to rise sharply, potentially forcing further unwinds." “The risk parity strategy at the center of this debacle is “intended to adapt to market conditions and be a one-stop shop for investor assets. Firms including Bridgewater Associates LP and AQR Capital Management LLC are the leading investors in the strategy." "If stocks are ... three times as volatile as Treasury bonds, an investor would put three times as much in bonds as in stocks, for example. As stock volatility increases ... a risk-parity portfolio manager would sell some stocks ... adding pressure on the overall stock market." "And if bonds or other safer asset classes also come under pressure and become more volatile, as has also been happening this week, they’d sell those as well, incurring losses along the way." "Risk parity is not big enough, doesn’t trade enough, and doesn’t trade quickly enough to ever be noticeable in the movements of stock or bond markets." According to the article, key factors in volatility include scarce liquidity, prevalence of technical trading, as well as institutional risk management strategies.
Too Hot To Handle: CME Group, Inc. ($CME) announced the auction of Ronin Capital portfolios which fell victim to recent market turmoil (yhoo.it/2Qxe2dy). The firm’s problems stemmed from positions tied to the $VIX (cnb.cx/3aaSyLs). ZeroHedge was the first to report on this situation with an article titled “Someone Big Was Utterly Blown The F**k Out” -- bit.ly/2xZdbvT.
Guggenheim’s Minerd Sees A Depression Coming: “This thing could spiral into something akin to a global depression,” Minerd said in a Bloomberg Television interview on Monday. “That risk is not remote at this point. I would say we have at least a 10% or 20% chance of that.” Minerd noted that sovereign debt has risen to disturbing levels and the $SPX could fall 50% (bloom.bg/2WwXvdl).
Information I'm Carrying Forward:
‘V-Shaped’ Recovery: Despite the rapid increase in coronavirus cases (bit.ly/2VWCvN6) across the rest of the world, China seems to be recovering. According to Bloomberg, “Reservations for domestic flights and hotels in China are recovering from a coronavirus-induced slump as people return to work across the nation” (bloom.bg/38CeEES). Additionally, Chinese cargo flows at ports are recovering, according to Freight Waves (bit.ly/3cHVgK0).
‘Help! I’ve Fallen, And I Can’t Get Up!’: According to ARK Investment Management, prior to COVID-19 entering the U.S., consumer confidence, spending and business were improving. "The US Purchasing Managers Index had plummeted to a four year low. Consumers have been responding to record low unemployment rates and accelerating wage gains while businesses have been unsettled by various #trade conflicts and flattening to inverted yield curves." Ark suggests that inverted yield curves (which usually precede recessions) were a commonplace during periods of disruptive innovation, leading up to the 1920s. That said, what does all this information mean for a subsequent recovery? Well, Ark suggests that lags in inventory and capital spending are worrisome; "While real GDP could be hit through mid-year by cancelled flights and conferences and other business disruptions causing another round of inventory and capital spending cuts, the rubber band associated with a global rebound has been stretching for more than a year now." In other words, Ark thinks we may experience a V-shaped recovery (bit.ly/3d1vpg2).
"The healthy reserves of many states and cities are why we think municipalities are well positioned to weather some economic dislocation,” according to Cumberland Advisors (bit.ly/3cLaXQO).
Exploration and production “firms hold the majority of the $86 billion of debt coming due in 2020-24, implying a higher default risk for the industry” (bit.ly/3aW3egR).
“Oil prices expected to remain anchored around $65 per barrel through 2024.” (tmsnrt.rs/38Nl3Nx) Visit (tmsnrt.rs/38Nl3Nx) to view strategic choices for Saudi Arabia and Russia to protect prices and/or defend market share; one option includes forcing U.S. shale to slowdown.
"Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash … Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now." (bit.ly/3cJ7phV) Adding, firm’s have reduced spending (bit.ly/2TTo5fj) which may weaken the economy; The BLS released a report which turned negative for the first time in a while (bit.ly/33jCKDB).
Talk Of Credit Crisis: According to Bloomberg, the fear that a coronavirus-panic and slowdown may cause a credit crisis was ignited after financial conditions tightened despite the Federal Reserve’s emergency rate cut (bloom.bg/2TydohN). Adding, Bloomberg suggests that signs of stress in the credit market are apparent through multiple channels; credit card and loan delinquencies are appearing on the consumer lending front, while across the world, “Non-bank companies have drastically upped their leverage since the last crisis, as treasurers have taken advantage of historically low interest rates” (bloom.bg/2TydohN). The same article alleges that this increase in debt and leverage is a problem, even in a low rate environment, due to the “profitability drought that is making it harder for companies to service debts.”
"A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months … While China’s government has cut interest rates, ordered banks to boost lending and loosened criteria for companies to restart operations, many of the nation’s private businesses say they’ve been unable to access the funding they need to meet upcoming deadlines for debt and salary payments. Without more financial support or a sudden rebound in China’s economy, some may have to shut for good” (bloom.bg/39DjNxK).
Canada passes new Nafta deal. (bloom.bg/33N2gkV).
Disclaimer:
This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve, especially me.
An analysis for the week ahead.
Points of Interest:
50 week moving average (which sits on a 50% retracement level); 3-day balance and 2440 level; 2015 and 2016 distribution area; cycle analysis.
Technical:
On Monday, /ES dropped to a 61.80% retracement and balanced around that level until Friday news was followed by a move to prior day excess lows. Important to note -- on a multi-intraday basis -- price broke an uptrending line (i.e., a weak reference) that started Wednesday afternoon, but Wed, Thur, Fri value areas still overlapping.
Sunday’s open and Monday trading will determine if there is a break out of balance, accepting Friday’s end-of-day liquidation and prior day spikes. If that trend continues, immediate targets include 2200 and 1900. Cycle low at 3/18-3/23. If /ES stays in rotation and cannot get above 2400, then there is no meaningful trend change to take note of.
Index Analysis:
$SPX:
SPX
$RUT:
RUT
$NDX:
NDQ
$DJI:
NYA
$NYA:
NYA
$UKX:
UKX
$NI225:
NI225
$HSI:
HSI
Futures Analysis:
/GC:
Fundamental:
‘There’s A Sale At Penny’s’: Target fed funds rate has been slashed to 0-0.25%. This came alongside a 150 bp slash in the discount, “thereby narrowing the spread between the federal funds rate and discount rate to the top of the new federal funds target range.” Additionally, QE returned; the Fed will “begin the purchase of $500 billion of Treasury bonds across the curve beginning March 16 and it will also buy $200 billion of mortgage backed securities as a means to support the housing market.” This version of QE will “resume reinvestment of both maturing Treasury securities and mortgaged backed securities. At the same time, the Board of Governors put out a statement that not only encouraged banks to rely upon intraday credit to support a smooth functioning payments system but also urged large bank holding companies to dip into their liquidity buffers as needed to support lending and the economy” (bit.ly/2Uub0rx).
‘99 Problems’ And Liquidity Is One: Last week investors observed disruptions in the U.S. Treasury market as shown by wide spreads and difficult transaction completion (bit.ly/3adlQZY). That said, the Federal Reserve announced its intentions to enhance liquidity swap line arrangements alongside 5 other major central banks, helping ease dollar funding stress. Adding, “'The swap lines among these central banks are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets,' the joint statement said." "Dollars have been in huge demand ... outside U.S. borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling." Read More Here: reut.rs/2xfoMXn.
‘Hot Hot Hot’: Home sales surged to a high. This came alongside a rise in homebuilding, single-family completions and inventory of homes under construction. The National Association of Realtors expects recent social distancing policies to hurt the selling season, but sees hope in Fed Stimulus (reut.rs/2J5yNJh). Note: “ortgage agreements effectively constrain ... selling properties at a loss, sellers must delay any planned sale until the economy recovers,” according to Moody's Analytics. “This all translates into a steep decline in existing home sales during recessions.” "Last month, houses for sale typically stayed on the market for 36 days, down from 43 days in January, and 44 days a year ago. 47% of homes sold in February were on the market for less than a month. First time buyers accounted for 32% of sales last month, matching January."
‘The Walls Is Gray, The Clothes Is Orange’: According to Moody’s Analytics, the recent bill to address the virus shutdown and mitigate the economic impact adds to deficit and tilts outlook down, worsened by a lack in “mandated paid sick leave and universal healthcare, which may necessitate fiscal stimulus” (t.co/oFGQRXqN1f?amp=1). Adding, if fiscal stimulus is successful, higher GDP growth would alleviate an intense “upward trajectory of the federal debt burden.” Debt would remain affordable in the face of low rates, “a key pillar of … fiscal strength.” Moody’s base case for the virus concentrates the economic disruption through Q2 2020, alongside lower realized GDP growth. Additionally, Moody’s stated that liquidity and functioning credit markets -- alone -- are insufficient in stopping bank asset declines; also, bank credit cost increases will ding profits, but equity, funding cushions are strong.
‘Work Hard Play Hard’: “Goldman Sachs predicts more than 2 million Americans will file for unemployment claims by next week, pointing to ‘an unprecedented surge’” (bit.ly/2wvkcUC). "If Goldman's economic forecasters are right, the number of Americans filing initial claims for unemployment benefits next week will more than triple the all-time high of 695,000 set in October 1982, and nearly four times the number seen at the peak of the Great Recession." This came alongside a jump in initial claims for the week ending March 14 (bit.ly/33DNvjW). "Thursday's jobless claims report is likely 'only the tip of the iceberg: These numbers do not account for the surge of new claims from overwhelmed websites from coast to coast.'" Adding, the hardest hit sectors include sports, entertainment, hotels, restaurants, transportation and retail. In the same article, Bank of America strategists said that a total of approximately 3.5 million jobs will be lost.
‘I’m Back’: After two months of viral insanity, China and other economic centers in the region are returning to work. That said, “data show
‘Big Things Poppin’: According to a Bloomberg Opinion article, “forward PE’s look attractive for a period with such low interest rates, but they aren’t even close to the levels seen during the 2008 Credit Crisis or even the Sovereign Debt Crisis, where negative earnings and corporate solvency was a problem” (bit.ly/2J2arAd).
U.S. Expansion: The New York Fed’s Empire State business conditions index fell to its lowest level since the Global Financial Crisis. “The impact of the coronavirus was still in its early stages at the time of this survey. Nonetheless, the early indications suggest that the impact was substantial” (bit.ly/33zr5k7).
‘Hello, goodbye’: Oil took a dump as Saudi Arabia escalated tensions with Russia. The intent of a heavy supply increase is to get the Russian’s negotiating. Read more about this chicken fight at reut.rs/2INzgQc. What happens to the United States? Well, according to Reuters, "'U.S. production is likely less well hedged than the market realizes,' said Michael Tran, managing director of energy strategy at RBC Capital Markets in New York” (reut.rs/2TNGCJQ). Basically, producers bought protective put spreads and collars which only hedged from normal (expected) declines. What happened wasn’t quite expected, and so, some firms, like $APA and $CLR are facing severe trouble. Here are break-even prices for oil producing countries (tmsnrt.rs/2QbTAyI). Adding to this information, if there was a supply-war truce, two things would happen; first, prices would not return to pre-OPEC levels as demand has deteriorated; second, higher prices would help backstop energy and financial markets, allowing efforts to be diverted to fighting a global financial crisis (reut.rs/2xRjOjE).
‘Push It’: For fiscal stimulus to work, almost $4 trillion would need to be injected into the economy. “U.S. gross domestic product is $20 trillion in round numbers, of which 70%, again in round numbers, comes from consumption. That means that consumers contribute a bit less than $1.2 trillion each month. So if the nation comes to a complete halt and stays that way for three months, the implication is that it will take a bite approaching $4 trillion out of GDP. So a fiscal package of $4 trillion might be in order” (bloom.bg/2Qx68ko).
Supply Risks: Joe Brusuelas of RSM expects supply shocks to roll from Asia, to Europe and then North America, "with the worst impact for businesses to come in April and May” (bit.ly/3cV15nD). Additionally, an ISM survey indicates that the virus caused supply disruptions for 75% of U.S. companies, leading to a hit in revenues (bit.ly/2IOsp9b).
Delinquency rates move higher (bit.ly/2QhAGq6); I detailed subprime auto-loan issues in a Benzinga.com article I wrote late last year (bit.ly/2vXjFec).
Consumer confidence fell to its lowest since January 2019 (bit.ly/3bkXH3t).
Sentiment: 34.4% Bullish, 14.5% Neutral, 51.1% Bearish as of 3/21/2020. (bit.ly/330VhEp)
In The News:
Narrative Economics: “Narratives have the power to amplify and accelerate the transmission of recessionary or expansionary forces through the economy because they can become self-fulfilling” (reut.rs/33zmyOC).
“Bruno Braizinha at Bank of America had this perspective, earlier this week: When we abstract from the near-term noise and volatility and refocus on year-end scenarios we find two limiting cases: (1) a U.S. recession scenario with the pricing of the Fed to the Zero Lower Bound, which implies 20 basis points for two-year Treasuries and 50-80 basis points for 10-year Treasuries; or (2) an upswing back to trend growth as the coronavirus outbreak dissipates, which likely implies a Fed on hold after a 50 basis-point cut (two-year Treasuries around 1.1%) and 10-year Treasuries in the 1.5-1.7% range. A 50/50 weighting of these scenarios implies a 1-1.25% range for 10-year Treasuries at year-end. With forwards currently around 1.1%, the market seems to be assigning a marginally higher probability to the bullish rates scenario (bearish risky assets) for end-2020” (bloom.bg/2TT0JF4).
‘Roar’: According to Michael Bloomberg, restoring confidence in the months ahead -- after the hardest economic hits have taken place -- will fall on Congress passing a major infrastructure and clean energy bill before the April recess. In doing so, shovels can hit the ground when everyone is looking for signs of hope and growth (bloom.bg/3bkVuFd).
Goldman injects $1 billion into money-market portfolios after heavy withdrawals. “The recent market panic has been reminiscent of what happened in 2008, when money-market fund problems threatened to freeze up global markets” (reut.rs/3abeEx7).
Creditworthiness Took A Hit: “The share of bond issuers with the lowest investment grade rating — BBB- for S&P and Fitch or Baa3 for Moody’s — has risen to around 45% in Europe from around 14% in 2000, and to 36% in the United States from 29%, BIS analysis shows” (reut.rs/2vIKClC). A drop in ratings could lead to a mass sale in bonds.
Energy Slump: “While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time. The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude. In the short run, Russia is in a good position to withstand an oil price slump. The budget breaks even at a price of $42 a barrel and the finance ministry has squirreled away billions in a rainy-day fund. Nonetheless, the coronavirus’s impact on the global economy is still unclear and with millions more barrels poised to flood the market, Wall Street analysts are warning oil could test recent lows of $26 a barrel” (yhoo.it/39BlzPY).
Cue The Unwind: Last week I made a note about deleveraging. Brokers, including IBKR, suspended intraday margin discounts and made changes to liquidation deferrals (bit.ly/3aUq34t). Adding to the leverage discussion is Bank Of America ($BAC) claiming that the “unwind of leveraged trading strategies risk
Too Hot To Handle: CME Group, Inc. ($CME) announced the auction of Ronin Capital portfolios which fell victim to recent market turmoil (yhoo.it/2Qxe2dy). The firm’s problems stemmed from positions tied to the $VIX (cnb.cx/3aaSyLs). ZeroHedge was the first to report on this situation with an article titled “Someone Big Was Utterly Blown The F**k Out” -- bit.ly/2xZdbvT.
Guggenheim’s Minerd Sees A Depression Coming: “This thing could spiral into something akin to a global depression,” Minerd said in a Bloomberg Television interview on Monday. “That risk is not remote at this point. I would say we have at least a 10% or 20% chance of that.” Minerd noted that sovereign debt has risen to disturbing levels and the $SPX could fall 50% (bloom.bg/2WwXvdl).
Information I'm Carrying Forward:
‘V-Shaped’ Recovery: Despite the rapid increase in coronavirus cases (bit.ly/2VWCvN6) across the rest of the world, China seems to be recovering. According to Bloomberg, “Reservations for domestic flights and hotels in China are recovering from a coronavirus-induced slump as people return to work across the nation” (bloom.bg/38CeEES). Additionally, Chinese cargo flows at ports are recovering, according to Freight Waves (bit.ly/3cHVgK0).
‘Help! I’ve Fallen, And I Can’t Get Up!’: According to ARK Investment Management, prior to COVID-19 entering the U.S., consumer confidence, spending and business were improving. "The US Purchasing Managers Index had plummeted to a four year low. Consumers have been responding to record low unemployment rates and accelerating wage gains while businesses have been unsettled by various #trade conflicts and flattening to inverted yield curves." Ark suggests that inverted yield curves (which usually precede recessions) were a commonplace during periods of disruptive innovation, leading up to the 1920s. That said, what does all this information mean for a subsequent recovery? Well, Ark suggests that lags in inventory and capital spending are worrisome; "While real GDP could be hit through mid-year by cancelled flights and conferences and other business disruptions causing another round of inventory and capital spending cuts, the rubber band associated with a global rebound has been stretching for more than a year now." In other words, Ark thinks we may experience a V-shaped recovery (bit.ly/3d1vpg2).
"The healthy reserves of many states and cities are why we think municipalities are well positioned to weather some economic dislocation,” according to Cumberland Advisors (bit.ly/3cLaXQO).
Exploration and production “firms hold the majority of the $86 billion of debt coming due in 2020-24, implying a higher default risk for the industry” (bit.ly/3aW3egR).
“Oil prices expected to remain anchored around $65 per barrel through 2024.” (tmsnrt.rs/38Nl3Nx) Visit (tmsnrt.rs/38Nl3Nx) to view strategic choices for Saudi Arabia and Russia to protect prices and/or defend market share; one option includes forcing U.S. shale to slowdown.
"Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash … Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now." (bit.ly/3cJ7phV) Adding, firm’s have reduced spending (bit.ly/2TTo5fj) which may weaken the economy; The BLS released a report which turned negative for the first time in a while (bit.ly/33jCKDB).
Talk Of Credit Crisis: According to Bloomberg, the fear that a coronavirus-panic and slowdown may cause a credit crisis was ignited after financial conditions tightened despite the Federal Reserve’s emergency rate cut (bloom.bg/2TydohN). Adding, Bloomberg suggests that signs of stress in the credit market are apparent through multiple channels; credit card and loan delinquencies are appearing on the consumer lending front, while across the world, “Non-bank companies have drastically upped their leverage since the last crisis, as treasurers have taken advantage of historically low interest rates” (bloom.bg/2TydohN). The same article alleges that this increase in debt and leverage is a problem, even in a low rate environment, due to the “profitability drought that is making it harder for companies to service debts.”
"A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months … While China’s government has cut interest rates, ordered banks to boost lending and loosened criteria for companies to restart operations, many of the nation’s private businesses say they’ve been unable to access the funding they need to meet upcoming deadlines for debt and salary payments. Without more financial support or a sudden rebound in China’s economy, some may have to shut for good” (bloom.bg/39DjNxK).
Canada passes new Nafta deal. (bloom.bg/33N2gkV).
Disclaimer:
This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve, especially me.
This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve (myself especially), so if you see something wrong, speak up.
