UPDATED 3PM:
European markets still traded broadly higher into lunch but failed to make much headway in a pretty lacklustre session. The FTSE 100 failed the test at 5900 and retreated to 5800 where it found support. Bear in mind this comes after a near 4% gain in the last trading session on Thursday. The DAX was off its highs but still traded up 1% for the session. As of send time, Wall Street is more positive and the Dow was looking to open about 300 points higher.
Meanwhile corporate earnings kicked off today with two Dow components first on the slate. Johnson & Johnson raised its dividend but lowered its guidance for 2020 to reflect the Covid-19 impact. The dividend was raised by 6.3% to $1.01 on adjusted earnings per share of $2.30 vs $2.01 forecast.
JPMorgan EPS came in a 78 cents vs $1.84 expected and $2.57 a year ago. The key thing was credit costs – provisions for losses jumped to $8.3bn, which was double the median estimate, although it was a lot lower than the $25bn that one analyst forecast. Last year the number was $1.3bn. The bank is preparing for a severe recession and needs to set aside capital to cover expected losses – problem is no one has a clue how big these might be. I should stress that even the cleverest banks won’t know just what the damage will be in a situation where the economy is stopped and then restarted. No big surprise to see a big improvement in trading revenues whilst similarly the drop in investment banking earnings was to be expected.
Wells Fargo was similarly weak - $0.01 EPS vs $0.33 expected down to the build-up of a huge capital buffer against expected credit losses. The bank raised its reserves by $3.1bn and took a $950 impairment charge that produced a headwind of $0.73 on EPS.
Gold pushed up to set fresh 7-year highs with spot up at $1727. The move higher comes investors hedge their bets against a sharp decline corporate earnings and a deluge of central bank printing. US retail sales tomorrow and China’s GDP print on Friday are likely to be the chief macro events to focus on. Whilst the gold safety net is all about the decline in real yields, the idea that central bank printing will lead to inflation seems a step too far given the profoundly deflationary shock from Covid-19. Nevertheless, despite inflation and inflation expectations tumbling the impact of Fed and other central bank easing could see real yields drop further into negative territory.
Crude oil futures (Front month WTI) were weaker still with $22 cracking. The massive contango still leaves the Jun contract at above $29. The spread means Spot Oil on the platform is trading with a huge premium to the normal futures contract. A retrace to $20 looks possible for the futures and the real question is how the Jun and further out contracts can hold up where they are. Whilst OPEC has cut output and US production is coming off sharply, the massive build in inventories will surely take time to unwind and we do not see a sudden rebound in demand as economies take time to come out of lockdown. Even when restrictions are lifted, it will take time for people to drive and fly as much as they did. And as far as the OPEC deal goes, Oman’s March output was up 13% in March vs February.
In FX, the pound was unmoved by the OBR saying that UK GDP could decline by 35% in the second quarter. The coronavirus will cause a deep recession and a £220bn black hole in the public purse, according to the watchdog. This is a known – what matters is how soon the exit from lockdown and how quickly the recovery. The latter depends to a huge degree on how effective the fiscal support has been – how well has money and relief got to companies and individuals. The hit to sentiment long term is going to be much harder to get over.
GBPUSD held gains north of 1.2530. As per this morning, the pair is looking to hold the rally above the 61.8 retracement at 1.25150. March swing highs around 1.2650 offer near-term resistance to the bulls, as well as the 200-day moving average at 1.2657.
09:00AM
After rallying into the Easter weekend, European markets were bit lacklustre on Tuesday but still trading marginally higher thanks to some decent numbers out of China and the continued hope that governments are getting a grip of the crisis. US shares closed softer on Monday, with the S&P 500 down 1 per cent, but this was after the best weekly rally for Wall Street since 1974.
Asian shares rallied overnight after better-than-expected Chinese trade data. Exports fell 6.6 per cent in March, against –14 per cent expected. Imports slipped 0.9 per cent vs –9.5 per cent forecast. With the usual caveats around Chinese government data, these numbers are much better than feared and underpinned broad strength in Asian trade. The Nikkei 225 closed 3 per cent higher, finishing at a one-month high, while shares across China were also up around the 1 per cent mark for the day. US futures are trading higher.
Lockdowns are being extended: The bitterer the pill, the stronger the medicine. At least that is what many governments are hoping for as they extend lockdowns and seek a path out of the mess. France will only gradually begin reopening the country from May 11th, while India’s lockdown is being extended through to May 3rd. The UK seems set to extend the lockdown by another 3 weeks to May 7th. The hope is that the more pain now, the quicker you can reopen the economy. We’ll need it – France's finance minister Le Maire says GDP will decline 8 per cent in 2020.
Meanwhile in the US, Donald Trump is as belligerent as ever, saying he is working on plans to reopen the economy, despite being the global epicentre of the outbreak and deaths exceeding 22,000. Several state governors are taking steps on their own to do this. The risk lies, as everyone knows, in reopening too soon and needing to close down again. But if the US economy does get moving sooner than elsewhere, we could see stocks outperform too.
Earnings season kicks off today in the US with the big banks. JPMorgan and Wells Fargo get the show on the road. Bank of America, Goldman Sachs and Morgan Stanley report on Wednesday. Investors seem to be expecting heightened volatility around this quarter’s earnings releases, reflecting the deep uncertainty about how bad the numbers will be. Heightened volatility will undoubtedly support trading top line, but we will need to see what effect government support has had on things like impairment charges. And as ever, the real focus will be on the earnings outlook for Q2.
Despite the historic OPEC++ deal to cut output by 9.7m bpd over the next two months and commit to ongoing curbs for two years, WTI has slipped lower since reopening on Monday and is forming a support zone around $22.30/40. Brent is struggling to hold $32.
There is still a lot uncertainty over whether the reduction in output will be enough. Saudi energy minister Abdulaziz Bin Salman said it will be more than the 9.7m headline cut, indicating as much as 19.5m bpd will come out of the market initially. But the commitment still lacks what some think could be a demand crash worth 30m bpd. Whilst there is bound to be a rebalancing in oil markets due to supply coming off, either by design or by default, most think OPEC and allies haven’t done enough to prop up prices in the near term, albeit they do seem to have shown a willingness to prevent a complete collapse as inventory builds threatened to overwhelm the market.
Output in North America is already collapsing. The EIA sees output down 366k bpd in April to 8.71m bpd and a further drop in May to 8.53m bpd. It wasn’t' long ago US output was around 13m bpd. In Canada the number of active rigs has declined to just 35 from as many as 240 in February. Bank of America says the deal by OPEC will stem the decline in the US – just 1.8m bpd being lost vs a 3.5m without the deal. It predicts demand for 2020 will be down 9.2m bpd, vs a prior estimate of 4.4m. Texas oil regulators could decide today to mandate 20 per cent production cuts.
The biggest uncertainty for oil is how quickly does demand recover in the medium term? Indeed, this is the central question for risk assets in general.
In FX, the pound pushed up to its strongest in a month versus the US dollar. GBPUSD broke clear of the month range yesterday and continues to find near term support above 1.2530. Looking to hold the rally above the 61.8 retracement at 1.25150.The mid-March swing highs around 1.2650 offer near-term resistance to the bulls, as well as the 200-day moving average at 1.2657 . Daily MACD still positive. The UK and EU are trying to keep the Brexit show on the road and are due to set out how they plan to progress trade talks on Wednesday.
Chart: FTSE 100, 1hr, MACD signalling weakness, look for support around Thursday’s lows at 5,677.
Neil Wilson is chief markets analyst at Markets.com
