First up, the Federal Reserve kicks off its two-day meeting today (28 April) and while there is always scope for a surprise, we would not anticipate any change to the policy outlook, chiefly because the Fed is no longer waiting for scheduled policy meetings but is operating in ‘real-time’.
There is virtually zero chance the Fed will remove any accommodation until the threat of Covid-19 has passed. But if anyone thinks the FOMC will go negative they are in for a shock – there is no appetite to cut rates any lower and go below the zero lower bound. Europe and Japan are hardly shining examples of that policy working. Jay Powell has already ruled it out, though that in itself is not a reason it won’t happen.
The Fed has already thrown the kitchen sink at the market and the economy, announcing unlimited bond buying - QE4ever - and expansion of corporate debt buying to include junk. There is not a huge amount left for the Fed could realistically do, save buying stocks outright and taking rates negative, neither or which are palatable or likely in the near term, partly because the efforts so far have calmed market stress and prevented further dislocation.
Markets will be looking for any signal from Jay Powell about how the Fed views the rebound – is he still confident of a bounce back in the second half? Formal projections are not due until June.
It’s a fairly similar story for the European Central Bank (ECB). We think they will not commit to any further policy moves right now but will likely signal they are ready to do so by June. The Pandemic Emergency Purchase Programme (PEPP) QE lift has been initiated with an overall envelope of €750bn, and it appears likely to be expanded by an additional €500bn in the next month or three.
Two key things will be the focus. First the communication needs to be crystal clear – we don’t want a repeat of the spreads widening fiasco from Christine Lagarde. Since then the ECB has been absolutely on-point. The ECB must be continue to show to the market that it stands four-square behind the functioning of markets, the single currency and supporting the EZ economy. And on this, I would anticipate a lot of the focus in the press conference to be on the European Council efforts on a bailout package. Watch the BTPs-Bund spreads for how the market views the ECB performance.
EURUSD – as noted on Monday, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission showed euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since then. We saw a shift like this in speculative EUR positioning in 2017 it preceded a 15% rally in EURUSD.
Daily - Bulls looking to take out the 50-day SMA at 1.0950 area before push to the 23.6% retracement around 1.1090.
1hr – Majority of today’s gains being overturned as USD comes back.
08:30 HSBC & BP absorb the damage, oil plunges again
The S&P 500 rallied to close at its highest since 10 March as investors pin their hopes on states reopening in the coming days and weeks, but we’ve had a less impressive session overnight in Asia.
European shares are a bit mixed today on a huge day for corporate earnings, which are by and large showing up the huge damage being done to heavyweight stocks from Covid-19 and the collapse in oil prices. The FTSE 100 opened mildly lower but is holding the 5800 level.
US futures have weakened along with oil, which is coming under intense selling pressure again.
HSBC joined the growing number of banks setting aside huge amounts of capital to absorb the expected economic hit from the Covid-19 outbreak. Today’s Q1 update showed a 48 per cent decline in reported profits before tax to $3.2bn as it hiked loan loss provisions to $3bn. It comes after a $3.9bn loss in Q4 2019 due to writing down assets in its investment and commercial banking arms in Europe by $7.3bn. Shares slipped nearly 2 per cent in early trade in London.
There are two main challenges for HSBC. First its pivot to Asia and reliance on earnings out east, at a time when emerging market growth could become very challenged due to Covid-19 and a stronger USD. Second, it’s embarking on a major restructuring designed to slash costs that will inevitably be delayed. Management note today they will be slower to reduce risk weighted assets (RWAs).
Having been made to scrap dividends and buybacks by UK regulators, there was chatter HSBC would think about moving its headquarters out of London and back to Hong Kong. Investors residing in the ex-colony were not impressed, with some launching a legal challenge. HSBC took the strange step of apologising to them today for the loss of income. But while regulators over here may be exceedingly cautious and willing to bash the banks at times, it’s nothing on what awaits if you get within reach of Beijing. Reassessment of the West’s relationship with China after Covid-19 suggests it will be prudent to stick to London.
Elsewhere, European banks are in full reporting mode this week. Santander profits were down 82 per cent after setting aside €1.6bn in provisions for losses. UBS profits rose 40 per cent and it seems less exposed to loan loss provisions than many peers.
BP, meanwhile, faces a single problem – a collapsing oil market as demand falls and prices plunge. Management reported underlying replacement cost profit for the first quarter of $0.8bn, compared with $2.4bn for the same period a year earlier. This, they said, reflected lower prices, demand destruction in the downstream particularly in March, a lower estimated result from Rosneft and a lower contribution from oil trading.
As a result, net debt ballooned by $6bn to $51.4bn leaving gearing at 36.2%. But it’s maintained its dividend – for now. The $10bn acquisition of BHP’s shale assets was not such a smart move. As mentioned before, if BP wants to go green and be ‘carbon neutral’ by 2050, it’s going to require higher oil prices to do it. Oil will pay for the shift away from oil. BP shares slipped 2% in early trade.
Finally, highlighting the extent of the damage in US shale, Weir Group reports today that Q1 Oil & Gas orders were down 34 per cent, and expects capex in North America to be down 50 per cent in 2020.
Oil slumps again
On oil, the front-month (June) WTI contract is coming in for the expected bashing. Prices plunged Monday and have extended losses in Asia after USO said it was dumping its June contracts, about 20% of its holdings. It was inevitable that the front month would again hit the skids as we approach tank tops in the US and producers are too slow to turn off the taps. Increasingly there are also signs floating storage is running out for Brent. There is nothing to stop front month WTI approaching zero again with nowhere to stash the oil. The market will remain in steep contango as traders try to find shelter in future months but this only heaps more and more pressure on the front months.
Charts of the day
Having cleared the 50-day simple moving average decisively with yesterday’s close, the S&P 500 is now facing the key resistance around 2885.
WTI has slumped again and continues to make new lows this morning – path to zero is open again.
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Neil Wilson is chief markets analyst at Markets.com
