Yesterday’s risk party has left participants with a bit of a hangover: risk assets have taken a bit of a beating today amid a slew of pretty rotten economic data and an ECB presser that maybe wasn’t all that. There is also a sense that equity markets rode too aggressively on the Gilead news and need to see more evidence, while the FTSE has notably underperformed thanks to the oil majors.
The S&P 500 opened down more than 1 per cent before paring losses to trade 0.5 per cent lower after half an hour of trading, while European stocks extended losses through the trading session to erase yesterday’s rally. The FTSE 100 has been knocked back under 6,000 as Shell tumbled on its dividend cut. Shell scrubbed around 60 points off the index, or about 1 per cent of the value of the market. BP scrubbed another 15 points or so as the Shell effect weighed on its peer – dividend doubts creeping in. AstraZeneca put on the most index points on hopes it will have a vaccine ready for limited use this year.
Aside from the meltdown for Shell shareholders and income investors, the news on the economic front has not been terribly good. Eurozone growth was -3.8 per cent in Q1, while US personal spending declined 7.5 per cent in March and US initial job claims surged by another 3.8m – taking total losses to almost 30m since the crisis broke.
FX markets showed a very sharp reversal for risk later on in the session as the AUD tumbled. AUDJPY broke the 0.6930 swing low before paring losses in a sharp move lower in the afternoon. AUDUSD also slid, taking an 0.64 handle briefly as it balked at the 100-day SMA at 0.65670. EURUSD was pretty well flat on the day as it endured the usual ECB whipsaw.
On that, the ECB didn’t really wow the markets with any major new support but did try to smooth bank liquidity operations with a new acronym – PELTROs, or pandemic emergency longer-term refinancing operations. The central bank did not expand the PEPP envelope but made it very clear.
More focus was on the presser and while Christine Lagarde’s delivery is still not very smooth, she repeated commitments on country-specific support in a clear and determined fashion that indicates the ECB is not going to let peripheral spreads blowout.
The peak hit ahead of the European open was the highest we’ve seen all day. The S&P 500 topped out at the Mar 6th cash close at 2973 before the European session got underway and headed weaker through to the cash open on Wall Street, with SPX testing the 2900 level again, which was rejected firmly. Looking to reclaim the 61.8% retracement at 2934, with support at 2885.
09:30 Shell sold, Lloyds crumples, markets look to future post Covid-19
Shares in Shell slumped 7 per cent as it cut its dividend and reported net income in the first quarter almost halved. Whilst BP chose to absorb a $6bn rise in net debt to $51bn and gearing above 36x in order to preserve its precious dividend, Shell seems to be taking a more prudent approach in cutting its dividend for the first time since the 1940s. Arguably BP is better placed to weather the storm, but Shell is taking the more sensible course of action. Shell’s gearing ratio is down to around 28x, a more comfortable level for Ben van Beurden than it is for Bernard Looney. This poses a simple question for investors – can BP keep it up? Investing in oil stocks is clearly a tricky game right now - read Michael Taylor's argument on why now might be the right time to consider Shell.
Shares in Lloyds sank 4 per cent after profits collapsed in the first quarter and it significantly raised impairment charges. Profits before tax fell by 95 per cent to £74m, as it raised credit losses provisions to £1.4bn. More worryingly for Lloyds is the 11 per cent fall in revenues – if the housing market remains sluggish it’s got a lot of exposure to worry about and doesn’t have the investment banking arm to fall back on that Barclays does. The read across hit RBS, which is similarly exposed to credit impairments in the UK, with shares almost 4 per cent lower. For our preview of all the major lenders' Q1's see this news feature.
The US economy shrank more than expected in the first quarter, declining by 4.8 per cent and signalling the slowdown in Q2 could be well beyond estimates. Spain’s economy declined by 5.2 per cent in the first quarter, marking the steepest contraction since records began in 1995. It was also worse than the ~4 per cent decline expected.
But the extent of economic destruction matters less to the market than the speed at which recovery will happen, so news from Gilead that its remdesivir drug can probably treat Covid-19 sent stocks into a strong rally. White House health advisor Dr Anthony Fauci gave it a cautious thumbs up, too. Global stock markets are looking to a world post-Covid-19, although the wider macro trade is less optimistic.
The S&P 500 rallied over 2.6 per cent, closing 5 points above the important 61.8 per cent retracement found at 2934, after the Gilead news. The Dow also rallied and is on pace for its best month since 1987. The broader S&P 500 is tracking its best month since Oct 1974. These are strange times for markets, but you have to look at the way in which tech is driving gains and how large caps can lean on central bank support.
European markets jumped yesterday and are skirting around the flat line after almost an hour of trading as traders try to figure out whether there is any more left in this rally. I don’t think markets are going to want to retest the highs any time soon and profit-taking and renewed risk-aversion will likely see a pullback before long.
Last night the Federal Reserve warned of medium-term risks to the economy and signalled there is not going to be a V-shape recovery. Jay Powell did nothing to upset markets and suggested it was likely the Fed would need to do more. The European Central Bank will need to communicate a similar message of support today.
Microsoft and Facebook earnings were very strong, beating estimates, but this does nothing but underline the relative safety to be found in high quality technology companies with strong balance sheets and resilience to lockdown measures. Facebook jumped 10 per cent in after-hours trading as it said April showed some stability in ad revenues, echoing the statement from Alphabet.
Oil continues to notch gains as the risk rally reflects hopes of the global economy opening up sooner, and after a smaller-than-feared build in US crude inventories. Front-month WTI rose above $17 in early European trade.
US crude oil inventories rose by 9m barrels from the previous week less than the 11-12m expected and giving some flicker of hope to beleaguered oil traders. Domestic US production slipped, but not by a lot, falling to 12.1m bpd from 12.2m bpd a week before.
Russia’s energy minister Novak said the country’s producers would cut output by 20 per cent from February levels in May, while Norway is playing ball with the OPEC+ arrangement by reducing production by 13 per cent. But demand falls still seem to exceed the capacity of the market to reduce supply. The International Energy Agency said Thursday that global energy demand will fall by 6 per cent in 2020, and will be down 9 per cent in the US and 11 per cent in the EU.
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Neil Wilson is chief markets analyst at Markets.com
