Unwinding The Global Lockdown

Okay, very good morning to you. Monday, 20th of April. Hope everyone had a great weekend. Going to go through not just the, the kind of situation as it stands right now, but have a bit of a look over the week ahead. What are the key things that we're looking out for? To the side of me here, you can see a blog called the Macro Menu. So anyone new to this channel, please do like and subscribe to the video first of all for daily updates for me and the team. But also every Sunday I basically publish a report called the Macro Menu, which is my kind of fundamental view about the week ahead and some of the key issues that I'm looking at. So some of the things, just to give you an overview that I've looked at this week, is the economic reality kind of hitting home in regard to more economic data coming out. This week, specifically the PMI data. I'm quite interested to look at that's coming out from pretty much every major economy around the world this week, including the US and the eurozone, as well as the UK. And then we've got initial jobless claims. People are still going to be looking at that. And I was reading a couple of things over the weekend, and what I thought was, you know, just a quite striking number was that Oxford Economics were talking about in their research report that they're looking for non-farm payrolls for the month of April, so that we'll get at the beginning of May. They're looking for a number of around -25 million. Obviously, mathematically, it does make sense just given the, the scope, as this graphic would suggest, of the kind of averaging of the initial jobless claims that we've had. But again, a quite stark contrast to what we had in the global financial crisis, where the worst one-off print was only around 800,000 The number we can expect for non-farm in a few weeks' time could be a negative 25 million, which would be absolutely unprecedented at that type of scale. A lot of that stuff though, I guess, is priced in. It's as sensational as it is. So forward-looking things that are going to be quite key are the manufacturing service PMI numbers. We've already seen those in the eurozone last month pretty much drop off a cliff. So it's about, well, how how pessimistic are people about the future going forward. Also, some other things I touch upon in this, which I think perhaps could be quite interesting to have a look at, was I kind of talk about this slow path back to normality, this idea about the kind of elimination of a quick bounce in a V-shape. It's going to be much more long and protracted than that. And I think the kind of balance at this point, particularly when the focus now is about unwinding the lockdown I think keeping a track on the testing volumes in different countries. And there's different ways you can look at this. But I guess here I've got a chart of total tests for COVID-19 per 1,000 people rather than an actual cumulative total, obviously different in population sizes and so on. Some other things, again, Donald Trump kind of politically. I talk about some European stuff and then oil. And that's going to be a bit of a focal point for what we're going to talk about in the briefing this morning. Um, because we've got the expiration of the May contract coming tomorrow. We can expect more volatility going into that expiration. Prices we'll have a look at in a moment because we're in quite extreme contango at the moment, and I'll explain what exactly that means. But the main thing is oil is down, and certainly we've maintained a pretty bearish view ever since OPEC struck that accord, what, almost 2 weeks ago now. We've always felt that the, the kind of immediacy of the huge supply shock that we're going under, given that the lockdown was so immediate globally, the OPEC action was going to do a little to offset that, at least in the near term. So yeah, that's coming to fruition a little bit now, and it's something we can, we can delve into a bit more. So yeah, this macro menu, the other thing that's probably quite useful, there's an earnings kind of snapshot of who are the key people coming out. And then we've got a calendar of events, which we'll, we'll have that here now, and we'll circle back and we'll close with this for this briefing this morning, and I'll run you through a few highlights. But if you need that, obviously my Twitter handle is here. I do post that on Twitter on Sunday afternoon generally when I get it out, and it can be a nice thing to complement your just general technical analysis that you, you do getting ready for the week ahead. Also as well, for those interested, the Amplify Now kind of e-learning portal, I'll put a link into the video description. But Sam did quite a cool thing yesterday that he's going to do going forward where he did a basically like a weekly trade setup video. And so that's going to be particularly useful as well to kind of complement what I talk about on the fundamentals. He's going to be talking about, so here kind of week ahead outlook. I think he did the S&P and the euro, so something to check out as well. But let's have a quick look at the charts before we get through the headlines. And fairly muted open, uh, to be honest, comparative to some of the big gaps in price that we have been seeing over the last couple of weeks. Equity index futures a little bit mixed overnight in Asia. U.S. stock futures trading a little lower this morning Uh, we're down about 122 in the Dow, 13, 14 points in the S&P. Uh, the DAX off its most extreme levels on the upside, it has pared down a little bit, albeit still up about 100 and sitting just above its pivot at the moment. Uh, but just running into a little bit of resistance, uh, at around just before Europe came in, kind of a double touch on that level just short of our 1, um, at around 10,764. Failing at the moment, and we're just within that kind of— that's the top end of the range, also encapsulating some of the highs that we saw at the back end of last week, uh, and the downside to pivot at the moment. FX markets, the DXY's a little bit firmer. We're up about a third of a percent at the moment, which is putting a little bit downward pressure since Europe's come in on the major FX pairs. Consequently, both just managing to just break out of that kind of consolidation hugging the pivot level in the futures overnight. So a bit of a follow-through to the downside here in both EURUSD and cable. Uh, gold, not too much movement. Again, pretty quiet in the overnight session and just hugging 1,700. Before then, just a little bit of downside just seen here more recently. T-notes up about 5 ticks, but crude probably a little bit of a focal point, and we're going to start with that in terms of a bit of a conversation. This is the headline people are looking at. I'm going to run through a few different things. Um, the headline on Bloomberg— obviously Bloomberg are going to want to make this as sensational as possible. So often when you're reading media at the moment, they are referring to the May contract, not the June contract. But from a trader's point of view, the roll has already happened. So the effective front month, which is where the volume is now is and has been June for a little while now. So you really should be focusing more on that than the, than the May print, because if you actually look at it at the moment, if we go back to my chart, this is the June contract which is trading. It's had a little bit of a bounce here. It saw some quite extreme volatility in the overnight session. You can see that extremity of the wick here actually printed down at a low of 2271. But we're just recovering up towards $24 at the moment, albeit still down just over a dollar. So that's trading at $23.87 in June. May is trading down, as you can see, it has been trading down sub-$15. So quite a big disparity between the two contracts. Um, contango structure of the futures market, where contracts end for the, for the latter months, uh, delivery trade at a premium to the, the current first contract, which would be May at this point. The May contract for WTI, I mean, trading about— well, you can see it there, it's about an $8 lower than the June contract, near the record 8.5 spread between the first and second months that were set back in December of 2008. So a couple things to bear in mind here then with oil to explain what this could mean from a trading perspective. One, the headline saying that wild oil markets set for extra volatility as contracts expiring near Now, the extra volatility could well be in part because of the fact that you have got such a big divergence between these two calendar months. Crude stockpiles at Cushing— so Cushing is that main kind of hub in Oklahoma where it's the delivery point then upon expiration of oil— and the problem you've got there is that stockpiling at Cushing has jumped about 48%, almost 55 million barrels, since the end of February. According to the IEA. So this market oversupply situation, of which has led to this action from OPEC, isn't a new thing. It's been happening for a while. Remember, there were concerns as well about trade war and, and so on before we got into this latest pandemic situation. So concerns continue to mount that storage facilities in the US will run out of capacity. So if you think about it then, everyone looking to get out and sell sell out of their May contract, and that's just forced that, that first calendar month contract lower and widened then out the, the spread between the two contracts. Hence the reason why, you know, this is happening at the moment. Another interesting stat here though: crude explorers shut down about 13% of U.S. drilling fleet last week as the swelling worldwide glut of crude for drastic cost cutting and project cancellations among drillers. And, you know, this was one of the things here. I'm just going to flip this to this chart. This was previous annotations from a conversation I was having with a, with a group a few weeks ago. And as you can see, I've got these 3 arrows or 4 arrows here. And, you know, when we were having the conversation a few weeks ago, this was back in March, and this is when we were testing that lower bound level of around Feb. And, you know, remember the market was responding to that technical point of support a little bit, but we always thought that, you know, just given, uh, the, the size and scope of the demand shock on the back of the coronavirus, that we felt that OPEC, even if they were going to implement, as they have done, a record agreement, is probably going to do little in the immediate period to offset then, um, this, this imbalance between supply and demand. So prices have come down, and the, the big point here now is that we've managed to get our heads below then that November 2001 low. So I'm looking at monthly continuation now here, and this then does bring in that, that front month or May contract, and that's why you can see that break then of that key level here. And but the idea being that, you know, as we go down now, technically one point is when we break these long-standing levels, that can exert then further downward pressure. And that can then— if you look here, there's not a great deal of the next kind of clear point, doesn't come down till, you know, kind of a 10:35 area, which doesn't eliminate that from becoming a possibility. But one of the things I talk about in the macro menu, one of the things that I'm quite keen to watch is this idea, and I talk about it here if you're interested. Now I just explained that Crude Explorers shut down 13% of US drilling fleet last week alone. Since mid-March, basically US rig count has dropped about 250. It's probably even more than that by now. And that's around 30%. So around, well, over now 30% of operational rigs in America have just come offline as a natural reaction to the fact that these drillers need to cut costs. It becomes no longer economically viable to operate, and so therefore naturally US oil production is going to decrease quite rapidly. My feelings of why I've remained quite bearish is that that is true, and that is a statistic to monitor, but ultimately that takes a little while for it to really kick in. And so these arrows I've got here is ultimately, I think, then once these oil-producing, uh, country— I think OPEC compliance is going to be strong because it's in their interest for it to be that way, but then Uh, I also think that the natural, uh, reduction in production is going to see, uh, prices in the second half of this year. So I think it's going to be in the next 2, 3 months it will start commencing, and thereafter we will get a distinct bounce in prices. So if you were thinking about that longer-term opportunity, it definitely is coming, uh, and I think you definitely will see a meaningful recovery. And you think about it, if we're trading down at $10 You know, a move back to $20. Well, I think you're looking more like a move like $26 or back up to, uh, kind of $40 would be more of a longer-term target. You know, to $26, you're looking at a 137% gain. Back up to $40, you're looking at a gain of 263%. So, you know, these could be great long-term investments if you were looking at, say, cash equities, a couple of oil majors like Exxon, for example, or if you're just riding out, uh, you know, kind of a structured trade in reflection then from the macro view that generally oil is going to respond in time as we get over the worst of the coronavirus and that situation starts to improve going forward. Um, so yeah, just thought I'd go into that in a little bit more detail. Obviously any questions, just let me know in the, in the chat room or on the video. I'll be happy to help. All right, let's, let's get on with a few other things then. So that's oil, and I definitely think oil is— it could be, if it does continue to see more aggressive downside, a bit of a something to watch for equity traders, uh, given the fact that, you know, we've kind of been in a fairly bullish mood recently. Could that be the straw that breaks the rally's back in that respect? So something to just be aware of. Quick update on the coronavirus. This is that FT graphic looking at the kind of daily deaths with coronavirus on a 7-day rolling average. And you can see here quite a lot of these European hotspots continuing to come lower. Fewer daily deaths reported in Italy, Spain, and the UK. I'm glad to report the New York Governor Andrew Cuomo said the state may be past the high point of the coronavirus deaths. And obviously that's an important one as well because that's the kind of epicenter of the outbreak in North America. One article though that did come out over the weekend that did catch a bit of attention was in The Telegraph. They were citing the World Health Organization, saying that there's no evidence that people who have survived coronavirus have immunity. Now this is quite a significant thing if it is proven to be true, because if you remember even what the UK government's stance was at the beginning. It was, you know, Boris was of that mindset of kind of herd protection. It was like everyone should get it, and then therefore there will be casualties. I'm sure he's regretting saying these things now, but he was saying then we can build up a herd immunity and we can move forward much quicker, and therefore we can get the economy still working, and that's going to mean lesser people losing their jobs, it's going to be less economic impact and so on. But obviously, you know, things have changed radically for the UK government because of the cost of life that has been seen. So antibody tests may be ineffective at showing if a patient is immune to the virus or for how long antibodies might give protection. So this is definitely something to monitor because going forward, and one of the things I talk about in that week ahead kind of blog is about this idea of now, um, how our company— how our country is going to unwind the lockdown. I think that's the next big talking point that's going to come. Now, Boris Johnson, obviously coming out of intensive care, he's now kind of getting back into these meetings now, um, as it's been kind of chaired here by Dominic Raab in his replacement over the last couple of weeks. Um, but Johnson does face quite a stiff challenge at the moment because there was a couple of reports, not sure if you saw in the Sunday Times and the FT, that were very critical of the government's handling of the coronavirus at the beginning under his stewardship. Because if you remember, Boris, I think, was on holiday with his girlfriend at the time when everything was outbreak in China was happening. Um, generally the UK was one of the slowest to respond in terms of sort measures that were taken. A lot of the protective gear as well was very late coming. We actually sent quite a lot of that to China originally. We only requested help from other businesses to provide that type of equipment in April, and obviously that was very late in the game when they offered assistance 2 months earlier. So yeah, there's a lot of negative press reports about the government's handling, but I guess what's interesting important now then is about what do we do going forward. And apparently the cabinet is very split at the moment. Basically, Michael Gove and the Chancellor Sunak— and definitely you can understand the latter— they kind of want to relax the lockdown as soon as they can, really, because, you know, if you're the Chancellor, obviously you're, you're quite economic-oriented in terms of your, your agenda. And he knows that the implications of a lockdown have a severe impact on UK economy. So the quicker we can get things back into, into play, the quicker we can start addressing that kind of the scope of the downturn or the size of it, but also the speed of the recovery. On the opposite side though, Hancock has said he wants to wait until the virus is kind of defeated first, and apparently he has backing from Dominic Cummings, which we know has some sway behind closed doors over these decisions that get made on a cabinet level. So yeah, this is what's going to be key to watch. A couple things that I've seen over the weekend, this was one when there's a reported kind of— in America, it's also been talked about in the UK about a 3-stage process of unwinding lockdown, and this is what some of the speculation was suggesting suggesting a red, amber, green phase and the subsequent dates. So the red phase being that small non-essential shops can reopen—warehouses, nurseries, hairdressers, and so on. God knows I need a haircut coming soon. But that would be on May 11th. Then the amber phase being small businesses with up to 50 staff can reopen. That might not be until the end of May. Social distancing measures are then lifted, or some. And then the green phase is then when cinemas, theaters, comedy clubs, sports venues reopen, pubs. So if you think about it, those more kind of areas where there'd be kind of mass gatherings in that sense, that wouldn't be till June. But basically Downing Street has been pretty quick to come out flat and deny this. I think probably the worst thing that they can do now is really commit to specific dates in time because ultimately that's probably not going to be met. And I would say, my opinion at this point, I would say I agree with the approach in a staggered fashion because we do need to reopen the economy as soon as possible, but I think these dates are a little bit optimistic here in my view. But this is what's going to be quite, quite key going forward is the timeline and how this is executed. and then how successfully we, we hit these timelines, uh, as to then, um, the, the kind of impact on markets going forward. From a US point of view, Trump's kind of getting involved and, and the US are looking to, to throw more money at the issue. Uh, relief deal for the US small businesses may come as soon as today, according to President Trump at the weekend. So this is a kind of top-up on that, um, that big package that they delivered a few weeks ago. Uh, and I did see this and I thought I'd share. This is the, the fiscal support. I just wanted to give it a bit of context of what we've been seeing just generally. Uh, this is looking at government spending as a percentage of GDP. Uh, and it's just quite mind-blowing really when you look at, um, the COVID-19 response. And this is why a lot of people, although there is a bit of a split in opinion, a growing number of people are getting fairly bullish about equities at this point, given the fact of the unprecedented steps that the Federal Reserve, global central banks have taken, but in combination with this fiscal spending, which if you look at it here, kind of 3 times the size of the financial crisis and way more steeper trajectory in terms of injecting its money straight in. And it, you know, you'd be looking at the kind of scope and scale of what we've seen on these, these previous types of occasions in terms of its percentage of GDP at that point. So that, and, you know, another thing to be aware of when we start hearing these numbers, everyone's obviously quite fearful about how, how much of a contraction generally economies are going to see in the second quarter, which is going to take the brunt of this kind of COVID-19 impact. But the dispersion in GDP quarterly growth forecast, the gap between the 25th and the 75th percentile is massive. You know, it's very hard for an economics team to basically calculate the GDP impact when it's just been so violent, the movement in, in the data set, and it's so wide-ranging. They're seeing such volatile variance. It means that trying to accurately predict then GDP has led to this monster range that we would be— we'd normally see in any normal time would be less than 1%, and we're looking here kind of up to 17% at this point. So yeah, try— you know, when you hear these, these press reports, they talk about, you know, GDP is expected at X. Basically, you've got to give that a very wide berth either side as to where that might come out. But that does translate then from a trading point of view is probably going to take quite a lot to shock the market because the, the ranges are going to be very large. So it's got to be probably pretty spectacular on either side to really move the needle, given we've got a bigger kind of buffer in that sense. One thing I did see this morning was this, and this was talking about virus-hit Brexit talks. I mean, you You know, if you can remember, there was a thing called Brexit that kind of was the talking point of literally every briefing I gave for the entirety of kind of Q4, I remember, of last year going into the election. But actually, after kind of it got parked for several weeks, Britain and Europe will restart talks on Monday over the future relationship, and officials will meet by video conference for a full week of discussions. This week, so you might get a few little comments, if you like, about Brexit until the end of June. Either side can, of course, ask for a transition period to be extended for a period of up to 2 years, subject to the other's consent. Obviously, the economic disruption of Brexit and the coronavirus combined is probably more than likely they're going to have to call for extra time at this point, given that, as I said, that extension request, they've only got about another 2 months to make that call. 2 further video conference rounds are or have been arranged, the 11th of May and the 1st of June. But I'd say there's just some such more important kind of facing issue in the form of the virus at the moment. I don't think the governments are going to be too caught up in the Brexit for the moment. Boris obviously playing the card that he has to play, and he's been pretty adamant that we're not going to request an extension, he's going to deliver Brexit. But I think that's just— then he's going to have to take this down as he normally does to the wire, and I would expect that submission of request to extend probably this summer. Um, the final point on that kind of the government side was Central bank officials have held earlier talks with European Commission on setting up a eurozone bad bank that would take billions of euros in debt off lenders' balance sheets, according to the FT this morning. This comes after Politico the weekend on Sunday reported that Europe will need to find another half a trillion euros to finance the economic recovery from COVID-19. This comes after they kind of approved with gritted teeth that previous amount of around €540 billion just a week ago. And it's raised this idea of a recovery fund, and obviously a lot of that comes then through this idea of kind of shared debt issuance or euro bonds, and that's come under very firm resistance. And so countries like— obviously I heard Spain this morning are requesting some pretty sizable numbers that would have to be kind of backstopped in that kind of Eurozone together format. Italy, probably their, um, their country in terms of their yields and fixed income BTPs will probably be very volatile to the outcome of some of these teleconference conversations of European officials that are happening on Thursday. Any further pushback on this idea of of how they're going to finance this recovery fund, or indeed actually getting more funds into the pot from a fiscal point of view in a coordinated fashion, all the more risk there are to, to BTPs in that fashion. Um, final thing is earnings. Uh, during the upcoming week, we've got about 96 S&P 500 companies reporting, 6 of the Dow 30 components. You can see here a couple of the, the main ones that I'd probably be most interested interested in. Aftermarket today, you've got IBM. Tomorrow, pre-market, Coca-Cola, Netflix. Of course, you probably read a lot about them. Obviously, on lockdown, a lot of people, a lot of people getting involved with Joe Exotic and the Tiger King has been incredibly popular. But Netflix will likely be one in the spotlight to see how they've potentially outperformed in this type of environment. With the pickup of their services. There's a couple of airlines stocks which I think will be quite fascinating to watch as well, just given the ramifications of just the complete halt of global air travel. And I want to see what that looks like then on the actual numbers and outlook for the likes of Delta and Southwest Airlines. They're coming out on Wednesday and Thursday pre-market. Uh, then you've got companies like Eli Lilly on Thursday, Intel, and on Friday Verizon and American Express are probably some of the larger market cap names that are coming out. But this full table is available in that macro menu, um, and I will put the link to this report in the video. But other than that, finishing off, what have we got for the rest of the week from a data perspective? So just giving you the summary of highlights. Uh, so today, as per usual, it's relatively quiet on a Monday from scheduled things. IBM is after market though. From Tuesday, so overnight, so by this time tomorrow, we will have the Australian RBA minutes. Um, we also start to get some UK data in on unemployment rate and employment change. For the US, existing home sales. Going into Wednesday, data-wise, you've got UK inflation metrics, so CPI, PPI, RPI. And then Thursday is when it gets kind of more interesting. That's when we start to get the, the kind of drop of the major manufacturing and service PMIs. And these are the flash readings, they will be important. You've got Australia and Japan overnight, you then get France, Germany, Eurozone, and the UK later on, on that, that morning, with the US in the afternoon alongside new home sales. And then Friday Um, we've got UK retail sales, of course, expecting pretty much record numbers. I think last week, remember, the UK or the US retail sales came in at a minus just over 8% reading, quite close to consensus, but still the lowest reading since the records began back in 1991. UK retail sales, although there might be a bit of kind of infantry building or stockpiling that consumers were doing going into the eventual lockdown, which came around, um, kind of mid-March. At the end of the day, that number is going to be pretty dire. So, uh, probably not going to be too much of a surprise, but definitely, uh, headline-worthy at that point. So that'll be coming with the S&P also due to deliver an update review on the sovereignty of the UK. Which could be quite interesting as well. So that is it, that is the briefing for this morning. Any questions though, just let me know, I'd be happy to help. And as I said, if you're not subscribed to the channel on YouTube, make sure you hit that subscribe button. I'll appreciate it. All right, have a good day and a good week ahead. Catch you guys tomorrow. Thanks.