Given the pace at which the global economic environment is changing as a result of the spread of COVID-19, we’ve found there is an increased interest in up-to-date insight on the economy and the markets. With volumes of information out there, we aim to cut through the clutter by summarizing the week’s events by producing this brief written by Chief Investment Officer, Rob Edel, published every week.
Equities were mixed last week, which isn’t surprising given how strong the markets have been over the past few weeks. According to Strategas, the rally in equities during the preceding 20 trading days was second only to the rally after the 2009 market low. The S&P 500 declined 1.3% last week and the NASDAQ lost 0.2%, but the Russell 2000 gained 0.3% and the S&P/TSX increased 0.4% as gold and energy pushed Canadian stocks higher. Market breadth was still narrow with Technology and Healthcare leading the way and value continuing to lag, but volatility moved marginally lower and market losses incurred in the first half of the week were nearly erased by the end of trading on Friday.
The bond market was equally non-committal with high yield spreads widening at the margin, but not materially. Both the US and Canadian yield curves flattened a bit with 10-year yields declining; however, seeing higher 2-year treasury yields in the US is positive and shows some incremental confidence in the capital markets, even if it was only a couple of basis points. We also took some comfort from US 10-year break-even rates moving nine basis points higher, indicating inflationary expectations have perhaps bottomed. On the negative side, the US dollar continued to strengthen and the Canadian dollar slipped 0.7% while gold traded nearly $47/oz. higher; both typically seen as harbingers of negative economic growth.
Stocks and bonds were not the top story last week, it was oil. May WTI Crude oil future contracts stunned traders early in the week by doing what was thought to be the impossible, trading below zero for the first time in history. The May contract, which was set to expire later in the week, traded as low as -$40 a barrel on Monday and ended the day -$37.63 a barrel. The June contract also traded sharply lower, but was never close to going negative, and closed the week at a solid $16.94 a barrel. Because WTI futures contracts settle with physical delivery, most financial buyers needed to roll out of the May contract (and into the June or longer-term contract) before they expired, at any price. They don’t have the ability to take physical delivery. The problem with the oil market right now is it is becoming harder and harder for anyone else to take physical delivery either as demand has fallen off a cliff and storage capacity is starting to become scarce.
According to BMO Capital Markets, US crude demand declined about 6.6 million barrels a day, or by about one third, and will probably end up down 7 to 9 million barrels a day by the end of the month with demand being cut in half. Supply will continue to decline, but producers are limited in how much and how quickly they can turn off the taps without permanently harming production. Oil did find support near the end of the week, particularly after US President Trump directed the US Navy to fire on potentially hostile Iranian ships, but expect oil to remain volatile and possible trade below zero again in May until demand recovers and the economy comes back to life. Interestingly, oil stocks actually traded higher last week even with oil’s historic plunge.
As mentioned above, stocks were mixed but given the market has been so strong and the economy continues to surprise to the downside, a pullback would not have surprised most traders. US jobless claims for the week ending April 18th came in at 4.4 million with continuing claims for the week ending April 11th now close to 16 million. Existing home sales and durable goods orders also disappointed, falling 8.5% and 14% respectively in March. More and more headlines in the financial press question what the market is seeing that the economy is not.
The virus and the ability to flatten the curve remain hot topics. Progress continues to move in the right direction and more and more governments are starting to detail plans to re-open their economies. At the same time, aggressive fiscal and monetary programs continue to backstop the economy to ensure businesses and consumers will be ready when it’s time to start relaxing social distancing measures. Last week US Congress approved another $484 billion aid package with talks of additional stimulus continuing in Washington. It’s hard for investors to fight the Fed or Congress.
What would truly move sentiment higher would be progress on the virus treatment front which was unfortunately lacking last week. According to the Washington Post, Veteran Affairs patients’ use of Hydroxychloroquine was linked to higher mortality and the FDA warned against its use outside of hospitals. Also Gilead’s antiviral drug, Remdesivir, received some negative results from a trial accidentally released by the WHO though the study lacked a control group and was terminated early due to low enrolment. Some anecdotal opinions we have read peg the prospects for Remdesivir at about 50/50 with more conclusive trial data expected over the next few weeks.
While neither drug may ultimately prove a viable treatment option, we are confident good treatment options will be uncovered in the following months. There is just too much scientific firepower being deployed for this not to be the case. We are learning more and more about the virus every day and how best to fight it. While it has previously been known that some COVID-19 deaths have been due to a hyperactive response from the patients own immune system, a Washington Post article last week highlighted how blood clots have also played a role, with up to 40% of COVID-19 patients experiencing blood clots that can go onto result in strokes and heart attacks. Also being discussed is the tuberculosis vaccine Bacillus Calmette-Guerin, which is thought to bolster the immune system and sharply reduce incidences of respiratory infections, as is the role of nicotine could play in preventing coronavirus infections (fewer smokers are getting infected according to data in China and France). What is not being considered is the idea of ingesting or injecting household cleaning chemicals into one’s body, as suggested by President Trump last week.
Markets were a little on edge over the apparent disappearance of North Korean leader Kim Jong Un. It is rumored the dictator underwent a cardiovascular procedure and his current condition is grave. President Trump, on the other hand, has been very visible, holding daily press conferences that drag on for hours. Along with his absurd comments around potential treatment therapies, Trump has also helped confuse State governors trying to formulate plans to re-open their economies. He has tweeted support to demonstrators protesting against stay-at-home orders in states like Minnesota, Virginia, and Michigan, before strongly disagreeing with Georgia governor Brian Kemp’s plans to let small businesses re-open. Markets would like to see a little more Kim Jong Un and a little less President Trump.
Overall, we continue to see more downside than upside given the recent strength of the market and continued weakness in the economy. The fact the market was caught so off-guard by the dramatic decline in oil demand, leaves us less certain economic forecasts are adequately discounting the impact of the “great lockdown.” Without a near-term breakthrough on the treatment front, we fear growth could be slower to recover than investors hope, even with massive central bank and government support.
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